-----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, Q7BxCiemopziowSwvll9IngD0NpRgOl6cojn1+PZvP9KWJOYb7FaCRHTmkSfSEqW wjz64f1IKTLrbMWzrWp5HA== 0000950129-99-004740.txt : 19991104 0000950129-99-004740.hdr.sgml : 19991104 ACCESSION NUMBER: 0000950129-99-004740 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19991103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUEVO ENERGY CO CENTRAL INDEX KEY: 0000861819 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760304436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-90235 FILM NUMBER: 99740282 BUSINESS ADDRESS: STREET 1: 1021 MAIN SUITE 2100 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136520706 S-4 1 NUEVO ENERGY COMPANY 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1999 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- NUEVO ENERGY COMPANY (Exact name of registrant as specified in its charter) DELAWARE 1311 76-0304436 (State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer or organization) Classification Code Number) Identification Number)
1021 MAIN, SUITE 2100, HOUSTON, TEXAS 77002 (713) 652-0706 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT M. KING 1021 MAIN, SUITE 2100, HOUSTON, TEXAS 77002 (713) 652-0706 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Copies to: GEORGE G. YOUNG III HAYNES AND BOONE, L.L.P. 1000 LOUISIANA ST., SUITE 4300 HOUSTON, TEXAS 77002 TELEPHONE: (713) 547-2081 TELECOPY: (713) 547-2600 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number of the earlier effective registration statement for the same offering. --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ---------------
CALCULATION OF REGISTRATION FEE ======================================================================================================================== TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION FEE REGISTERED PRICE PER UNIT PRICE - ------------------------------------------------------------------------------------------------------------------------ 9 1/2% Senior Subordinated Notes due 2008................ $257,310,000 100% $257,310,000 $71,533 (1) ========================================================================================================================
(1) Calculated in accordance with Rule 457(f)(2). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED NOVEMBER 3, 1999. [LOGO] NUEVO ENERGY COMPANY OFFER TO EXCHANGE 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A ($257,310,000 IN PRINCIPAL AMOUNT OUTSTANDING) THE EXCHANGE OFFER o The exchange offer expires at 5:00 p.m., New York City time, on ______________________________, 1999, unless extended. o Subject to customary conditions, which we may waive, the exchange offer is not conditioned upon a minimum aggregate principal amount of existing notes being tendered. o All existing notes tendered according to the procedures in this prospectus and not withdrawn will be exchanged for an equal principal amount of exchange notes. o The exchange offer is not subject to any condition other than that it not violate applicable laws or any applicable interpretation of the staff of the Securities and Exchange Commission. THE EXCHANGE NOTES o The terms of the exchange notes to be issued in the exchange offer are substantially identical to the existing notes, except that we have registered the exchange notes with the Securities and Exchange Commission. In addition, the exchange notes will not be subject to the transfer restrictions the existing notes are subject to, and provisions relating to an increase in the stated interest rate on the existing notes will be eliminated. o The exchange notes will be senior subordinated obligations of Nuevo Energy Company. They are subordinate to our senior debt. As of June 30, 1999, we had senior debt outstanding of approximately $120.0 million. o Interest on the exchange notes will accrue from August 20, 1999 at the rate of 9 1/2% per year, payable semi-annually in arrears on each June 1 and December 1, beginning December 1, 1999. ------------------ YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 15 OF THIS PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER. ------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ THE DATE OF THIS PROSPECTUS IS _____________________, 1999. 3 TABLE OF CONTENTS
Page ---- Where You Can Find More Information...............................................................................1 Forward-Looking Statements........................................................................................2 Summary...........................................................................................................3 Risk Factors.....................................................................................................15 Capitalization...................................................................................................22 Selected Consolidated Financial Data.............................................................................23 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................................26 Business and Properties..........................................................................................38 Beneficial Ownership of Our Common Stock.........................................................................52 Management.......................................................................................................54 Executive Compensation...........................................................................................57 Performance Graph................................................................................................63 Use of Proceeds..................................................................................................63 The Exchange Offer...............................................................................................64 Description of the Exchange Notes................................................................................72 Registration Rights.............................................................................................110 Plan of Distribution............................................................................................110 Legal Matters...................................................................................................111 Experts.........................................................................................................111 Glossary of Oil and Gas Terms...................................................................................111 Index to Financial Statements....................................................................................F1
WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the SEC's public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. We also file information with the New York Stock Exchange. Such reports, proxy statements and other information may be read and copied at 30 Broad Street, New York, New York 10005. This prospectus incorporates important business and financial information about us that is not included in or delivered with this document. You may request a copy of this information at no cost, by writing or telephoning us at the following address: Nuevo Energy Company 1021 Main, Suite 2100 Houston, Texas 77002 Attn: Corporate Secretary Phone: (800) 364-0206 -1- 4 THE EXCHANGE OFFER IS EXPECTED TO EXPIRE ON _____________, 1999 AND YOU MUST MAKE YOUR EXCHANGE DECISIONS BY THIS EXPIRATION DATE. TO OBTAIN TIMELY DELIVERY OF THE REQUESTED INFORMATION, YOU MUST REQUEST THIS INFORMATION BY _____________, 1999, OR THE DATE THAT IS NO LATER THAN FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE. You should rely only on the information provided or incorporated by reference in this prospectus or any supplement. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information included or incorporated by reference in this prospectus or any documents incorporated by reference herein is accurate as of any date other than the date on the front of such documents. FORWARD-LOOKING STATEMENTS In this prospectus, we make forward-looking statements. We cannot assure you that the plans, intentions or expectations upon which our forward-looking statements are based will occur. Our forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed elsewhere in this prospectus and the documents that are incorporated by reference into this prospectus. Some of the risks which could affect our future results and could cause results to differ materially from those expressed in our forward-looking statements include: o the volatility of oil and natural gas prices; o the uncertainty of estimates of oil and natural gas reserves; o the impact of competition; o difficulties encountered during the exploration for and production of oil and natural gas; o the difficulties encountered in delivering oil and natural gas to commercial markets; o changes in customer demand; o the uncertainty of our ability to attract capital; o changes in the extensive government regulations regarding the oil and natural gas business; and o compliance with environmental regulations. The information contained in this prospectus, including the information set forth under the heading "Risk Factors," identifies additional factors that could affect our operating results and performance. We urge you to carefully consider those factors. Our forward-looking statements are expressly qualified in their entirety by this cautionary statement. -2- 5 SUMMARY This summary highlights information from this prospectus, but does not contain all material features of the exchange offer. For a complete description of information which may be important to you, you should read this entire document and the materials we have referred you to and consult with your own legal and tax advisors. If you are not familiar with the terms used to describe the quantities, present value and other information about oil and gas reserves, please see "Glossary of Oil and Gas Terms." In this prospectus, the words "we," "our," "ours," and "us" refer to Nuevo Energy Company and, except as otherwise specified in this prospectus, to our subsidiaries. THE EXCHANGE OFFER On August 20, 1999, we issued $257,310,000 of our 9 1/2% Senior Subordinated Notes due 2008, Series A in exchange for $157,460,000 aggregate principal amount of our 9 1/2% Senior Subordinated Notes due 2006 and $99,850,000 aggregate principal amount of our 8 7/8% Senior Subordinated Notes due 2008. The existing notes were issued to qualified institutional buyers and institutional accredited investors in reliance upon the exemption from registration provided by Regulation D under the Securities Act. In connection with the issuance of the existing notes, we entered into a registration agreement in which we agreed to deliver to you this prospectus and to use our best efforts to complete the exchange offer or to file and cause to become effective a registration statement covering the resale of the existing notes. If the exchange offer is not completed by February 16, 2000 and if we have not caused a registration statement covering the resale of the existing notes to become effective by that date, the interest rate on the notes will be increased by 0.5% per year for the 90 days subsequent to February 16, 1999. The interest rate on the notes will be increased by an additional 0.25% per year for each 90-day period during which the exchange offer is not completed and the resale registration statement is not effective. The maximum amount by which the interest rate will be increased is 1% in total. After the exchange offer is complete, you will no longer be entitled to any exchange or registration rights for your notes. You should read the discussion under the heading "The Exchange Offer" beginning on page 27 and "Description of the Exchange Notes" beginning on page 38 for further information about the exchange notes. The Exchange Offer........................ We are offering to exchange up to $257,310,000 principal amount of exchange notes for an identical principal amount of existing notes. Existing notes may be exchanged only in $1,000 increments. The terms of the exchange notes are identical in all material respects to the existing notes except that the exchange notes have been registered under the Securities Act. Because we have registered the exchange notes, the exchange notes will not be subject to transfer restrictions and holders of exchange notes will have no registration rights. Also, the exchange notes will not contain provisions for an increase in their stated interest rate. Resale ................................. We believe the notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act provided that: -3- 6 o the exchange notes received in the exchange offer are acquired in the ordinary course of your business; o you are not participating and have no understanding with any person to participate in the distribution of the exchange notes issued to you in the exchange offer; and o you are not an affiliate of ours. Each broker-dealer issued exchange notes in the exchange offer for its own account in exchange for existing notes acquired by the broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes issued in the exchange offer. A broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the exchange notes issued to it in the exchange offer. Expiration Date........................... 5:00 p.m., New York City time, on _________________, 1999, unless we extend the exchange offer. It is possible that we will extend the exchange offer until all existing notes are tendered. You may withdraw existing notes you tendered at any time before 5:00 p.m., New York City time, on the expiration date. See "The Exchange Offer--Expiration Date; Extensions; Amendments." Accrued Interest on the Exchange Notes and the Existing Notes....................... The exchange notes will bear interest from August 20, 1999 at a rate of 9 1/2% per year, payable semi-annually on June 1 and December 1, commencing December 1, 1999. May 15 and November 15 are the record dates for determining holders entitled to interest payments. Conditions to the Exchange Offer................................ The exchange offer is subject only to the following conditions: o the compliance of the exchange offer with securities laws; o the proper tender of the existing notes; o the representation by the holders of the existing notes that they are not our affiliate, that the exchange notes they will receive are being acquired by them in the ordinary course of their business and that at the time the exchange offer is completed the holder had no plan to participate in the distribution of the exchange notes; and -4- 7 o no judicial or administrative proceeding shall have been threatened that would limit us from proceeding with the exchange offer. Procedures for Tendering Existing Notes Held in the Form of Book-Entry Interests................. The existing notes were issued as global securities and were deposited with State Street Bank and Trust Company when they were issued. State Street Bank and Trust Company issued a certificateless depositary interest in each note, which represents a 100% interest in the note, to The Depository Trust Company. Beneficial interests in the notes held by participants in DTC, which we will refer to as notes held in book-entry form, are shown on, and transfers of the notes can be made only through, records maintained in book-entry form by DTC and its participants. If you are a holder of an existing note held in the form of a book-entry interest and you wish to tender your book-entry interest for exchange in the exchange offer, you must transmit to State Street Bank and Trust Company, as exchange agent, at the address on the cover page of the letter of transmittal, before the expiration date of the exchange offer, the following: EITHER o a properly completed and executed letter of transmittal, which accompanies this prospectus, or a facsimile of the letter of transmittal, including all other documents required by the letter of transmittal; or o a computer-generated message transmitted by means of DTC's Automated Tender Offer Program (ATOP) system that, when received by the exchange agent will form a part of a confirmation of book-entry transfer in which you acknowledge and agree to be bound by the terms of the letter of transmittal; AND, EITHER o a timely confirmation of book-entry transfer of your existing notes into the exchange agent's account at DTC, according to the procedure for book-entry transfers described in this prospectus under the heading "The Exchange Offer--Procedures for Tendering--Existing Notes Held in Book-Entry Form", must be received by the exchange agent on or prior to the expiration date; or o the documents necessary for compliance with the guaranteed delivery procedures described below. -5- 8 Procedures for Tendering Existing Notes Held in Certificated Form.................... If you hold your existing notes in certificated form and wish to accept the exchange offer, sign and date the letter of transmittal, and deliver the letter of transmittal, along with certificates for the existing notes and any other required documentation, to the exchange agent on or before the expiration date. Representations and Warranties........................... By executing the letter of transmittal or by being deemed to have executed the letter of transmittal by tendering through ATOP, you represent to us that, among other things: o the exchange notes you receive will be acquired in the ordinary course of your business; o you have no arrangement with any person to participate in the distribution of the exchange notes; and o you are not an affiliate of ours or, if you are an affiliate, you will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Special Procedures for Beneficial Owners.................... If you are a beneficial owner whose existing notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and wish to tender those existing notes in the exchange offer, please contact the registered holder as soon as possible and instruct them to tender on your behalf and comply with the instructions in this prospectus. Guaranteed Delivery Procedures........................... If you are unable to deliver the existing notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, you may tender your existing notes according to the guaranteed delivery procedures described in this prospectus under the heading "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights......................... You may withdraw existing notes you tendered by furnishing a notice of withdrawal to the exchange agent or by complying with applicable ATOP procedures at any time before 5:00 p.m. New York City time on the expiration date. See "The Exchange Offer--Withdrawal of Tenders." -6- 9 Acceptance of Existing Notes and Delivery of Exchange Notes.................... If the conditions described under "The Exchange Offer--Conditions" are satisfied, we will accept for exchange any and all existing notes that are properly tendered before the expiration date. See "The Exchange Offer--Procedures for Tendering." If we close the exchange offer, the exchange notes will be delivered promptly following the expiration date. Otherwise, we will promptly return any existing notes tendered. Exchange Agent............................ State Street Bank and Trust Company is serving as exchange agent for the exchange offer. The address for the exchange agent is listed under "The Exchange Offer--Exchange Agent." If you would like more information about the exchange offer, you should call the exchange agent at (617) 662-1525. The facsimile number for the exchange agent is (617) 662-1724. See "The Exchange Offer" for more detailed information concerning the terms of the exchange offer. TERMS OF THE EXCHANGE NOTES The form and terms of the exchange notes to be issued in the exchange offer are the same as the form and terms of the existing notes except that the exchange notes will be registered under the Securities Act and, accordingly, will not bear legends restricting their transfer. The notes issued in the exchange offer will evidence the same debt as the existing notes, and both the existing notes and the exchange notes are governed by the same indenture. Title..................................... 9 1/2% Senior Subordinated Notes due 2008, Series B. Maturity Date............................. June 1, 2008. Interest Payment Dates.................... June 1 and December 1 of each year, commencing on December 1, 1999. Optional Redemption....................... We may redeem up to one-third of the exchange notes prior to June 1, 2001 from the proceeds of one or more bona fide underwritten sales to the public of our common stock at a redemption price of 109.5% of the principal amount. Otherwise, we will not have the right to redeem the exchange notes until June 1, 2003, after which we may redeem the exchange notes if we pay the redemption premium described under "Description of the Exchange Notes--Redemption at the Option of Nuevo." Subordination............................. The exchange notes will be unsecured senior subordinated obligations of ours. The payment of the principal of, and premium and interest on, the exchange notes will be subordinated in right of payment to the payment of all of our current and future senior indebtedness to the same extent as the existing notes are subordinated to senior indebtedness. In -7- 10 addition, the exchange notes will be structurally subordinated to the liabilities of our subsidiaries. For a description of the terms and possible effects of subordination, see "Risk Factors" and "Description of the Exchange Notes--Subordination." At June 30, 1999, we had $120.0 million of outstanding senior indebtedness and our subsidiaries had liabilities on their balance sheets of $106.6 million. The exchange notes will rank equally with: o any of the existing notes not acquired by us in the exchange offer; o our 9 1/2% Senior Subordinated Notes due 2006; and o our 8 7/8% Senior Subordinated Notes due 2008. As of September 1, 1999, there was outstanding $2,540,000 and $150,000 principal amount of our 9 1/2% notes due 2006 and our 8 7/8% notes due 2008, respectively. The indenture for the exchange notes will permit us to incur additional indebtedness, including indebtedness that ranks senior in right of payment to the exchange notes. Change of Control......................... If a change of control occurs, we will be required to offer to repurchase the exchange notes for cash in the amount of 101% of the principal amount of the exchange notes plus accrued and unpaid interest. For a description of a change of control, see "Description of the Exchange Notes--Repurchase at the Option of the Holders--Change of Control." Our bank credit facility currently prohibits us from purchasing any of the exchange notes, which would include any purchase we may be required to make pursuant to a change of control offer. We cannot assure you that we will be able to amend the bank credit facility to permit the purchase of exchange notes or refinance the bank credit facility with lendors who will allow us to make the required purchases. Also, if a change of control were to occur, there can be no assurance that we will have sufficient funds to purchase any of the exchange notes or be permitted under the terms of other agreements to purchase the exchange notes. See "Risk Factors" for a description of the possible effects if we are unable to purchase the exchange notes upon a change of control. Exchange Notes Covenants.................. The indenture governing the exchange notes contains covenants that limit our ability to, among other things: o incur additional indebtedness; o pay dividends and repurchase our capital stock; o enter into transactions with our affiliates; -8- 11 o dispose of assets; and o engage in mergers and consolidations. These covenants are subject to important exceptions and qualifications which are described under "Description of the Exchange Notes--Material Covenants." Risk Factors.............................. See "Risk Factors" for a discussion of factors you should carefully consider before deciding to invest in the exchange notes. ABOUT NUEVO We are an independent oil and gas company. Our properties are concentrated in California, where we are the largest independent producer, with properties located both onshore and offshore. Our onshore California properties are located primarily in the San Joaquin, Los Angeles and Ventura Basins. Our offshore California properties are located in the Santa Barbara Channel and offshore Long Beach. We also own properties in the onshore Gulf Coast region and internationally offshore the Republics of Congo and Ghana in West Africa and onshore in Tunisia. Since our inception in 1990, we have expanded our operations through a series of disciplined, low-cost acquisitions of oil and gas properties and the subsequent exploitation and development of these properties. We have complemented these efforts with strategic divestitures and an opportunistic exploration program which provides exposure to prospects with the potential to add substantially to our growth. At June 30, 1999, our estimated net proved reserves were 297.4 MMBOE, of which 75% were proved developed. On a pro forma basis, assuming we had closed the Star acquisition described below on January 1, 1999, average daily net production would have been approximately 61.0 MBOE per day during the first half of 1999. Approximately 85% of this pro forma production on a BOE basis was attributable to our California properties, while our Gulf Coast area properties and West Africa properties represented approximately 6% and 9%, respectively, of this pro forma production. Additionally, our production during the first half of 1999 was 38% light and medium grades of oil and refined products, 48% heavy oil and 14% natural gas. As of June 30, 1999, we operated properties representing approximately 85% of our estimated net proved reserves on a BOE basis. BUSINESS STRATEGY Our business strategy consists of the following: o dedication to a management philosophy that frames important decisions in terms of anticipated impact on per share, rather than absolute, growth in reserves, production, cash flows and net asset value; o maintenance of a sound capital structure that allows us to implement a contrarian investment orientation; o the outsourcing of non-strategic functions; -9- 12 o the alignment of employee compensation with shareholder objectives; and o a commitment to an exemplary corporate governance structure which reinforces the view of Nuevo as a conduit for stockholders to achieve superior long term capital gains. BUSINESS STRENGTHS We believe that the following strengths provide us with significant competitive advantages. Timely Acquisitions and Divestitures of Properties. We have demonstrated an ability to make acquisitions of producing properties with significant exploitation or exploration opportunities at favorable prices and have shown discipline in avoiding acquisitions in high-priced markets. We also seek to divest properties in order to take advantage of strong markets and to redeploy capital into higher return alternatives. For example, in the first six months of 1999, we sold our East Texas properties described under "--Recent Developments" and redeployed a portion of the proceeds in the Star acquisition. Record of Reserve Growth at Low Finding Costs. Between December 31, 1996 and June 30, 1999, our estimated net proved reserves increased 18% on both an aggregate and a per share basis, from 251.8 MMBOE to 297.4 MMBOE, at an average finding cost of $2.83 per BOE. Over this period, our finding costs from exploration and exploitation per BOE have averaged $2.87 domestically and $9.93 internationally, while our average finding costs from acquisitions were $1.84 per BOE. Exploitation Projects. We have an inventory of over five years of low risk exploitation projects which have the potential to significantly increase reserves. Despite a significantly reduced capital budget in response to low oil prices, between January 1, 1998 and June 30, 1999, we replaced 282% of our production through exploitation and exploration. Long-Lived Production Profile. Our properties are long-lived with a reserve life index of 14.6 years as of June 30, 1999. This reduces re-investment risk and adds stability to long term cash flows. Low Cost Structure. We believe that we have the ability to significantly reduce operating costs on acquired properties from levels experienced by prior operators. For example, the lease operating expense per BOE for the properties acquired in April 1996 from Union Oil Company of California was reduced from $6.40 in the first quarter of 1996 to $5.94 for the year ended December 31, 1998 despite an increase in prices for natural gas used as an energy source in our thermal oil operations and other service costs during this period. Additionally, we aggressively outsource many day to day functions to third party service providers, allowing us to maintain a low cost structure and permitting our executive management team to focus on strategic decisions. Preservation of a Sound Capital Structure. We believe that our contrarian acquisition strategy requires that we maintain a strong capital structure. Accordingly, as of June 30, 1999 our long term debt was $1.28 per BOE, which is among the lowest in the industry. During the recent period of depressed oil prices, our strong capital structure allowed us to maintain significant liquidity in the form of unused commitments under our bank credit facility. Reduction of Commodity Price Risk Exposure. We have implemented a hedging policy designed to reduce our near term exposure to fluctuating oil prices. This hedging policy is designed to enhance the stability of our cash flows, assure us of internal funding for capital projects, improve our debt capacity and reduce the volatility of our interest coverage ratios. We have entered into oil -10- 13 hedges equal to 67% of our forecasted production in the second half of 1999, and 60% of our forecasted oil production in 2000. RECENT DEVELOPMENTS East Texas Sale. In January 1999, we sold properties in East Texas for $192.0 million. Reserves attributable to the East Texas properties were primarily natural gas. The estimated net proved reserves of these properties were 329 Bcfe on December 31, 1998. We placed $100.0 million of the proceeds of this sale in an escrow account to facilitate like-kind exchange tax treatment for any properties we acquired in the first six months of 1999. Of these escrowed proceeds, $61.4 million were used to fund the Star acquisition. We used the remaining net proceeds from this sale plus amounts remaining in escrow after the Star acquisition to reduce amounts outstanding under our bank credit facility. Star Acquisition. In June 1999, we acquired oil properties located onshore and offshore California for $61.4 million from Texaco, Inc. The acquired properties had estimated net proved reserves at June 30, 1999 of 33.7 MMBOE and will increase our production from California by approximately 5.0 MBOE per day. All of these properties are additional interests in our existing properties or are located near our existing properties. The acquisition includes interests in the Cymric, the East Coalinga, the Dos Cuadras and other fields we operate. Recovery of Oil Prices. The price for crude oil on the New York Mercantile Exchange for near month contracts increased from $12.09 per Bbl at December 31, 1998 to $19.29 per Bbl at June 30, 1999. Our estimated net proved reserves would have increased 61.8 MMBOE during the first six months of 1999, without including the effect of acquisitions and divestitures. PRINCIPAL OFFICE Our principal executive offices are located at 1021 Main, Suite 2100, Houston, Texas 77002 and our telephone number is (713) 652-0706. -11- 14 SUMMARY CONSOLIDATED FINANCIAL DATA
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------- ----------------------- ACTUAL PRO FORMA ACTUAL ------------------------------------- --------- ----------------------- 1996(1) 1997(1) 1998 1998(2) 1998 1999 --------- --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS) STATEMENT OF OPERATIONS DATA: Revenues: Oil and gas revenues ......................... $ 279,859 $ 331,973 $ 240,010 $ 214,195 $ 123,045 $ 95,052 Gain on sale of assets, net .................. 6,008 1,372 5,768 5,768 1,677 80,312 Other ........................................ 43,190 23,933 6,925 6,925 4,451 4,139 --------- --------- --------- --------- --------- --------- Total revenues ................................. 329,057 357,278 252,703 226,888 129,173 179,503 --------- --------- --------- --------- --------- --------- Costs and expenses: Operating expenses ........................... 128,478 138,641 139,934 132,650 69,039 60,355 Provision for impairment of oil and gas properties(3) ......................... -- 30,000 68,904 68,904 -- -- Provision for (revision of) impairment of assets held for sale(4) ................ -- 23,942 (3,740) (3,740) -- -- Exploration costs ............................ 4,571 11,082 16,562 16,562 2,331 9,999 Depreciation, depletion and amortization .............................. 75,664 102,158 85,036 81,695 46,556 46,257 General and administrative expenses .......... 14,880 19,822 18,633 18,633 8,526 7,199 Outsourcing fees ............................. 10,249 11,984 9,461 8,157 7,199 6,846 Interest expense ............................. 36,009 27,357 32,471 25,350 14,444 16,400 Dividends on TECONS(5) ....................... 165 6,613 6,613 6,613 3,306 3,306 Other expense ................................ 1,069 3,019 5,726 5,726 1,846 2,836 --------- --------- --------- --------- --------- --------- Income (loss) before income taxes, minority interest and extraordinary item .............. 57,972 (17,340) (126,897) (133,662) (24,074) 26,305 Net income (loss)(6) ........................... 34,278 (13,700) (94,272) (99,303) (14,204) 15,784 STATEMENT OF CASH FLOWS DATA: Net cash flows provided by (used in) operating activities ......................... $ 126,921 $ 165,462 $ 35,833 N/A $ 21,917 $ (13,156) Net cash flows (used in) provided by investing activities ......................... (546,002) (169,478) (148,335) N/A (94,603) 99,642 Net cash flows provided by (used in) financing activities ......................... 426,952 (412) 110,697 N/A 69,842 (40,250) OTHER FINANCIAL DATA: Capital expenditures: Acquisitions ................................. $ 492,603 $ 10,206 $ 10,733 $ 10,733 $ 7,810 $ 61,416 Other ........................................ 89,743 185,689 152,541 135,508 94,285 36,695 --------- --------- --------- --------- --------- --------- Total ........................................ $ 582,346 $ 195,895 $ 163,274 $ 146,241 $ 102,095 $ 98,111 ========= ========= ========= ========= ========= ========= EBITDAX(7) ..................................... $ 168,373 $ 182,440 $ 73,181 $ 55,954 $ 40,886 $ 21,955 Ratio of earnings to fixed charges (8) ......... 2.6x -- -- -- -- 2.3x Ratio of EBITDAX to interest expense(9) ....... 4.7x 6.7x 2.3x 2.2x 2.8x 1.3x Ratio of EBITDAX to interest expense and TECON dividends .......................... 4.7x 5.4x 1.9x 1.8x 2.3x 1.1x Ratio of total debt to EBITDAX(10) ............. 1.7x 1.7x 5.8x 5.9x N/A N/A
AS OF JUNE 30, 1999 ------------- BALANCE SHEET DATA: Working capital............................................................................. $ 55,917 Total assets................................................................................ 790,274 Total debt.................................................................................. 382,051 Stockholders' equity........................................................................ 247,782
(See footnotes on the following page) -12- 15 - ------------------ (1) Effective January 1, 1998, we changed our method of accounting for our investments in oil and gas properties from the full cost method to the successful efforts method. All prior years' financial statements presented in this memorandum have been restated to reflect this change. A more detailed explanation of the successful efforts method of accounting and the effect of the change on our financial statements is set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note 2 to the consolidated financial statements for the year ended December 31, 1998 included in our Form 10-K for the year ended December 31, 1998. See "Where You Can Find More Information." (2) In January 1999, we sold properties in East Texas. Pro forma information gives effect to the sale as if it occurred January 1, 1998. Pro forma information is not necessarily indicative of future results. (3) We incurred an impairment of $68.9 million at December 31, 1998 and $30.0 million at December 31, 1997 on our oil and gas properties due to decreased crude oil prices. For more information with respect to impairment expense, see note 2 to the consolidated financial statements for the year ended December 31, 1998, included in our Form 10-K. (4) The provision for impairment of assets held for sale reflects a charge we took to write down our midstream assets to their fair value in 1997. These assets are primarily gas pipelines and processing plants. The impairment represents our estimate of the difference between the book value of these assets and the amount we expect to receive when we sell the assets. (5) TECONS are the Company Obligated Mandatorily Redeemable Convertible Preferred Securities of our financing subsidiary, Nuevo Financing I. The principal assets of Nuevo Financing I are $115.0 million of our 5 3/4% convertible subordinated debentures due December 15, 2026. Interest we pay on the 5 3/4% debentures to Nuevo Financing I are paid by Nuevo Financing I as dividends on the TECONS. (6) During 1997, we redeemed our 12 1/2% senior subordinated notes prior to maturity and recorded $3.0 million as our extraordinarily loss on early extinguishment of debt, net of income tax benefit. (7) The term "EBITDAX" means earnings before interest, dividends on TECONS, taxes, depreciation, depletion and amortization, property impairment, gain/loss on sale and exploration costs. EBITDAX is included because it is commonly used as a measure of a company's ability to incur indebtedness. EBITDAX should not be used as a substitute for cash flow from operating activities or other income or cash flow information prepared in accordance with generally accepted accounting principles as an indication of profitability or liquidity. EBITDAX may not be comparable to similarly titled items of other companies. (8) When we calculate our ratio of earnings to fixed charges, earnings means income or loss before income taxes and fixed charges. Fixed charges means the sum of the following: o interest expense; o dividends on the TECONS; o amortization of debt issuance costs; and o the portion of operating leases deemed to be representative of interest. Earnings were not sufficient to cover fixed charges for 1997 and 1998 by $19.5 million and $127.5 million, respectively, and for the six months ended June 30, 1998 by $24.6 million. (9) For purposes of this calculation, interest expense does not include dividends on the TECONS. (10) Total debt does not include the TECONS. -13- 16 SUMMARY OPERATING AND RESERVE DATA
DECEMBER 31, JUNE 30, ---------------------------------------- 1996 1997 1998 1999 ---------- ---------- ---------- ---------- Estimated Net Proved Reserves: Oil (MBbls) .......................................... 186,053 227,264 190,141 272,266 Gas (MMcf) ........................................... 394,630 390,691 403,256 150,713 Oil equivalent (MBOE) ................................ 251,825 292,379 257,350 297,385 Pretax discounted present value (in thousands) ....... $1,358,581 $ 901,107 $ 299,933 $ 836,002 Percent of proved developed reserves ................. 71% 68% 72% 75% Reserve life index (in years) ........................ 13.2 12.5 10.6 14.6 Reserve Replacement Data: Three year average finding costs per BOE(1) Domestic ........................................... $ 3.03 $ 2.83 $ 3.54 $ 2.58 International ...................................... $ 1.16 $ 1.42 $ 6.80 $ 7.15 Total .............................................. $ 2.85 $ 2.70 $ 3.66 $ 2.83 Three year average production replacement ratio(1) ... 735% 584% 380% 279%
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------- --------------------- PRO ACTUAL FORMA(2) ACTUAL --------------------------------------------- --------------------- 1996 1997 1998 1998 1998 1999 -------- -------- -------- -------- -------- -------- Production Data: Oil (MBbls)(5) ............................... 13,344 17,409 18,806 18,718 9,364 8,757 Gas (MMcf) ................................... 34,775 35,625 32,521 19,471 16,736 8,227 Oil equivalent (MBOE) ........................ 19,140 23,347 24,226 21,963 12,154 10,128 Average Sales Price Per Unit(3): Oil (per Bbl) ................................ $ 15.84 $ 14.86 $ 9.25 $ 9.23 $ 9.48 $ 9.07 Gas (per Mcf) ................................ $ 2.08 $ 2.06 $ 2.00 $ 2.10 $ 2.01 $ 1.87 Oil and Gas Operating Income per BOE: Revenues ..................................... $ 14.62 $ 14.22 $ 9.91 $ 9.75 $ 10.12 $ 9.39 Operating expenses (including severance taxes) ..................................... 4.86 5.14 5.56 5.80 5.41 5.71 Exploration costs ............................ 0.24 0.47 0.68 0.75 0.19 0.99 General and administrative expenses (4) ..... 1.31 1.36 1.16 1.22 1.29 1.39 Depreciation, depletion and amortization ..... 3.72 4.23 3.45 3.65 3.77 4.49 -------- -------- -------- -------- -------- -------- Operating income (loss) ...................... $ 4.49 $ 3.02 $ (0.94) $ (1.67) $ (0.54) $ (3.19) ======== ======== ======== ======== ======== ========
- ------------------ (1) The reserve replacement data and production replacement ratio for June 30, 1999 represent averages over the two years and six months ended June 30, 1999. (2) We sold properties in East Texas in January 1999 as described under "--Recent Developments," above. These properties had estimated net proved reserves at December 31, 1998 of 329 Bcfe. Pro forma information gives effect to this sale as if it occurred January 1, 1998. (3) Average sale prices include the effects of hedging. (4) Our general and administrative expenses per BOE include outsourcing fees. (5) Includes natural gas liquids. -14- 17 RISK FACTORS You should carefully consider all of the information we have included in this prospectus and the documents we have incorporated by reference before tendering your existing notes. OUR SIGNIFICANT DEBT LEVELS AND OUR DEBT COVENANTS MAY LIMIT OUR FUTURE FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING AND IN PURSUING BUSINESS OPPORTUNITIES. As of June 30, 1999, we had approximately $380.0 million in long-term debt, excluding current maturities. The level of our indebtedness will have important effects on our future operations, including: o A portion of our cash flow will be used to pay interest and principal on our debt and will not be available for other purposes. o Our bank credit facility contains financial tests which we must satisfy in order to avoid a default under our bank credit facility. o Covenants in the new notes, our existing senior subordinated notes and our bank credit facility require us to meet financial tests in order to borrow additional money, which may have the effect of limiting our flexibility in reacting to changes in our business and our ability to fund future operations and acquisitions. o Our ability to obtain additional financing for capital expenditures and other purposes may be limited. SINCE THE EXCHANGE NOTES ARE SUBORDINATED TO SENIOR DEBT, THERE MAY NOT BE SUFFICIENT ASSETS TO PAY AMOUNTS OWED ON THE EXCHANGE NOTES IF A DEFAULT OCCURS. The exchange notes will be subordinated to our current and future senior debt. In addition, the exchange notes will rank equally with our existing and future senior subordinated indebtedness and will be subordinated to the obligations of our subsidiaries. Upon a liquidation or in a bankruptcy or other similar proceeding, the holders of our senior debt will be entitled to be paid in full before any payment may be made to the holders of the exchange notes. In addition, creditors of our subsidiaries will be paid prior to any use of our subsidiaries' assets to make payments on the exchange notes. As a result, the holders of exchange notes may receive less, proportionately, than the holders of senior debt. We cannot assure you that we will have sufficient assets to pay amounts due on the exchange notes. Our indenture for the exchange notes will permit us to incur additional debt in the future, including the entire amount that will be available for borrowing under our bank credit facility. YOU MAY SUFFER ADVERSE CONSEQUENCES IF YOU DO NOT EXCHANGE EXISTING NOTES. The existing notes that are not exchanged for exchange notes have not been registered with the SEC or in any state. Unless the existing notes are registered, they may only be offered and sold pursuant to an exemptions from, or in a transaction that is not subject to, the registration requirements of the Securities Act. Depending upon the percentage of existing notes exchanged for exchange notes, the liquidity of the existing notes may be adversely affected. WE MAY NOT BE ABLE TO REPURCHASE EXCHANGE NOTES UPON A CHANGE OF CONTROL. If a change of control occurs, each holder of exchange notes will have the right to require us to repurchase all or any part of that holder's exchange notes as described under "Description of the Exchange Notes--Repurchase at the Option of Holders--Change of Control." Our bank credit facility -15- 18 prohibits the repurchase of the exchange notes. In order to repurchase the exchange notes, we would be required to repay our debt under our bank credit facility or obtain consents from our bank lenders. If we cannot repay the bank credit facility or obtain the consents, we would not be able to repurchase the exchange notes. Also, we may not have sufficient funds available or be able to obtain the financing necessary to repurchase the exchange notes. If a change of control occurs and we do not offer to repurchase the exchange notes or if we do not repurchase the exchange notes when we are required to, an event of default will occur under the indenture governing the exchange notes, which would also be a default under our bank credit facility. Each of these defaults could have a material adverse effect on us and the holders of the exchange notes. OIL AND GAS PRICES ARE VOLATILE AND WERE DEPRESSED RECENTLY. Our success is highly dependent on prices for oil and gas, which are extremely volatile. Beginning in 1997 and continuing through earlier this year, the prices we received for our production declined, especially for oil. Any substantial or extended decline in the price of oil would have a material adverse effect on us. Oil and gas markets are both seasonal and cyclical. The prices of oil and gas depend on factors we cannot control such as weather, economic conditions and government actions. Prices of oil and gas will affect the following aspects of our business: o our revenues, cash flows and earnings; o our ability to attract capital to finance our operations and the cost of the capital; o the amount we are allowed to borrow under our bank credit facility; o the value of our oil and gas properties; and o the profit or loss we incur in exploring for and developing our reserves. OUR CALIFORNIA HEAVY OIL PRODUCTION MAY INCREASE OUR SUSCEPTIBILITY TO OIL PRICE VOLATILITY. The price we receive for heavy oil is lower than for lighter oil. In addition, the difference between the prices we receive for California heavy oil and our production costs are less than for lighter grades. As a result, the effect of a decrease in the price of oil will more adversely affect the profitability of heavy oil compared with lighter oil. WE MAY BE UNABLE TO REPLACE RESERVES WHICH WE HAVE PRODUCED. Our future success depends upon our ability to find, develop and acquire additional oil and gas reserves that are economically recoverable. Without successful exploration, exploitation or acquisition activities, our reserves and revenues will decline. We cannot assure you that we will be able to find and develop or acquire additional reserves at an acceptable cost. WE MAY NOT BE SUCCESSFUL IN ACQUIRING AND DEVELOPING OIL AND GAS PROPERTIES. The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities and other factors. Such assessments are necessarily inexact. As a result, we may not recover the purchase price of a property from the sale of production from the property, or may not recognize an acceptable return from properties we acquired. In addition, we cannot assure you that -16- 19 our exploitation and development activities will result in any increases in reserves. Our operations may be curtailed, delayed or canceled as a result of lack of adequate capital and other factors, such as title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties or shortages or delays in the delivery of equipment. In addition, the costs of exploitation and development may materially exceed initial estimates. WE MAY NOT BE ABLE TO MAKE ACQUISITIONS OR GENERATE CASH FLOWS IF WE ARE UNABLE TO RAISE CAPITAL. We will be required to make substantial capital expenditures to develop our existing reserves and to discover new oil and gas reserves. Historically, we have financed these expenditures primarily with cash from operations, proceeds from bank borrowings and proceeds from the sale of debt and equity securities. We cannot assure you that we will be able to raise capital in the future. We also make offers to acquire oil and gas properties in the ordinary course of our business. If these offers are accepted, our capital needs may increase substantially. INFORMATION IN THIS PROSPECTUS REGARDING OUR FUTURE EXPLOITATION AND EXPLORATION PROJECTS REFLECTS OUR CURRENT INTENT AND IS SUBJECT TO CHANGE. We describe our current exploitation and exploration plans in this prospectus and the materials incorporated by reference in this prospectus. Whether we ultimately undertake an exploitation or exploration project will depend on the following factors: o availability and cost of capital; o receipt of additional seismic data or the reprocessing of existing data; o material changes in oil or gas prices; o the costs and availability of drilling rigs and other equipment, supplies and personnel necessary to conduct these operations; o success or failure of activities in similar areas; o changes in the estimates of the costs to complete the projects; o our ability to attract other industry partners to acquire a portion of the working interest to reduce exposure to costs and risks; and o decisions of our joint working interest owners. We will continue to gather data about our projects, and it is possible that additional information may cause us to alter our schedule or determine that a project should not be pursued at all. You should understand that our plans regarding our projects are subject to change. YOU SHOULD NOT PLACE UNDUE RELIANCE ON RESERVE INFORMATION BECAUSE RESERVE INFORMATION REPRESENTS ESTIMATES. Estimating quantities of proved reserves is inherently imprecise and involves uncertainties and factors beyond our control. The reserve data in this prospectus represent only estimates. Such estimates are based upon assumptions about future production levels, future oil and gas prices and future operating costs. As a result, the quantity of proved reserves may be subject to downward or -17- 20 upward adjustment. In addition, estimates of the economically recoverable oil and gas reserves, classifications of such reserves, and estimates of future net cash flows, prepared by different engineers or by the same engineers at different times, may vary substantially. Information about reserves constitutes forward-looking information. See "Forward-Looking Statements." Estimates as of June 30, 1999 included in this prospectus are estimates prepared by our internal staff of engineers and were not reviewed by our independent reserve engineers. See "Experts." WEATHER, UNEXPECTED SURFACE CONDITIONS, AND OTHER UNFORESEEN OPERATING HAZARDS MAY ADVERSELY IMPACT OUR OIL AND GAS ACTIVITIES. There are many operating hazards in exploring for and producing oil and gas, including: o our drilling operations may encounter unexpected formations or pressures which could cause damage to equipment or personal injury; o we may experience equipment failure which curtails or stops production; and o we could experience blowouts or other damages to the productive formations which may require a well to be re-drilled or other corrective action to be taken. In addition, any of the foregoing may result in environmental damages or personal injury for which we will be liable. Moreover, our offshore operations are subject to a variety of risks peculiar to the marine environment such as hurricanes and other adverse weather conditions. Offshore operations are also subject to more extensive governmental regulations. We cannot assure you that we will be able to maintain adequate insurance at rates we consider reasonable to cover our possible losses from operating hazards. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and results of operations. THE RECENT DEPRESSED FINANCIAL CONDITIONS IN THE OIL AND GAS INDUSTRY MAY CHANGE EXPLORATION AND DEVELOPMENT PLANS OR CAUSE DIFFICULTIES IN FINANCING ACTIVITIES. The low prices for oil and gas during 1998 and the first half of 1999 have limited the access of many independent oil and gas companies to the capital necessary to finance activities. As a result, the decision not to drill or complete a well may be based on a lack of available capital rather than the quality of the project. Most oil companies have substantially reduced their capital budgets for 1999 and 2000. In addition, some of the other working interest owners of our wells may be unwilling or unable to pay their share of the costs or projects as they become due. At worst, a working interest owner may declare bankruptcy and refuse or be unable to pay its share of the cost of a project. In such cases, we could be required to pay other working interest owners' share of the costs. TURMOIL IN FOREIGN COUNTRIES MAY AFFECT OUR FOREIGN INVESTMENTS. Our foreign investments involve risks typically associated with investments in emerging markets, including: o we may experience political instability in the countries where we have foreign investments; -18- 21 o we may be forced to renegotiate our contracts with foreign governments; o we may experience the nationalization of the oil and gas industry in the countries where we have foreign investments; o we may experience foreign government restrictions on their currency and large fluctuations in the exchange rate; and o we may have increased taxes or royalties imposed on our foreign operations by foreign governments. Political conditions in the geographic area around the Congo have been unstable in recent years. During 1997, a new government took power in the Congo following a civil war. Our Congo production is located approximately 30 miles offshore and has experienced no material interruption as a result of the political instability. We attempt to conduct our business in such a manner so that political and economical events of this nature will continue to have minimal effect on our operations, but we cannot assure you that we will be successful in protecting against such risks. Previous Congo governments have requested that we convert our Marine I Exploitation Permit to a production sharing agreement. We cannot assure you that the new government will not make such a request or as to the terms of the agreement if such a request is made. WE HAVE LESS CONTROL OVER OUR FOREIGN THAN OUR DOMESTIC INVESTMENTS. Foreign governments often retain ownership of the minerals. Our lack of control over the minerals could result in the following: o the foreign country may require exploration or development to progress on a faster of slower pace than we prefer; o the foreign country may require us to pay large royalties or taxes to them; and o the foreign country may require us to spend larger amounts on exploration and development than we have funds for or than we deem appropriate, which may mean that we forfeit all or a portion of acreage subject to this requirement. All of these events could reduce the value of our foreign investments. WE COULD INCUR LIABILITY IN CONNECTION WITH OUR PROPERTIES IN THE CONGO. In connection with our respective acquisitions of two subsidiaries owning interests in the Yombo field offshore the Republic of Congo, we and a wholly-owned subsidiary of CMS NOMECO Oil and Gas Co. agreed with the seller of the subsidiaries not to claim tax losses, called "dual consolidated losses," incurred by such subsidiaries prior to the acquisitions. Under the agreement, we and the CMS subsidiary may be liable to the seller for the recapture of dual consolidated losses utilized by the seller in years prior to the acquisitions if triggering events occur. These triggering events include: o the disposition by us or the CMS subsidiary of a respective Congo subsidiary; o either Congo subsidiary's sale of its interest in the Yombo field; o the acquisition of us or CMS by another consolidated group; or -19- 22 o the failure of a Congo subsidiary to continue as a member of its respective consolidated group. A triggering event will not occur, however, if a subsequent purchase enters into agreements specified in the U.S. Internal Revenue Service's consolidated return regulations intended to ensure that such dual consolidated losses will not be claimed. We have agreed with CMS that the party responsible for the triggering event shall indemnify the other for any liability to the seller as a result of such triggering event. Our potential direct liability could be as much as $50 million, as of December 31, 1998, if a triggering event with respect to us occurs. We believe that CMS's liability, for which we would be jointly liable with an indemnification right against CMS, could be as much as $67 million, as of December 31, 1998. We do not expect a triggering event to occur with respect to us or CMS and do not believe that the agreement will have a material adverse effect on us. WE MAY NOT HAVE PRODUCTION TO OFFSET HEDGES; BY HEDGING, WE MAY NOT BENEFIT FROM PRICE INCREASES. Part of our business strategy is to reduce our exposure to the volatility of oil and gas prices by hedging a portion of our production. In a typical hedge transaction, we will have the right to receive from the other parties to the hedge the excess of the fixed price specified in the hedge over a floating price based on a market index, multiplied by the quantity hedged. If the floating price exceeds the fixed price, we are required to pay the other parties this difference multiplied by the quantity hedged. We are required to pay the difference between the floating price and the fixed priced when the floating price exceeds the fixed price regardless of whether we have sufficient production to cover the quantities specified in the hedge. Significant reductions in production at times when the floating price exceeds the fixed price could require us to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging will also prevent us from receiving the full advantage of increases in oil or gas prices above the fixed amount specified in the hedge. The price of California heavy crude oil may vary widely from the index prices typically used in oil hedges. This difference increases the risk involved in hedging the California heavy crude oil. COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS COULD BE COSTLY AND COULD NEGATIVELY IMPACT PRODUCTION. Our operations are subject to numerous laws and regulations governing the operation and maintenance of our facilities and the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may: o require that we acquire permits before commencing drilling; o restrict the substances that can be released into the environment in connection with drilling and production activities; o limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; and o require remedial measure to mitigate pollution from former operations, such as plugging abandoned wells. Under these laws and regulations, we could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain limited insurance coverage for sudden and accidental environmental -20- 23 damages. We do not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost. Moreover, we do not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental environmental damages is available at a reasonable cost. Accordingly, we may be subject to liability or we may be required to cease production from properties in the event of environmental damages. FACTORS BEYOND OUR CONTROL AFFECT OUR ABILITY TO MARKET PRODUCTION. The ability to market oil and gas from our wells depends upon numerous factors beyond our control. These factors include: o the extent of domestic production and imports of oil and gas; o the availability of capacity to refine heavy oil; o the proximity of the gas production to gas pipelines; o the availability of pipeline capacity; o the demand for oil and gas by utilities and other end users; o the availability of alternative fuel sources; o the effects of inclement weather; o state and federal regulation of oil and gas marketing; and o federal regulation of gas sold or transported in interstate commerce. Because of these factors, we may be unable to market all of the oil or gas we produce. In addition, we may be unable to obtain favorable prices for the oil and gas we produce. THERE MAY NOT BE A LIQUID MARKET FOR RESALE OF THE EXCHANGE NOTES. There is not established trading market for the exchange notes. We do not intend to apply for listing the exchange notes on any securities exchange or for quotations through the NASDAQ National Market. We cannot assure you that a market for the exchange notes will develop, or that the market will have sufficient liquidity to enable resale of the exchange notes. WE FACE A THREAT OF BUSINESS DISRUPTION FROM THE YEAR 2000 ISSUE. The year 2000 issue refers to the inability of computer and other information technology systems to properly process date and time information, stemming from the outdated programming practice of using two digits rather than four to represent the year in a date. The consequence of the year 2000 issue is that computer and embedded processing systems are at risk of malfunctioning, particularly during the transition from 1999 to 2000. The effects of the year 2000 issue are exacerbated by the interdependence of the computer and telecommunications systems throughout the world. This interdependence also exists among Nuevo and our vendors, customers and business partners, as well as with regulators in the United States. -21- 24 Our operations are highly dependent on automation. The risks to us associated with the year 2000 issue fall into three general areas: o failure of our financial and administrative systems which could result in our receiving incorrect information upon which we base decisions; o failure of the embedded systems which control our highly automated production facilities; and o failure of our suppliers and purchasers to correct their year 2000 problems. -22- 25 CAPITALIZATION Our consolidated capitalization at June 30, 1999, as adjusted to give effect to the exchange of the exchange notes for the existing notes, is described below:
JUNE 30, 1999 ------------------------------------------- PRO PRO FORMA ACTUAL FORMA(1) AS ADJUSTED(2) ---------- ---------- ---------- (IN THOUSANDS) Cash and cash equivalents ........................................ $ 53,639 $ 46,116 $ 46,016 ========== ========== ========== Long-term debt (excluding current maturities): Credit Facility ................................................ $ 120,000 $ 120,000 $ 120,000 Exchange notes ................................................. -- -- 257,310 Existing notes ................................................. -- 257,310 -- 8 7/8% senior subordinated notes due 2008 ...................... 100,000 150 150 9 1/2% senior subordinated notes due 2006 ...................... 160,000 2,540 2,540 ---------- ---------- ---------- Total long-term debt ....................... 380,000 380,000 380,000 Company-obligated Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I ("TECONS") ..................... 115,000 115,000 115,000 Stockholders' equity: Preferred stock, $1.00 par value, 10,000,000 shares authorized; none outstanding ............................................. -- -- -- Common stock, $.01 par value, 50,000,000 shares authorized; 20,308,462 issued(3) ......................................... 203 203 203 Treasury stock, 449,255 shares ................................. (19,053) (19,053) (19,053) Stock held by benefit trust, 71,630 shares ..................... (2,014) (2,014) (2,014) Additional paid-in capital ..................................... 355,720 355,720 355,720 Accumulated deficit ............................................ (87,074) (88,804) (88,864)(4) ---------- ---------- ---------- Total stockholders' equity ........................ 247,782 246,052 245,992 ---------- ---------- ---------- Total capitalization .............................. $ 742,782 $ 741,052 $ 740,992 ========== ========== ==========
- ------------------- (1) Pro forma amounts give effect to the exchange of existing notes for our 9 1/2% senior subordinated notes due 2006 and our 8 7/8% senior subordinated notes due 2008. (2) Assumes that all holders of the existing notes validly tender their existing notes and that net fees and expenses payable by us associated with the exchange offer aggregate approximately $100,000. (3) Does not include 2,745,613 shares of common stock subject to outstanding options which may be issued under our stock incentive plans. (4) Reflects estimated costs and expenses for third-party financial advisory, legal and accounting services rendered in connection with the exchange offer. Does not include interest payable to holders of existing notes in the exchange offer. -23- 26 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected financial data for the five years ended December 31, 1998 and for the six-month periods ended June 30, 1998 and 1999. The financial data for each of the five years in the period ended December 31, 1998 has been derived from our audited consolidated financial statements for these periods which are incorporated by reference into this prospectus. The financial data for each of the six-month periods ended June 30, 1999 and 1998 has been derived from our unaudited condensed consolidated financial statements for these periods which are also incorporated by reference into this prospectus. Such unaudited financial statements have been prepared on the same basis as our audited financial statements. We believe that such unaudited financial statements contain all adjustments necessary for a fair presentation of the financial information presented (consisting only of normal recurring adjustments). Interim results are not necessarily indicative of results for the full year. The selected financial data is not necessarily indicative of our future results.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------------------------- -------------------- 1994(1) 1995(1) 1996(1) 1997(1) 1998 1998 1999 -------- -------- -------- -------- --------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Oil and gas revenues ................. $ 79,968 $102,455 $279,859 $331,973 $ 240,010 $123,045 $ 95,052 Gas plant revenues ................... 28,798 27,183 34,802 14,826 2,665 1,405 1,288 Pipeline and other revenues .......... 10,309 7,222 6,774 5,772 2,700 1,722 4 Gain on sale of assets, net .......... 2,402 -- 6,008 1,372 5,768 1,677 80,312 Interest and other income ............ 245 1,106 1,614 3,335 1,560 1,324 2,847 -------- -------- -------- -------- --------- -------- -------- Total revenues .................... 121,722 137,966 329,057 357,278 252,703 129,173 179,503 -------- -------- -------- -------- --------- -------- -------- Costs and expenses: Lease operating expenses ............. 15,160 28,873 93,062 120,042 134,704 65,774 57,876 Gas plant operating expenses ......... 25,794 22,667 29,311 13,356 3,202 1,423 2,336 Pipeline and other operating costs ... 6,767 4,726 6,105 5,243 2,028 1,842 143 Provision for impairment of oil and gas properties(2) ................. -- -- -- 30,000 68,904 -- -- Provision for (revision of) impairment of assets held for sale(3) ........................... -- -- -- 23,942 (3,740) -- -- Exploration costs .................... 4,300 2,357 4,571 11,082 16,562 2,331 9,999 Depreciation, depletion and amortization ...................... 48,144 45,233 75,664 102,158 85,036 46,556 46,257 General and administrative expenses .......................... 7,480 5,444 14,880 19,822 18,633 8,526 7,199 Outsourcing fees ..................... 6,369 5,857 10,249 11,984 9,461 7,199 6,846 Interest expense ..................... 12,560 15,389 36,009 27,357 32,471 14,444 16,400 Dividends on TECONS(4) ............... -- -- 165 6,613 6,613 3,306 3,306 Loss on sales of assets, net ......... -- 645 -- -- -- -- -- Other expense ........................ 2,387 45 1,069 3,019 5,726 1,846 2,836 -------- -------- -------- -------- --------- -------- -------- Total costs and expenses .......... 128,961 131,236 271,085 374,618 379,600 153,247 153,198 -------- -------- -------- -------- --------- -------- --------
-24- 27
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1994(1) 1995(1) 1996(1) 1997(1) 1998 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA) (Loss) income before income taxes, minority interest, and extraordinary item ....................... (7,239) 6,730 57,972 (17,340) (126,897) Income tax (benefit) expense ............... (2,865) 2,582 23,965 (6,656) (32,625) Minority interest in earnings (loss) of subsidiary ............................... 52 16 (271) (8) -- ---------- ---------- ---------- ---------- ---------- (Loss) income before extraordinary item .... (4,426) 4,132 34,278 (10,676) (94,272) Extraordinary loss on early extinguishment of debt net of income tax benefit of $2,037(5) ................................ -- -- -- 3,024 -- ---------- ---------- ---------- ---------- ---------- Net (loss) income .......................... $ (4,426) $ 4,132 $ 34,278 $ (13,700) $ (94,272) Dividends on preferred stock ............... 1,750 1,472 939 -- -- ---------- ---------- ---------- ---------- ---------- (Loss) income attributable to common stockholders ............................. $ (6,176) $ 2,660 $ 33,339 $ (13,700) $ (94,272) ========== ========== ========== ========== ========== (Loss) income per common share--basic ...... $ (0.57) $ 0.24 $ 1.99 $ (0.69) $ (4.76) ========== ========== ========== ========== ========== Weighted average common shares outstanding .............................. 10,763 11,057 16,755 19,796 19,795 ========== ========== ========== ========== ========== (Loss) income per common share--diluted .... $ (0.57) $ 0.23 $ 1.84 $ (0.69) $ (4.76) ========== ========== ========== ========== ========== Weighted average common and dilutive potential common shares outstanding ...... 10,763 11,355 18,596 19,796 19,795 ========== ========== ========== ========== ========== STATEMENT OF CASH FLOWS DATA: Net cash flows provided by (used in) operating activities ..................... $ 58,513 $ 37,194 $ 126,921 $ 165,462 $ 35,833 Net cash flows (used in) provided by investing activities ..................... $ (100,158) $ (32,582) $ (546,002) $ (169,478) $ (148,335) Net cash flows provided by (used in) financing activities ..................... $ 29,929 $ (2,294) $ 426,952 $ (412) $ 110,697 OTHER FINANCIAL DATA: Capital expenditures ....................... $ 105,048 $ 41,445 $ 582,346 $ 195,895 $ 163,274 EBITDAX(6) ................................. $ 55,363 $ 70,354 $ 168,373 $ 182,440 $ 73,181 Ratio of earnings to fixed charges(7) ...... -- 1.4x 2.6x -- -- Ratio of EBITDAX to interest expense(8) .... 4.4x 4.6x 4.7x 6.7x 2.3x Ratio of total debt to EBITDAX(9) .......... 2.2x 1.7x 1.7x 1.7x 5.8x Book value per common share--diluted ....... 10.92 10.86 18.58 16.40 11.71 BALANCE SHEET DATA: Working capital (deficit) .................. $ 6,396 $ 15,757 $ 22,338 $ 9,257 $ 111,629 Total assets ............................... 272,444 262,359 817,643 804,286 817,685 Total debt(9) .............................. 119,541 116,709 292,446 309,656 422,302 Stockholders' equity ....................... 117,557 123,349 345,439 324,739 231,878
SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1999 ---------- ---------- (UNAUDITED) (Loss) income before income taxes, minority interest, and extraordinary item ....................... (24,074) 26,305 Income tax (benefit) expense ............... (9,870) 10,521 Minority interest in earnings (loss) of subsidiary ............................... -- -- ---------- ---------- (Loss) income before extraordinary item .... (14,204) 15,784 Extraordinary loss on early extinguish of debt net of income tax benefit of $2,037(5) ................................ -- -- ---------- ---------- Net (loss) income .......................... $ (14,204) $ 15,784 Dividends on preferred stock ............... -- -- ---------- ---------- (Loss) income attributable to common stockholders ............................. $ (14,204) $ 15,784 ========== ========== (Loss) income per common share--basic ...... $ (0.72) $ 0.80 ========== ========== Weighted average common shares outstanding .............................. 19,759 19,848 ========== ========== (Loss) income per common share--diluted .... $ (0.72) $ 0.79 ========== ========== Weighted average common and dilutive potential common shares outstanding ...... 19,759 19,915 ========== ========== STATEMENT OF CASH FLOWS DATA: Net cash flows provided by (used in) operating activities ..................... $ 21,917 $ (13,156) Net cash flows (used in) provided by investing activities ..................... $ (94,603) $ 99,642 Net cash flows provided by (used in) financing activities ..................... $ 69,842 $ (40,250) OTHER FINANCIAL DATA: Capital expenditures ....................... $ 100,414 $ 100,021 EBITDAX(6) ................................. $ 40,886 $ 21,955 Ratio of earnings to fixed charges(7) ...... -- 2.3x Ratio of EBITDAX to interest expense(8) .... 2.8x 1.3x Ratio of total debt to EBITDAX(9) .......... N/A N/A Book value per common share--diluted ....... 15.79 12.44 BALANCE SHEET DATA: Working capital (deficit) .................. $ 2,598 $ 55,917 Total assets ............................... 851,387 790,274 Total debt(9) .............................. 380,754 382,051 Stockholders' equity ....................... 311,933 247,782
- --------------------- (1) Effective January 1, 1998, we changed our method of accounting for our investments in oil and gas properties from the full cost to the successful efforts method. All prior years' financial statements presented in this prospectus have been restated to reflect this change. (2) We incurred an impairment of $68.9 million at December 31, 1998 and $30.0 million at December 31, 1997 on certain fields due to decreased crude oil prices. (3) The provision for impairment of assets held for sale reflects a charge we took to write down our midstream assets to their fair value in 1997. These assets are primarily gas pipelines and processing plants. The impairment represents our estimate of the difference between the book value of these assets and the amount we expect to receive when we sell the assets. -25- 28 (4) TECONS are the Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of our financing subsidiary Nuevo Financing I. The principal assets of Nuevo Financing I are $115.0 million of our 5 3/4% convertible subordinated debentures due December 15, 2026. Interest we pay on the 5 3/4% debentures to Nuevo Financing I are paid by Nuevo Financing I as dividends on the TECONS. (5) During 1997, we redeemed our 12 1/2% senior subordinated notes prior to maturity and recorded $3.0 million as our extraordinary loss on early extinguishment of debt, net of income tax benefit. (6) The term "EBITDAX" means earnings before interest, dividends on TECONS, taxes, depreciation, depletion and amortization, property impairment, gain/loss on sale and exploration costs. EBITDAX is included because it is commonly used as a measure of a company's ability to incur indebtedness. EBITDAX should not be used as a substitute for cash flow from operating activities or other income or cash flow information prepared in accordance with generally accepted accounting principals as an indication of profitability or liquidity. EBITDAX may not be comparable to similarly titled items of other companies. (7) When we calculate our ratio of earnings to fixed charges, earnings means income or loss before income taxes and fixed charges. Fixed charges means the sum of the following: o interest expense; o dividends on the TECONS; o amortization of debt issuance costs; and o the portion of operating leases deemed to be representative of interest. Earnings were not sufficient to cover fixed charges for 1994, 1997 and 1998 by $ 7.2 million, $19.5 million and $127.5 million, respectively, and for the six months ended June 30, 1998 by $24.6 million. (8) For purposes of this calculation, interest expense does not include dividends or interest payments on the TECONS. (9) Total debt does not include the TECONS. -26- 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are an independent oil and gas company. Our properties are concentrated in California, where we are the largest independent producer, with properties located both onshore and offshore. Our onshore California properties are located primarily in the San Joaquin, Los Angeles and Ventura Basins. Our offshore California properties are located in the Santa Barbara Channel and offshore Long Beach. We also own properties in the onshore Gulf Coast region and internationally offshore the Republics of Congo and Ghana in West Africa and onshore in Tunisia. Since our inception in 1990, we have expanded our operations through a series of disciplined, low-cost acquisitions of oil and gas properties and the subsequent exploitation and development of these properties. We have complemented these efforts with strategic divestitures and an opportunistic exploration program which provides exposure to prospects with the potential to add substantially to the growth of our shareholder value. On January 1, 1998, we changed the method we use to account for our investments in oil and gas properties from full cost to the successful efforts method. We believe that the change to the successful efforts method improves earnings quality and results in a balance sheet which more closely approximates the underlying economic value of our assets. In accordance with accounting rules, we have restated all prior year financial statements to give effect to the change to successful efforts accounting. The effect, after tax, of the change in accounting method as of December 31, 1997, was a reduction to retained earnings of $64.1 million. See the notes to our financial statements for additional information on the successful efforts method of accounting. RESULTS OF OPERATIONS Our results of operations are significantly affected by the prices we receive for our oil and gas production and the costs we incur to produce oil and gas. The following table shows our oil and gas production, average oil and gas prices and average costs incurred. The sales prices in the following table includes the effect of hedges.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------ ----------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- Production Data: Oil (MBBLS) (1) ......................... 13,344 17,409 18,806 9,364 8,757 Gas (MMcf) .............................. 34,775 35,625 32,521 16,736 8,227 Average Sales Price Per Unit: Oil (per Bbl) ........................... $ 15.84 $ 14.86 $ 9.25 $ 9.48 $ 9.07 Gas (per Mcf) ........................... 2.08 2.06 2.00 2.01 1.87 Cost Per BOE: Operating expenses, including severance taxes ................................. $ 4.86 $ 5.14 $ 5.56 $ 5.41 $ 5.71 Depreciation, depletion and amortization .......................... 3.72 4.23 3.45 3.77 4.49
- ------------------------- (1) Includes natural gas liquids. Our results of operations have also been affected by our acquisitions and sales of oil and gas properties. In April 1996, we acquired properties in California which currently form our core -27- 30 operating areas. In January 1999, we sold substantially all of our natural gas properties in East Texas for proceeds of $192.0 million. We placed $100 million of these proceeds in an escrow account to effect a like-kind exchange for federal tax purposes if we acquired oil and gas properties within six months following the East Texas sale. We closed the Star acquisition on June 28, 1999 for $61.4 million with a portion of the funds in escrow. Comparison of Six Months Ended June 30, 1999 and 1998 Revenues Oil and gas revenues for the six months ended June 30, 1999 were $95.1 million, or 23% lower than oil and gas revenues of $123.0 million for the same period in 1998. This decrease was primarily due to lower realized oil and gas prices in the first half of 1999, reduced oil volumes due to reduced capital spending and the sale of several non-core assets in 1999 and reduced gas volumes as a result of the sale of the East Texas natural gas properties on January 6, 1999. The following is a description of our oil and gas revenues by operating area. East: Oil and gas revenues for the six months ended June 30, 1999 were $7.7 million, or 68% lower than oil and gas revenues of $24.2 million for the same period in 1998. The decrease results primarily from lower natural gas production due to the sale of the East Texas natural gas properties as well as lower realized natural gas prices. West: Oil and gas revenues for the six months ended June 30, 1999 were $76.5 million, or 16% lower than oil and gas revenues of $90.7 million for the same period in 1998. This decrease is primarily due to a 7% lower realized oil price in the first half of 1999 as well as reduced oil volumes due to reduced capital spending. The realized oil price of $8.47 per barrel for the six months ended June 30, 1999, includes a hedging loss of $1.28 per barrel of oil produced.. International: Oil revenues for the six months ended June 30, 1999 were $10.9 million as compared to $8.1 million for the same period in 1998. The 34% increase results from a 19% increase in oil production along with a 13% increase in oil price realizations to $12.86 per barrel. Gain on sale for the six months ended June 30, 1999 was $80.3 million. Such gain was recognized in connection with the sale of the East Texas natural gas properties for proceeds of $191.1 million, as adjusted for final accounting, along with the sale of several non-core assets. Gain on sale for the six months ended June 30, 1998 was $1.7 million, which relates to the sale of our interest in the Coke field in Chapel Hill, Texas. Interest and other income for the six months ended June 30, 1999, includes $2.4 million associated with interest earned on the $100.0 million in proceeds from the sale of the East Texas natural gas properties funded into an escrow account to provide "like-kind exchange" tax treatment in the event we acquired domestic producing oil and gas properties in the first half of 1999. The escrow account was liquidated in late June and early July 1999, in connection with our June 1999 acquisition of certain California oil properties from Texaco, Inc. and repayment of a portion of bank debt, respectively. Expenses Lease operating expenses for the six months ended June 30, 1999 totaled $57.9 million, or 12% lower than $65.8 million for the six months ended June 30, 1998. Lease operating expenses per BOE were $5.71 in the first half of 1999, compared to $5.41 in the same period in 1998. The following is a description of our lease operating expenses by operating area. -28- 31 East: Lease operating expenses for the six months ended June 30, 1999 totaled $1.6 million, or 75% lower than $6.3 million for the six months ended June 30, 1998. The decrease is primarily attributable to the sale of the East Texas natural gas properties in January of 1999. Lease operating expenses per BOE were $2.36 in the first half of 1999, compared to $3.07 in the same period in 1998. West: Lease operating expenses for the six months ended June 30, 1999 totaled $50.0 million, or 7% lower than $53.9 million for the six months ended June 30, 1998. Lease operating expenses per BOE were $5.80 in the first half of 1999, compared to $5.74 in the same period in 1998. In the first quarter of 1998, poor weather conditions in California caused landslides and power outages, which resulted in $2.3 million of incremental, unusual costs. Reduced workover costs onshore in 1999 also contributed to the lower lease operating expenses year over year. International. Lease operating expenses for the six months ended June 30, 1999 totaled $6.3 million, or14% higher than $5.6 million for the six months ended June 30, 1998. Lease operating expenses per BOE were $7.44 in the first half of 1999, compared to $7.79 in the same period in 1998. Gas plant operating expenses were $2.3 million for the six months ended June 30, 1999 as compared to $1.4 million for the six months ended June 30, 1998. The 64% increase in gas plant expenses in 1999 compared to 1998 is due to increased ad valorem taxes. Exploration costs, which are composed of geological and geophysical costs, dry hole costs, delay rentals and expensed project costs, were $10.0 million and $2.3 million for the six months ended June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999, exploration costs are comprised of: o $7.3 million in dry hole costs; o $1.5 million in geological and geophysical costs; o $0.3 million in delay rentals; and o $0.9 million in expensed project cost. For the six months ended June 30, 1998, exploration costs were comprised of: o $0.1 million in dry hole costs; o $2.0 million in geological and geophysical costs; and o $0.2 million in delay rentals. East: During the first half of 1999, we plugged and abandoned the DeBord #1 well in our East area. The dry hole costs associated with this well were $0.6 million. The first half of 1999 also includes $0.2 million of geological and geophysical costs associated with a prospect in South Louisiana. Exploration costs in the first half of 1999 were $0.5 million. West: During the first half of 1999, we decided to plug and abandon the Cree Fee #1 well in the Midway Peak prospect area onshore California. The dry hole costs associated with this well were $6.5 million. Exploration costs in the first half of 1998 were $0.5 million. -29- 32 International: During the first half of 1999, $1.0 million in geological and geophysical costs were expensed associated with the Accra Keta and the East Cape Three Points prospects in Ghana. Exploration costs of $1.3 million in the first half of 1998 relates to geological and geophysical costs in Ghana. Depreciation, depletion and amortization of $46.3 million for the six months ended June 30, 1999 reflects a slight decrease from $46.6 million in the same period in 1998, due primarily to decreased production volumes offset by a higher depletion rate per BOE on our oil and gas properties. The weighted average depletion rate per BOE in the first half of 1999 was $4.57 versus $3.83 in the first half of 1998. Several factors contributed to the change in the average depletion rate per BOE. First, the property mix changed as the lower cost East Texas natural gas properties were sold in January. Second, our year end reserves decreased by approximately 12% from the previous year primarily as a result of lower crude oil prices utilized in computing estimated net proved reserves at year end 1998. Finally, the impairment of $68.9 million recognized in the fourth quarter of 1998 reduced the capitalized costs to be depleted and partially offset the increase in the depletion rate per BOE. The following is a description of depreciation, depletion and amortization by operating area. East: Depreciation, depletion and amortization of $4.3 million for the six months ended June 30, 1999 reflects a 34% decrease from $6.5 million in the same period in 1998, due primarily to decreased production volumes as a result of the sale of the East Texas natural gas properties in January 1999. West: Depreciation, depletion and amortization of $37.3 million for the six months ended June 30, 1999 reflects a 1% increase from $36.8 million in the same period in 1998, due primarily to an increased average depletion rate per BOE offset by decreased production volumes. International: Depreciation, depletion and amortization of $3.9 million for the six months ended June 30, 1999 reflects a 56% increase from $2.5 million in the same period in 1998, due primarily to an increased average depletion rate per BOE as well as increased production volumes. General and administrative expenses, together with outsourcing fees, totaled $7.2 million and $8.5 million in the six months ended June 30, 1999 and 1998, respectively. The 16% decrease is due primarily to a reduction in bonus accruals, engineering costs and third-party consulting studies. Interest expense of $16.4 million incurred in the six months ended June 30, 1999 reflects an increase of 14% as compared to interest expense of $14.4 million in the six months ended June 30, 1998. The increase is primarily attributable to our issuance of $100.0 million of 87/8% Senior Subordinated Notes due 2008 in June of 1998, which we used to repay lower-interest bank debt. In March 1999, we discovered that a non-officer employee had fraudulently authorized and diverted for personal use funds totaling $5.9 million, $4.3 million in 1998 and the remainder in the first quarter of 1999, that were intended for international exploration. Accordingly, we have reclassified the amounts lost in 1998 and 1999 from exploration costs to other expense. Based on our review of the facts, management is confident that only one employee was involved in the matter and that all misappropriated funds have been identified. Our board engaged a certified fraud examiner to conduct an in-depth review of the fraudulent transactions to determine the scope of the fraud, the possibility of recovery of amounts lost from insurance, from the terminated employee and/or from third parties, and to make recommendations regarding what, if any, new internal control procedures should be implemented. -30- 33 Net Income Net income of $15.8 million, $0.80 per common share -- basic and $0.79 per common share --diluted, was generated for the six months ended June 30, 1999, as compared to a net loss of $14.2 million, ($0.72) per common share -- basic and diluted, in the same period in 1998. Comparison of Years Ended December 31, 1996, 1997 and 1998 Revenues We have experienced significant oil and gas revenue volatility in recent years. Low oil prices are primarily responsible for the decreased revenues in 1998, while our acquisitions of producing properties and development drilling programs are primarily responsible for the increased revenues during 1997 and 1996. During this three year period, the volatility of oil and gas prices directly impacted revenues. To reduce our exposure to changes in oil and gas prices, we periodically utilize derivative financial instruments. As a result of such hedging transactions, oil and gas revenues were increased by $0.6 million in 1998, and were reduced by $6.0 million and $2.5 million in 1997 and 1996, respectively. Oil and gas revenues for 1998 of $240.0 million were 28% lower than 1997 oil and gas revenues of $332.0 million, primarily due to a 38% decrease in average realized oil prices from $14.86 per barrel in 1997 to $9.25 per barrel in 1998. Also contributing to this decline in oil and gas revenues were decreases in natural gas production and realized gas prices. Our gas production decreased 9% from 35.6 Bcf in 1997 to 32.5 Bcf in 1998. Average realized gas prices decreased 3% from $2.06 per Mcf in 1997 to $2.00 per Mcf in 1998. The decline in oil and gas revenues was partially offset by a 9% increase in our oil production from 17.1 MMBbls in 1997 to 18.5 MMBbls in 1998. The following is a description of our oil and gas revenues by operating area. East: Oil and gas revenues decreased 24% from $61.5 million in 1997 to $46.9 million in 1998. This decrease is primarily due to a 10% decrease in gas production from 20.8 Bcf in 1997 to 18.8 Bcf in 1998, as well as a 13% decrease in the average realized price of gas from $2.08 per Mcf in 1997 to $1.80 per Mcf in 1998. West: Oil and gas revenues decreased 28% from $247.7 million in 1997 to $177.3 million in 1998. This decrease is primarily due to a 39% decrease in the average realized price of oil from $14.73 per Bbl in 1997 to $8.98 per Bbl in 1998, which was partially offset by an 11% increase in oil production from 14.7 MMBbls in 1997 to 16.3 MMBbls in 1998. International: Oil and gas revenues decreased 31% from $22.8 million in 1997 to $15.8 million in 1998. This decrease was primarily due to a 26% decrease in the average realized price of oil from $14.66 per Bbl in 1997 to $10.82 per Bbl in 1998, as well as a decrease in oil production of 6% from 1.6 MMBbls in 1997 to 1.5 MMBbls in 1998. Oil and gas revenues for 1997 of $332.0 million were 19% higher than 1996 oil and gas revenues of $279.9 million, primarily due to 30% increase in oil production (including natural gas liquids) from 13.3 MMBbls in 1996 to 17.4 MMBbls in 1997. This increase in oil volumes is attributable to the fact that 1997 included an entire year of operating results for the California properties we acquired in April 1996, compared to only nine months in 1996. These California properties accounted for 75% of total oil and gas revenues in 1997. The increase in production was partially offset by the disruption of Point Pedernales production due to an oil spill in September 1997 and a decrease in the average realized prices of oil and gas in 1997. Our average realized price for oil in 1997 was $14.86 per barrel, a 6% decrease from $15.84 in 1996. Our average realized price for gas in 1997 was $2.06, a 1% -31- 34 decrease from $2.08 in 1996. The following is a description of our oil and gas revenues by operating area. East: Oil and gas revenues decreased 18% from $74.9 million in 1996 to $61.5 million in 1997. This decrease is due to: o a 6% decrease in gas production from 22.2 Bcf in 1996 to 20.8 Bcf in 1997; o a 36% decrease in oil production from 1.4 MMBbls in 1996 to 878 MBBLS in 1997; o a 7% decrease in the average realized price of oil from $20.39 per Bbl in 1996 to $18.95 per Bbl in 1997; and o a slight decrease in the average realized price of gas from $2.13 per Mcf in 1996 to $2.08 per Mcf in 1997. West: Oil and gas revenues increased 34% from $184.3 million in 1996 to $247.7 million in 1997. This increase is primarily due to the fact that 1997 included an entire year of operating results for the California properties, compared to only nine months in 1996. International: Oil and gas revenues increased 10% from $20.7 million in 1996 to $22.8 million in 1997. This increase is primarily due to a 10% increase in oil production from 1.4 MMBbls in 1996 to 1.6 MMBbls in 1997. Gas plant revenues in 1998 of $2.7 million were 82% lower than 1997 revenues of $14.8 million. This decrease is due to the sale of our interest in the Benedum Plant System in May 1997. Gas plant revenues in 1997 of $14.8 million were 57% lower than 1996 revenues of $34.8 million due to the sale of our investment in the Benedum Plant System in May 1997. We recognized a $2.3 million pre-tax gain on the sale. Pipeline and other revenues in 1998 of $2.7 million were 53% lower than 1997 revenues of $5.8 million. This decrease is primarily due to the sale of our interests in the Richfield Gas Storage facility in February 1998 and Bright Star Gathering, Inc. in July 1998. Pipeline and other revenues in 1997 of $5.8 million were 15% lower than 1996 revenues of $6.8 million, as a result of lower throughput during 1997 compared to 1996. Gain on sale of assets for 1998 was $5.8 million. This gain on sale of assets includes: o a $4.1 million gain on the sale of our interest in the Sansinena field in California in the third quarter of 1998; and o a $1.7 million gain on the sale of our interest in the Coke field in Chapel Hill, Texas in the first quarter of 1998. The net gain on sale of assets for 1997 was $1.4 million, which is comprised of: o a $1.4 million gain on the sale of our interest in Second Bayou, Weeks Island, Louisiana; o a $2.3 million gain on our interest in the Benedum Plant System; o a $1.6 million loss on the sale of our interest in the South Timbalier field; and -32- 35 o a $0.7 million loss on the sale of other non-core properties. The net gain on sale of assets for 1996 was $6.0 million, which is comprised of a $9.2 million gain on the sale of our interest in the Giddings field and East Texas Austin Chalk holdings in June 1996, which was offset by a $3.2 million loss on the sale of other non-core properties. Expenses Lease operating expenses for 1998 totaled $134.7 million, as compared to $120.0 million and $93.1 million for 1997 and 1996, respectively. The annual increases of 12% in 1998 and 29% in 1997 are generally reflective of higher production and costs associated with our California properties, which constituted 77%, 73% and 66% of total production in 1998, 1997 and 1996, respectively. In 1998, we experienced an increase in workovers of $11.2 million as compared to the same period in 1997, as well as poor weather conditions in the first quarter of 1998 in California that caused landslides and power outages, which resulted in $2.3 million of incremental, unusual costs. In 1997, lease operating expenses were incurred for an entire year versus only nine months in 1996, since the California properties acquired from Unocal were acquired in April 1996. The following is a description of the lease operating expenses by operating area. East: Lease operating expenses decreased slightly from $11.9 million in 1997 to $11.6 million in 1998. Lease operating expenses for our eastern oil and gas operations decreased 16% from $14.1 million in 1996 to $11.9 million in 1997, primarily due to a 14% decrease in oil and gas production. West: Lease operating expenses increased 16% from $96.1 million in 1997 to $111.2 million in 1998. This increase was due to an increase in workovers as compared to the same period in 1997, as well as poor weather conditions in the first quarter of 1998 in California that caused landslides and power outages which resulted in $2.3 million of incremental, unusual costs. Lease operating expenses for the west increased 41% from $68.1 million in 1996 to $96.1 million in 1997, since we owned the California properties for an entire year in 1997 versus only nine months in 1996. International: Lease operating expenses decreased slightly from $12.0 million in 1997 to $11.9 million in 1998. Lease operating expenses for our foreign oil and gas operations increased 10% from $10.9 million in 1996 to $12.0 million in 1997 due to a 10% increase in production. Gas plant operating expenses of $3.2 million in 1998 decreased 76% from $13.4 million in 1997, which decreased 54% from $29.3 million in 1996. These decreases are due to the sale of our investment in the Benedum Plant System in May 1997. Pipeline and other operating expenses for 1998 totaled $2.0 million, as compared to $5.2 million and $6.1 million in 1997 and 1996, respectively. The 61% decrease in 1998 is primarily due to the sale of our interests in the Richfield Gas Storage facility in February 1998 and Bright Star Gathering, Inc. in July 1998. The 14% decrease in 1997 is due to lower throughput in 1997 as compared to 1996. Exploration costs, including geological and geophysical costs, dry hole costs and delay rentals, were $16.6 million, $11.1 million and $4.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. Exploration costs for the year ended 1998 included: o $13.0 million of dry hole costs ($7.3 million of which relates to exploration activity in Ghana, West Africa); -33- 36 o $2.1 million of geological and geophysical costs ($1.5 million of which relates to activity in Ghana); o $0.9 million of delay rentals; and o $0.6 million of other exploration costs. Exploration costs for the year ended 1997 included: o $9.3 million of dry hole costs; o $0.7 million of geological and geophysical costs; o $1.0 million of delay rentals; and o $0.1 million of other exploration costs. Exploration costs for the year ended 1996 included: o $3.1 million of dry hole costs; o $1.2 million of geological and geophysical costs; o $0.2 million of delay rentals; and o $0.1 million of other exploration costs. Depreciation, depletion and amortization of $85.0 million in 1998 decreased 17% from $102.2 million in 1997, which increased 35% from $75.7 million in 1996. The decrease in 1998 is primarily due to the year-end 1997 impairment of $30.0 million related to the excess of capitalized costs over future net revenues, as well as the reclassification of the East Texas natural gas properties to assets held for sale as of July 1, 1998, at which point the properties were no longer depleted. The increase in 1997 is attributable to increased production volumes in 1997, due to the acquisition of the California properties from Unocal in April 1996. We recorded provisions for impairment of oil and gas properties in 1998 and 1997 in the amounts of $68.9 million and $30.0 million, respectively. These impairments were recorded as a result of declines in the price of oil, which caused capitalized costs to be in excess of future net revenues. No such impairment was recognized during 1996. In December 1997, we recorded a $23.9 million provision for impairment on assets held for sale, in connection with our plans to dispose of our non-core gas gathering, pipeline and gas storage assets during 1998, including all such assets except our California gas plants. A positive revision to this charge was made in the fourth quarter of 1998 in the amount of $3.7 million to reflect the estimated current fair market value of the Illini pipeline. General and administrative expenses totaled $18.6 million, $19.8 million, and $14.9 million in 1998, 1997 and 1996, respectively. The 6% decrease in 1998 is primarily due to a reduction in employee bonuses in 1998 and a $1.7 million severance expense incurred in the third quarter of 1997 associated with the resignation of our president and chief executive officer. These decreases were offset in part by non-recurring costs incurred in 1998 associated with outside engineering costs and third-party consulting studies associated with the re-negotiation of our outsourcing agreements. The -34- 37 33% increase in 1997 compared to 1996 is primarily due to additional general and administrative costs associated with a full year of operations from the California properties acquired from Unocal in 1996 and the $1.7 million severance payment referred to above. Outsourcing fees were $9.5 million, $12.0 million, and $10.2 million in 1998, 1997 and 1996, respectively. The 21% decrease in 1998 is primarily due to decreased operating cash flows as a result of low realized oil prices. The 17% increase in 1997 is primarily due to the fact that we had a full year of operations from the California properties in 1997 as compared to 1996. Interest expense of $32.5 million for 1998 increased 19% from $27.4 million in 1997, primarily as a result of additional borrowings under the our bank credit facility and the issuance in June 1998 of $100.0 million of 8 7/8% notes. Interest expense for 1997 decreased 24% from $36.0 million in 1996, primarily as a result of our redemption of the 12 1/2% notes, as well as decreased debt under the bank credit facility due to the repayment of a portion of the debt outstanding under this facility with the proceeds from the issuance of the TECONS in late 1996. Dividends on the TECONS increased from $0.2 million in 1996 to $6.6 million in 1998 and 1997. The TECONS pay dividends at a rate of 5.75% and were issued in December 1996. In March 1999, we discovered that an employee had fraudulently authorized and diverted for personal use funds totaling $5.9 million, $4.3 million in 1998 and the remainder in 1999, that were intended for international exploration. Accordingly, we have reclassified the amounts lost in 1998 from exploration costs to other expense. Based on its review of the facts, management is confident that only one employee was involved in the matter and that all misappropriated funds have been identified. The board of directors has engaged a certified fraud examiner to conduct an in-depth review of the fraudulent transactions to determine the scope of the fraud, the possibility of recovery of amounts lost from insurance, from the terminated employee and/or from third parties, and to make recommendations regarding what, if any, new internal control procedures should be implemented. Income tax benefit of $32.6 million was recognized in 1998, compared to a benefit of $8.7 million in 1997 and expense of $24.0 million in 1996. Our effective income tax rate was (25.7)%, (38.8)% and 41.3% in 1998, 1997 and 1996, respectively. At December 31, 1998, we determined that it was more likely than not that a portion of the deferred tax assets will not be realized and the valuation allowance was increased by $16.9 million to a total valuation allowance of $17.6 million. Extraordinary Loss In June 1997, we recorded an extraordinary loss on the early extinguishment of our 12 1/2% notes in the amount of $3.0 million, net of the related tax benefit of $2.0 million. No extraordinary items were recorded in 1998 or 1996. Net Income (Loss) A net loss of $94.3 million was generated in 1998, as compared to a net loss of $13.7 million in 1997 and net income of $34.3 million in 1996. Net income after deducting dividends paid on the 7% preferred stock was $33.3 million in 1996. There was no 7% preferred stock outstanding during 1998 or 1997; as such, no preferred dividends were paid in 1998 or 1997. -35- 38 PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT EXPENDITURES Our expenditures to acquire properties, and for exploration and development for the three years ended December 31, 1998 and for the six months ended June 30, 1999 are set forth in the following table:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------------ JUNE 30, 1996 1997 1998 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS) Acquisitions ....... $ 492,603 $ 10,206 $ 10,733 $ 61,416 Development ........ 73,610 156,328 116,631 30,552 Exploration ........ 16,133 29,361 35,910 6,143 ---------- ---------- ---------- ---------- $ 582,346 $ 195,895 $ 163,274 $ 98,111 ========== ========== ========== ==========
Our capital budget for 1999 includes $40.0 million for exploitation and development, $28.0 million of which is budgeted to be spent in California, $5.0 million in the Gulf Coast area and $7.0 million internationally. Our capital budget for 1999 also includes $17.0 million for exploration, $7.0 million of which is targeted for California, $2.0 million for the Gulf Coast area and $8.0 million internationally. Our capital budget for 1999 does not include any amounts for acquisitions, which could be material. As of June 30, 1999, we had spent approximately 48% of our capital budget for exploitation and 46% for exploration. In addition, in June 1999 we closed the Star acquisition for $61.4 million. Our 1999 capital budget is significantly smaller than our capital budgets for 1998 and 1997, primarily because of the depressed oil prices. Although oil prices have recently improved, we have not increased our 1999 capital budget. CAPITAL RESOURCES AND LIQUIDITY Since our inception, we have grown and focused our operations through a series of disciplined, low cost acquisitions of oil and gas properties and the subsequent exploitation and development of these properties. We have complemented these efforts with an opportunistic exploration program which provides exposure to prospects that have the potential to add substantially to our growth. The funding of these activities has historically been provided by operating cash flows, bank financing, private and public placements of debt and equity securities, property divestitures and joint ventures with industry participants. Net cash provided by operating activities was $35.8 million, $165.5 million, and $126.9 million in 1998, 1997 and 1996, respectively. We invested $157.4 million, $195.1 million and $516.0 million in oil and gas properties in 1998, 1997 and 1996, respectively. Additionally, we spent $2.8 million, $1.7 million and $21.1 million on gas plant and other facilities in 1998, 1997 and 1996, respectively. Included in the oil and gas capital expenditures for 1998 is approximately $81.5 million for development drilling activity in California. In our 1999 capital budget, approximately $40.0 million is allocated to exploitation and development projects and approximately $17.0 million is directed to prospect generation and exploration. Exploitation spending is anticipated to consist of $28.0 million in California, $5.0 million in the Gulf Coast region, and $7.0 million internationally. We plan to allocate exploration spending of $7.0 million in California, $2.0 million in the Gulf Coast region, and $8.0 million internationally. Changes in our cash flow from operations due to oil and gas price fluctuations may cause us to revise our capital expenditure plans. -36- 39 As of June 30, 1999, we had unused commitments under our bank revolving credit facility of $91.0 million and cash balances of $51.6 million. Effective January 6, 1999, the borrowing base on our bank credit facility was reduced from $380.0 million to $200.0 million, reflecting the sale on that date of our East Texas properties, and a significant decline in current and projected oil prices since the previous determination. We plan to sell some of our surface real estate assets in Orange County, California, during 1999 and use a portion of the proceeds to fund a portion of our 1999 capital program. We believe our working capital, cash provided by operating activities, property divestitures, project financing resources and the bank credit facility are sufficient to meet these capital commitments. MARKET RISK DISCLOSURE -- HEDGING We are exposed to market risk, including adverse changes in commodity prices and interest rates. Commodity Price Risk. We produce and sell crude oil, natural gas and natural gas liquids. As a result, our operating results are significantly affected by fluctuations in commodity prices caused by changing market forces. We periodically seek to reduce our exposure to price volatility by hedging our production through swaps, options and other commodity derivative instruments. We use hedge accounting for these instruments when available, and we report settlements of gains or losses on these contracts as a component of oil and gas revenues and operating cash flows in the period realized. These agreements expose us to counterparty credit risk to the extent that the counterparty is unable to meet its settlement commitments to us. Changes in prices for California crude oil production, especially sour heavy oil production, do not closely follow changes in the prices of oil futures prices on the NYMEX or other established futures markets. The difference we receive for our California production and the NYMEX prices or prices on other established futures markets is referred to as basis differential. The volatility of the basis differential makes it difficult to effectively hedge our California production. For the second half of 1999, we are party to crude oil swaps on an average of 30,000 Bbls per day, or 67% of our estimated crude oil production, at an average NYMEX price of $16.35 per Bbl. For calendar year 2000, we have entered into crude oil swaps on 16,500 Bbls per day, or 30% of our estimated crude oil production, at an average NYMEX price of $17.94 per Bbl. In addition, for calendar year 2000, we have hedged an additional 30% of our estimated crude oil production through the purchase of put options on 16,500 Bbls per day at a NYMEX price of $16.00 per Bbl, and the sale of call options on 16,500 Bbls per day at an average NYMEX price of $21.21 per Bbl. There was no net cost to us for these options. Interest Rate Risk. We may enter into financial instruments such as interest rate swaps to manage the impact of changes in interest rates. In 1999, we entered into an agreement which has the effect of hedging the price at which we may repurchase $16.4 million in principal amount of our 9 1/2% notes and converts the interest rate under the portion of the 9 1/2% notes subject to the agreement to a floating rate for a period of one year. The floating rate in June 1999 was 5.6%. The counterparty to this agreement is Bank of America, N.A. -37- 40 Our exposure to changes in interest rates primarily results from our short-term and long-term debt with both fixed and floating interest rates. The following table sets forth the principal amounts and the related average interest rates by year of maturity for our debt obligations at June 30, 1999:
FAIR VALUE 1999 2000 2001 2002 2003 THEREAFTER TOTAL LIABILITY ---------- ------ ----- ----- ---------- ---------- ---------- ---------- (IN THOUSANDS) Long-term debt, including current maturities: Variable rate ............. $ 2,051 -- -- -- $ 120,000 -- $ 122,051 $ 122,051 Average interest rate ..... 5.2% -- -- -- 5.4% -- 5.4% Fixed rate ................ -- -- -- -- -- $ 260,000 $ 260,000 $ 258,602 Average interest rate ..... -- -- -- -- -- 9.3% 9.3%
RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended, establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement requires all derivative instruments to be carried on the balance sheet at fair value and is effective for us beginning January 1, 2001, however, early adoption is permitted. We have not yet determined the impact of this statement on our financial condition or results of operations or whether we will adopt the statement early. OTHER MATTERS Inflation. Inflation has not had a material impact on our operations and is not expected to have a material impact on us in the future. Gas Balancing Positions. It is customary in the industry for various working interest partners to sell more or less than their entitled share of natural gas. The settlement or disposition of gas balancing positions is not anticipated to adversely impact our financial condition. Year 2000. See the discussion of the year 2000 issue under "Business and Properties -- Year 2000." -38- 41 BUSINESS AND PROPERTIES We are an independent oil and gas company. Our properties are concentrated in California, where we are the largest independent producer, with properties located both onshore and offshore. Our onshore California properties are located primarily in the San Joaquin, Los Angeles and Ventura Basins. Our offshore California properties are located in the Santa Barbara Channel and offshore Long Beach. We also own properties in the onshore Gulf Coast region and internationally offshore the Republics of Congo and Ghana in West Africa and onshore in Tunisia. Since our inception in 1990, we have expanded our operations through a series of disciplined, low-cost acquisitions of oil and gas properties and the subsequent exploitation and development of these properties. We have complemented these efforts with strategic divestitures and an opportunistic exploration program which provides exposure to prospects with the potential to add substantially to the growth of our shareholder value. RECENT DEVELOPMENTS East Texas Sale. In January 1999, we sold properties in East Texas for $192.0 million. Reserves attributable to the East Texas properties were primarily natural gas. The estimated net proved reserves of these properties were 329 Bcfe on December 31, 1998. We placed $100.0 million of the proceeds of this sale in an escrow account to facilitate like-kind exchange tax treatment for any properties we acquire in the first six months of 1999. Of these escrowed proceeds, $61.4 million was used to fund the Star acquisition. We used the remaining net proceeds from this sale plus amounts remaining in escrow after the Star acquisition to pay down our bank credit facility. Star Acquisition. In June 1999, we acquired oil properties located onshore and offshore California for $61.4 million. The acquired properties had estimated net proved reserves at June 30, 1999 of 33.7 MMBOE and will increase our production from California by approximately 5.0 MBOE per day. All of these properties are additional interests in or near our existing properties. The acquisition includes interests in the Cymric, the East Coalinga, the Dos Cuadras and other fields we operate. Recovery of Oil Prices. The price for crude oil on the New York Mercantile Exchange for near month contracts increased from $12.09 per Bbl at December 31, 1998 to $19.29 per Bbl at June 30, 1999. Our estimated net proved reserves would have increased 61.8 MMBOE during the first six months of 1999, without including the effect of acquisitions and divestitures. -39- 42 PRINCIPAL PROPERTIES The following table sets forth information about our principal oil and gas properties. This table does not include our properties in East Texas which we sold on January 6, 1999.
PRE-TAX ESTIMATED DISCOUNTED NET PROVED RESERVES, AS OF PRESENT JUNE 30, 1999 VALUE AT 1998 NET PRODUCTION --------------------------- JUNE 30, --------------------------- OIL GAS BOE 1999 OIL GAS BOE (MBbls) (MMcf) (MBOE) (M$) (MBbls) (MMcf) (MBOE) ------- ------- ------- ------- ------- ------- ------- U. S. Properties: California Fields: Cymric Fields ............... 49,189 4,974 50,018 150,740 3,905 1,604 4,172 Midway-Sunset Field ......... 43,162 -- 43,162 108,479 2,900 -- 2,900 Brea Olinda Field ........... 32,959 21,126 36,480 86,112 826 136 849 Belridge Field .............. 12,059 947 12,217 54,003 608 198 641 Santa Clara Field ........... 17,723 30,515 22,809 47,509 940 649 1,048 Point Pedernales Field ..................... 14,134 8,360 15,527 32,840 2,385 990 2,550 Huntington Beach Field ..................... 9,532 1,015 9,701 31,564 753 77 766 Dos Cuadras Field ........... 6,921 3,064 7,432 16,082 388 290 436 East Dos Cuadras Field ..................... 6,162 8,134 7,518 14,101 334 354 393 Other ....................... 25,753 35,725 31,707 55,357 3,401 9,407 4,969 ------- ------- ------- ------- ------- ------- ------- Total California ....... 217,594 113,860 236,571 596,787 16,440 13,705 18,724 Other U.S. Fields ............. 497 9,334 2,052 13,673 817 5,766 1,778 ------- ------- ------- ------- ------- ------- ------- Total U.S. ............. 218,091 123,194 238,623 610,460 17,257 19,471 20,502 ------- ------- ------- ------- ------- ------- ------- International Properties: Yombo Field, Congo .......... 17,208 -- 17,208 75,040 1,461 -- 1,461 Masseko Field, Congo ........ 7,878 -- 7,878 8,609 -- -- -- ------- ------- ------- ------- ------- ------- ------- Total International ........ 25,086 -- 25,086 83,649 1,461 -- 1,461 ------- ------- ------- ------- ------- ------- ------- Company Total (excluding Star Acquisition Fields) ................... 243,177 123,194 263,709 694,109 18,718 19,471 21,963 ======= ======= ======= ======= ======= ======= ======= Star Acquisition Fields .................... 29,089 27,519 33,676 141,893 N/A N/A N/A ------- ------- ------- ------- ------- ------- ------- Company Total ............... 272,266 150,713 297,385 836,002 N/A N/A N/A ======= ======= ======= ======= ======= ======= =======
PRODUCING PROPERTIES California Properties We acquired substantially all of our California properties from Unocal in April 1996. We acquired additional properties in California from Texaco, Inc. in the Star acquisition in June 1999. Cymric Field. The Cymric Field, discovered in 1909, is located in the southern San Joaquin Basin in Kern County, California. We own an average 99% working (88% average net revenue) interest in properties in the field, and operate 12 leases in the field, totaling 4,700 acres and containing 614 active wells (544 producers, 70 injectors). Production is from two zones, the Tulare formation at depths from 400 to 1,700 feet and the Antelope Shale at depths from 1,000 to 4,500 feet. -40- 43 Between April 1996 and December 1998, we drilled 205 wells, of which 109 were Tulare completions (including 11 horizontal Tulare wells), 53 were Thermal Antelope completions, and 42 were deeper fracture stimulated Antelope completions. We also have used multiple completion technology in producing the Thermal Antelope which can triple the production from a well while increasing the costs by only half. Production has increased by 76% from 6.8 MBBLS per day at the time of the acquisition to 11.9 MBBLS per day in December 1998. Additionally, our estimated net proved reserves increased in this field as of June 30, 1999 by 21.5 MMBOE since April 1996. We plan to drill an additional 10 wells during 1999, including four horizontal wells and six injection wells. In the Star acquisition described under "Recent Developments" we acquired additional interests in the Cymric Field. Midway Sunset Field. The Midway Sunset Field, discovered in the 1890's, is located in the southern San Joaquin Basin in Kern County, California. We own a 100% working (97% average net revenue) interest in our properties in the field. We operate seven leases in the field, totaling 1,120 acres and containing 536 (497 producers, 39 injectors) active wells. Production is from five zones with the Potter Sand and the Thermal Diatomite accounting for over 95% of total production. Between April 1996 and December 1998, we drilled 119 wells, of which 55 were Potter completions (including 11 horizontal Potter wells), 39 were Thermal Diatomite completions, seven were injection wells and 18 were Sub Potter sand completions. We have also used multiple completion technology in producing the Thermal Diatomite. Production increased by 29% from 5.9 MBBLS per day at the time of the acquisition in April 1996 to 7.6 MBBLS per day for December 1998. Our estimated net proved reserves increased in this field as of June 30, 1999 by 12.7 MMBOE since April 1996. We plan to drill an additional 10 vertical wells during 1999. Brea Olinda Field. The Brea Olinda Field, discovered in 1880, is located in Orange County near the City of Brea, California. We operate three fee properties with a 100% working and net revenue interest containing 189 active wells. We also have royalty interests in an additional 57 wells in this field. Production is from multiple-pay zones in the Miocene and Pliocene sandstones at depths of up to 6,500 feet. In 1996, following our acquisition of the property, 11 wells were recompleted, a new gas plant start-up was accomplished and two infill producers plus one waterflood injector were drilled. In 1997, we drilled seven infill producers and seven waterflood injectors and initiated water injection in three fault blocks. In 1998, we drilled three additional infill producers, continued waterflood expansion, and installed an electrical generation unit to power our field operations. Belridge Field. The Belridge Field, discovered in 1911, is located in the southern San Joaquin Basin in Kern County, California. We own a 100% working and net revenue interest in two leases in the field. In addition, we own a royalty interest in the productive zones above 2,000 feet on one of the leases. Between April 1996 and December 1998, we began redevelopment of the Tulare sands on one of the leases. This lease was idle at the time of the acquisition. We have drilled 54 wells in the Tulare sand including 10 horizontal and 28 injection wells. All of these wells were drilled during 1997 and 1998. Activity also continues in the ongoing development of the non-operated royalty property. We plan to drill an additional 20 wells in the field during 1999 including five horizontal wells. We also began a continuous steam injection program in 1998 as part of the redevelopment of the previously idle property. Our estimated net proved reserves increased in this field as of June 30, 1999 by 8.3 MMBOE since April 1996. Santa Clara Field. The Santa Clara Field is located seven miles offshore of Ventura County in the Santa Barbara Channel. We operate the platform (Gilda) with a 100% working (83.33% net revenue) interest. The field was developed in 1991 with production from the Pico, upper Repetto, lower Repetto, and Monterey reservoirs. Since April 1996, we have drilled and completed seven wells. Our estimated net proved reserves increased in this field as of June 30, 1999 by 10 MMBOE since April 1996. -41- 44 Point Pedernales Field. We acquired a 12% working (10% net revenue) interest in the Point Pedernales Field in July 1994 and an additional 68% working (57% net revenue) interest in the field as part of the acquisition of the California properties in April 1996. We operate the field which is located 3.5 miles offshore Santa Barbara County, California, in federal waters. There are 14 wells in the field, producing from a 12-pile 72 slot platform (Irene) in 240 feet of water. Production is from the Monterey Shale at depths from 3,500 to 5,150 feet. In 1997, both a successful infill well and an exploratory well were completed in the Point Pedernales Field. The successful exploratory well proved the existence of the Tranquillon Ridge Field, located to the southeast of the Point Pedernales Field, primarily in California state waters. We believe this new field contains substantial recoverable reserves, and can be developed using existing Point Pedernales infrastructure. We are in discussions with state regulators for the purpose of acquiring a lease to develop this field. We experienced an oil spill due to a pipeline leak at the end of September 1997. Repairs were performed and the field was back on production before the end of December 1997. Also in 1997 and early 1998, two wells were recompleted to provide additional gas production. Huntington Beach Field. The Huntington Beach Field in Orange County is located beneath the city of Huntington Beach extending offshore into state waters. We operate the platform which is located 2 1/4 miles offshore and was installed in 1964. We own a 100% working (82.7% net revenue) interest. Production is from two separate sands in the Upper Miocene reservoir. In 1997, we initiated a waterflood expansion and began a production enhancement program that added incremental production of over 900 Bbls per day. In 1999, we plan to continue both the waterflood expansion and production enhancements. Other U.S. Properties North Frisco City Field. We discovered the North Frisco City Field in 1991. It is located in Monroe County, Alabama. We operate the field which is productive in the Haynesville sand at 12,000 feet. We own an approximate 22% working (17% net revenue) interest. The field was unitized in 1994 in order to initiate a pressure maintenance project. This successful pressure maintenance project is expected to maintain production at current levels and should increase the ultimate recovery from the field from 25% to 50% of original oil in place. Our average daily production was 761 Bbls of oil per day and 856 Mcf of natural gas per day during 1998. Giddings Field. We currently own an interest in 12 producing wells in the Giddings field, located in Grimes and Austin Counties, Texas and have an average 46.9% working (35.2% net revenue) interest in these wells. Production is derived from the highly fractured Austin Chalk formation at approximate depths of between 12,800 and 15,300 feet. All of these wells are horizontally drilled and have been prolific producers with rates as high as 30 MMcf per day. We own a total of 6,078 acres in our Turkey Creek Prospect area. We recently drilled the Eller 1-H well on our 12,500 acre Nelsonville Prospect in Austin County. The well initially produced natural gas at 30 MMcf per day. We own a 50% working interest in this acreage. Our net average daily production was 8.8 MMcf per day and 30 Bbls per day for 1998. International Republic of Congo. In February 1995, we acquired a 43.8% working (32.5% net revenue) interest in the Congo Marine I Exploration Permit covering the Yombo and Masseko Fields offshore Congo. Our interest currently consists of a 50% working (37.5% average net revenue) interest. The permit area is located 30 miles offshore in 360 feet of water. The Yombo Field has 22 producing wells and two water injection wells on two platforms that produce from the Tchala and Sendji formations between 2,800 and 8,000 feet. Estimated net proved reserves in the Yombo Field were 17.2 MMBbls on December 31, 1993, the effective date of its acquisition by us. Since that date, net production has been 8.3 MMBbls and estimated net proved reserves have increased to 25.1 MMBbls as of June 30, 1999, 52% of which are proved developed. As part of the acquisition, we also acquired a converted super tanker with storage capacity of over one million barrels of oil for use as a floating production, storage and offloading vessel. Our production is converted to fuel oil on the vessel and sold on the -42- 45 basis of #6 fuel oil with less than 1% sulphur content. CMS NOMECO Oil and Gas Co. is the operator of the concession. During 1996, we completed a six-well development drilling program and a successful exploratory well to the Lower Sendji formation in the Yombo Field. The exploratory well has produced 1.3 MMBOE through December 1998 and currently produces at 1.2 MBbls per day. In 1997, we drilled a successful exploratory well to evaluate the Lower Sendji and subsalt section underlying the Masseko structure located several miles to the west of the Yombo Field, as well as to further delineate the Tchala and Upper Sendji zones which were discovered but not developed by a previous operator. This well tested at rates of over 3.0 MBbls per day in the Middle Sendji and successfully delineated the shallow horizons. The operator has obtained preliminary platform and facility designs. The Masseko structure had estimated net proved reserves of 7.6 MMBbls at December 31, 1998. During 1998, the operator continued expansion of the waterflood projects to enhance production from both the Tchala and Upper Sendji formations. Incremental production increases of 1.0 MBbls per day have been achieved to date. In August 1998, a platform rig began drilling in the field. A total of five new wells and three sidetrack wells are expected to be drilled by July 1999. Production for December 1998 averaged 4.2 MBbls per day. Current production is approximately 6.0 MBbls per day. EXPLORATION PROSPECTS Our exploration efforts focus on a mixture of low-risk step-out opportunities associated with known producing areas and high potential "impact" prospects. We seek to reduce the risk normally associated with high potential prospects through the utilization of advanced technology and by participating with other experienced industry partners. During 1998, we drilled 18 gross exploration wells, of which eight (44%) were successful. Our most significant discoveries were at the McKittrick Front 700, the Twisselman 6-14 and the Mongoose #3, all located in California. We plan to participate in two exploration wells in 1999 and have budgeted $16.0 million for exploration in 1999. Both 1999 exploration wells will be drilled in California. In 1999, we will continue to evaluate our East Cape Three Points (1.7 million acres) and Accra-Keta (2.7 million acres) Blocks offshore the Republic of Ghana in West Africa. We operate both blocks and hold 75% and 100% working interests, respectively. Our 1998 exploration well on the East Cape Three Points block encountered non-commercial quantities of hydrocarbons; however, additional prospects remain to be evaluated and will be a focus of 1999 efforts. We have several prospects in the Accra-Keta Block. These will be further evaluated by new seismic data to be acquired in 1999, with the drilling of an exploration well planned for 2000. An exploratory well on the Chott Fejaj Permit in Tunisia, in which we participated, encountered non-commercial quantities of hydrocarbons. Encouraged by the results of the well, the partners in the well obtained a renewal of the permit in order to allow deepening of the well. Current plans are to farmout the deepening of the well to an industry partner in 2000. During the second quarter of 1999, we abandoned our Cree Fee 1A exploration well in the Midway Peak Prospect in Kern County, California. We owned an 80% working interest in the well which was drilled to approximately 17,150 feet. Dry hole costs for this well (net to us) were $6.5 million through May 1999. The cost of the Cree Fee 1A exploration well was included in our 1998 budget and is not a part of our 1999 budget. In addition, a substantial portion of our exploration activity in the balance of 1999 will focus on identifying, evaluating and pursuing high-quality exploration opportunities in West Africa and North Africa. Our California properties also include an average 12% working (10% net revenue) interest in nine tested but undeveloped tracts located offshore California in the vicinity of the Point Pedernales Field. The oil and gas industry has voluntarily suspended development activities on these and other undeveloped offshore tracts pending completion of a study aimed at proposing a set of streamlined development rules that can be agreed upon by federal, state and local regulators. The completion of -43- 46 the study is scheduled for the third quarter 1999. We believe these tracts contain substantial recoverable oil reserves and plan to participate in the development of the fields when the suspension is lifted. OIL AND GAS RESERVES The following table shows information about our estimated net proved and proved developed reserves of oil and gas.
DECEMBER 31, JUNE 30, --------------------------------------------------------- ----------------- 1996 1997 1998 1999 ----------------- ----------------- ----------------- ----------------- OIL GAS OIL GAS OIL GAS OIL GAS (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) ------- ------- ------- ------- ------- ------- ------- ------- Proved reserves ...... 186,053 394,630 227,264 390,691 190,141 403,256 272,266 150,713 Proved developed reserves ........... 138,815 236,013 153,012 266,179 133,319 308,667 202,074 121,042
The following table sets forth the pre-tax discounted present value of our oil and gas reserves:
DECEMBER 31, ------------------------------------ JUNE 30, 1996 1997 1998 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS) Pre-tax discounted present value: United States ...................... $1,251,378 $ 832,808 $ 277,963 $ 752,353 International ...................... 107,203 68,299 21,970 83,649 ---------- ---------- ---------- ---------- Total ...................... $1,358,581 $ 901,107 $ 299,933 $ 836,002 ========== ========== ========== ==========
In general, estimates of reserves and of the future net cash flows attributable to the reserves are based upon a number of variable factors and assumptions, such as historical production from the properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and gas prices and future operating costs, all of which may vary considerably from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. The actual production, revenues, severance and excise taxes, development and operating expenditures with respect to our reserves will vary from estimates, and such variances could be material. Information set forth herein regarding the quantities of and cash flows attributable to our oil and gas reserves are forward looking statements. See "Forward-Looking Statements." -44- 47 ACREAGE The following table sets forth information about the properties we owned on December 31, 1998. Undeveloped acreage is considered to be those acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.
GROSS NET --------- --------- Developed acreage ...................... 284,158 138,566 Undeveloped acreage .................... 4,835,338 4,161,276 ---------- ---------- Total ........................ 5,119,496 4,299,842 ========== ==========
Undeveloped acreage primarily consists of interests in the Republic of Ghana. PRODUCTIVE WELLS The following table sets forth our gross and net interests in productive oil and gas wells as of December 31, 1998. Productive wells are producing wells and wells capable of production.
GROSS NET ----- ----- Oil wells .............................. 2,500 2,122 Gas wells .............................. 352 139 ----- ----- Total ........................ 2,852 2,261 ===== =====
DRILLING ACTIVITY The number of gross and net exploratory and development wells we drilled is described below. Exploratory Wells
GROSS NET ----------------------------------- -------------------------------------- NON- NON- PRODUCTIVE PRODUCTIVE TOTAL PRODUCTIVE PRODUCTIVE TOTAL ---------- ---------- ----- ---------- ---------- ----- 1996........................ 6 7 13 3.40 2.09 5.49 1997........................ 9 5 14 6.63 2.33 8.96 1998........................ 8 6 14 4.09 3.58 7.67
Development Wells
GROSS NET ----------------------------------- -------------------------------------- NON- NON- PRODUCTIVE PRODUCTIVE TOTAL PRODUCTIVE PRODUCTIVE TOTAL ---------- ---------- ----- ---------- ---------- ----- 1996.................... 149 1 150 125.24 1.00 126.24 1997.................... 236 1 237 217.52 1.00 218.52 1998.................... 155 -- 155 134.43 -- 134.43
GAS PLANT, PIPELINES AND OTHER FACILITIES In 1997 we decided to sell the gas gathering, processing and other mid-stream assets we owned which were not related to our core oil and gas assets. Following this decision, we made the following divestitures: o in May 1997, we sold our 95% interest in the Benedum Gas Plant for $25.0 million; o in February 1998, we sold our 48.5% interest in the Richfield Gas Storage Facility for $2.2 million; and -45- 48 o in July 1998, we sold our 80% interest in Bright Star Gathering, Inc. for $1.5 million. We have also entered into an agreement to sell our interest in the Illini Gas Pipeline which we expect to close in 1999. We continue to own three gas processing plants in California, which process gas from our California properties. LEGAL PROCEEDINGS We have been named as a defendant in the lawsuit Gloria Garcia Lopez and Husband, Hector S. Lopez, Individually, and as successors to Galo Land & Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending in the 79th Judicial District Court of Brooks County, Texas. This suit was filed on August 30, 1996. The plaintiffs allege: o underpayment of royalties and claim damages, on a gross basis against all working interest owners, of $27.7 million plus $26.2 million in interest for the period from 1985 to date; o that their production was improperly commingled with gas produced from an adjoining lease, resulting in damages, including interest of $40.8 million (gross); and o numerous other claims that may result in unspecified damages. Our working interest in these properties is 20%. We, along with the other defendants in this case, deny these allegations and are vigorously contesting these claims. We do not believe that the final outcome of this matter will have a material adverse impact on our operating results, financial condition or liquidity. Although from time to time we are involved in other legal proceedings relating to the ordinary course of our business, we do not believe that any of these proceedings, individually or in the aggregate, are material to us. CONTINGENT PAYMENT TO UNOCAL In connection with the acquisition of the properties located in California from Unocal in 1996, we agreed to make a contingent payment for the years 1998 through 2004 if oil prices exceed thresholds set forth in our agreement with Unocal. The contingent payment will equal 50% of the difference between the actual average annual price received on a field-by-field basis (capped by a maximum price) and a minimum price, less taxes, multiplied by the actual number of barrels of oil sold during the respective year. The minimum price of $17.75 per Bbl under the agreement (determined based on near month delivery of West Texas intermediate crude oil on the NYMEX) is escalated at 3% per year and the maximum price of $21.75 per Bbl on the NYMEX is escalated at 3% per year. Minimum and maximum prices will be netted down to the field level using a fixed differential equal to approximately the differential between actual sales prices and NYMEX prices in effect in 1995 ($4.34 per Bbl weighted average for all the properties acquired from Unocal). We will accumulate credits to offset the contingent payment when prices are $0.50 per Bbl below the minimum price. We accumulated $45.5 million in price credits as of June 30, 1999, which will be used to reduce future amounts owed under the contingent payment. YEAR 2000 Like all other enterprises that utilize computer technology, we face a threat of business disruption from the year 2000 issue. The year 2000 issue or Y2K refers to the inability of computer and other information technology systems to properly process date and time information, stemming from the outdated programming practice of using two digits rather than four to represent the year in a date. The consequence of Y2K is that computer and embedded processing systems are at risk of malfunctioning, particularly during the transition from 1999 to 2000. -46- 49 The effects of Y2K are exacerbated by the interdependence of computer and telecommunication systems throughout the world. This interdependence also exists among us and our vendors, customers and business partners, as well as with regulators in the United States and host governments abroad. The risks associated with Y2K that are expected to affect our business, fall into three general areas: o failure of the computer systems which control our financial reporting and administrative systems; o failure of the embedded systems in our field process control units which control the production of oil and gas from our fields; and o failure of computer systems of third parties with whom we do business or on whom we rely to conduct our business. We intend to address each of these three areas through a readiness process that seeks to: o increase the awareness of the issue among all employees; o identify areas of potential risk; o assess the relative impact of these risks and our ability to manage them; o remediate high priority risks wherever possible; and o engage in contingency planning for identifiable risks that cannot be remediated. Our board of directors has assigned the oversight of Y2K to the audit committee. From the audit committee, all responsibility for the readiness effort runs through our chief executive officer, and from our chief executive office through our chief financial officer (for financial and administrative systems) and the vice president of exploitation (for embedded systems in field process control units). The officers routinely update the audit committee and the entire board on their efforts to increase readiness for Y2K. We outsource a substantial portion of our administration and operations to Torch Energy Advisors Incorporated. We have worked with Torch to jointly develop a plan to address risks associated with Y2K as it is expected to affect our business. Torch provides our financial and administrative systems and operates a substantial portion of our properties. As used in the remainder of this Y2K discussion, references to us may include the Torch employees assisting us in our Y2K readiness program. As of August 1, 1999, we are in various stages of implementation of the plan, as summarized below. Financial and Administrative Systems Awareness. We have conducted numerous Y2K informational programs with our employees and Torch employees who provide input to or utilize the output of our financial and administrative systems. Employees at all levels of our organization have been asked to participate in the identification of potential Y2K risks which might otherwise go unnoticed by higher level employees and officers. As a result of these programs, we believe awareness of the Y2K issue is high among our employees and employees of Torch. Risk Identification. We believe that our significant financial and administrative systems exposure is the Y2K status of the accounting and land administration software that we use to collect and manage data for internal management decision making and for external financial reporting purposes. Other concerns include network hardware and software, desktop computing hardware and software, telecommunications and office space readiness. -47- 50 Risk Assessment. The failure to identify and correct a material Y2K problem in our financial and administrative systems could result in inaccurate or untimely financial information for management decision-making or financial reporting purposes. The severity of any such problems will impact the time period during which the quality of management information comes under question. At this time, we believe that any Y2K disruptions associated with our financial and administrative systems will not have a material effect on us. Remediation. Following upgrades to our accounting software, we achieved full Y2K compliance for our Oracle-based financial and administrative systems in July 1999. In addition, Torch has inventoried all network and desktop software applications used by us and believes them to be generally Y2K compliant. The costs of all such risk assessments and remediation are borne by Torch under the terms of our outsourcing agreements. Contingency Planning. If there are significant unanticipated disruptions in our financial and administrative systems, a number of accounting processes that are currently automated will need to be performed manually. Based on current information, we have not concluded that contingency arrangements for temporary staffing to accommodate such situations will be warranted. Embedded Systems Awareness. Our Y2K program has involved all levels of management of field assets from production foremen and higher. As a result, we believe awareness of the issue is high among our field personnel. Risk Identification. As is the case with most oil and gas companies, operation of our properties is highly automated. We have completed a comprehensive inventory of embedded computer components within the process control systems of our operated oil and natural gas fields and processing plants. We identified approximately 1,900 embedded components in these computerized systems. We researched the manufacturer and/or installer of each component to determine the anticipated compliance or non-compliance of the component. To date, almost all of our embedded components researched have been deemed either date insensitive or Y2K compliant. The Y2K compliance status for approximately 16% of our embedded components have not yet been identified, and research is continuing on these components. However, the complexity of embedded systems is such that a small minority of non-compliant components, even a single non-compliant component, can corrupt an entire system. Risk Assessment. The failure to identify and correct a Y2K problem could result in outcomes ranging from errors in data reporting, to curtailments or shutdowns in production, to environmental pollution or safety incidents. In an attempt to prevent such failures, we conducted system-level testing of assets owned at June 30, 1999. The component -level evaluation is complete, with the status of 16% of components still unknown and research on these components continuing. The system-level evaluation is virtually complete with approximately 90% of all critical systems owned at June 30, 1999 fully tested. Testing on the remaining systems is expected to be completed by September 30, 1999. For properties acquired after June 30, 1999, evaluation is ongoing and the extent of testing required is to be determined. To assist in this effort, we and Torch Operating Company have retained consultants who are knowledgeable and experienced in the assessment of Y2K issues impacting field operations. We completed risk assessment of all mission critical systems in the second quarter of 1999 for all of our properties owned as of June 30, 1999. Remediation will extend to September 30, 1999 for properties owned at June 30, 1999. Costs incurred through June 30, 1999, were not material to our results of operations, and cost of the assessment is not expected to be material to our future financial results. Because of the complexity of the risks inherent in the Y2K problem, at this time we are unable to express any degree of confidence that there will not be material production disruptions associated with Y2K non-compliance. Depending on the magnitude of any such disruptions and the time required to correct them, such failures could materially and adversely impact our results of operations, liquidity and financial condition. Remediation. We have prioritized the remediation of embedded components and systems that are either known to be Y2K non-compliant or that have higher risk of Y2K failures. We intend to give first priority to the remediation of any situation with potential impacts to human health and safety or the environment, and will further prioritize remediation targets by the anticipated financial impact. -48- 51 We are testing, upgrading and re-testing those embedded components and systems in field process control units deemed to pose the greatest risk. It is important to note that in some circumstances, the procedures that are used to test embedded components for Y2K compliance themselves pose a risk of damaging the component or corrupting the system, thereby accelerating the consequences of Y2K failures. Accordingly, in some situations, it may be deemed the most prudent decision not to test certain embedded components and systems. The amount of capital that we budgeted for these anticipated costs to remediate or replace embedded components and systems that pose the greatest risk of Y2K non-compliance is approximately $1.6 million and is not considered to be material to our liquidity or financial condition. However, it is expected that some additional risks may be identified during 1999, so there can be no assurances that actual capital spending on Y2K remediation will not significantly exceed any amounts originally budgeted. Contingency Planning. If material production disruptions occur as a result of Y2K failures in field operations, our operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is our intention to maintain adequate financial flexibility to sustain us during any such period of cash flow disruption. We are currently evaluating all alternatives and assessing our levels of risks based on the testing performed to date. We should have a better understanding of these issues by the end of the third quarter, which will enable us to execute the best contingency plan given the aforementioned risks. Third Party Exposures Awareness. We have conducted numerous Y2K informational programs with our employees and the employees of Torch who have significant interaction with our outside vendors, customers, and business partners. All of these employees have been asked to participate in the identification of potential third party Y2K risks, which might otherwise go unnoticed by higher level employees and officers. We believe that awareness of the issue is high. Risk Identification. Our most significant third party Y2K exposure is to the refinery customers who purchase our oil production, on the customer side, and from electricity and other utility companies supplying field operations, on the supplier side. Other significant concerns include the readiness of third party crude oil and natural gas pipeline facilities involved in the transportation of our products, the integrity of global telecommunication systems, the readiness of commercial banks to execute electronic fund transfers, and the ability of the financial community to maintain an orderly market in our securities. Risk Assessment. Refineries are extremely complex operations containing hundreds or thousands of computerized processes. The failure on the part of a refining customer to identify and correct a material Y2K problem could result in material disruptions in the sale of our production to that refinery. In many cases, our production may not be easily shifted to other markets, and the result can range from reduced realizations on crude oil produced, curtailed production or even shut-in production. Failures of pipelines that connect our production to markets may have similar effects. Although we have made inquiries to key third parties on the subject of Y2K readiness and will continue to do so, we have no ability to require responses to such inquiries or to independently verify their accuracy. Accordingly, we are unable to express any degree of confidence that there will not be material production disruptions associated with third party Y2K non-compliance. Depending on the magnitude of any such disruptions and the time required to correct them, such failures could materially and adversely impact our results of operations, liquidity and financial condition. Remediation. Where we perceive significant risk of Y2K non-compliance that may have a material impact on our operations, and where our relationship with a vendor, customer or business partner permits, we may pursue joint testing during 1999. Joint testing would occur following upgrades and other remediation to hardware, software and communication links, as applicable, with the intent of determining that the remediated system being tested will perform as expected on December 31, 1999. Contingency Planning. Should material production disruptions occur as a result of Y2K failures of third parties, our operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is our intention to maintain adequate financial flexibility to sustain us during any such period of cash flow disruption. We are currently evaluating all alternatives and assessing our levels of risks based on the testing performed to date and our confidence in the Y2K readiness programs of major/critical suppliers and customers. We should have a better understanding of these issues by the end of the third quarter, which will enable us to execute the best contingency plan given the aforementioned risks. -49- 52 MARKETS The markets for hydrocarbons continue to be quite volatile. Our financial condition, operating results, future growth and the carrying value of our oil and gas properties are substantially dependent on prevailing prices of oil and gas. Our ability to maintain or increase our borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond our control. These factors include weather conditions in the United States, the condition of the United States economy, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign oil imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil or gas would have an adverse effect on our carrying value of our proved reserves, our borrowing capacity, our ability to obtain additional capital, and our revenues, profitability and cash flows from operations. Properties characterized by the production of San Joaquin Valley heavy oil, which we define as those fields which produce primarily 15 (degrees) API quality crude oil or heavier through thermal operations, constituted 28% of our total 1998 output. In addition, properties which produce primarily other grades of relatively heavy oil, generally, 19 (degrees) API or heavier but produced through non- thermal operations, constituted 2% of our total 1998 output. The market for California heavy oil differs from the established market indices for oil elsewhere in the U.S., due principally to the higher transportation and refining costs associated with heavy oil. Our Yombo Field production in our Marine I Permit offshore the Congo produces a relatively heavy crude oil, 16-20 (degrees) API gravity, which is processed into a low-sulfur No. 6 fuel oil product for sale to worldwide markets. Production from this property constituted 6% of our total 1998 output. The market for residual fuel oil differs from the markets for WTI and other benchmark crudes due to its primary use as an industrial or utility fuel versus the higher value transportation fuel component, which is produced from refining most grades of crude oil. Sales to Tosco, formerly Unocal, accounted for 60%, 62% and 52% of 1998, 1997 and 1996 oil and gas revenues, respectively. Also in 1998, sales to Torch Energy L.L.C. accounted for 10% of total 1998 oil and gas revenues. The loss of any single significant customer or contract could have a material adverse short- term effect on us; however, we do not believe that the loss of any single significant customer or contract would materially affect our business in the long-term. Under the terms of a $30.0 million volumetric production payment, we were committed to deliver 10.7 BCF of natural gas through December 1998. As of December 31, 1998, we had fulfilled our obligation under this commitment. There are no other significant delivery commitments, and substantially all of our oil and gas production is sold at market responsive pricing through a marketing affiliate of Torch Energy Advisors Incorporated. From time to time, we may enter into crude oil and natural gas price swaps or other similar transactions to hedge our exposure to price fluctuations. REGULATION Oil and Gas Regulation The availability of a ready market for oil and gas production depends upon numerous factors beyond our control. These factors include state and Federal regulation of oil and gas production and transportation, as well as regulations governing environmental quality and pollution control, state limits on allowable rates of production by a well or proration unit, the amount of oil and gas available for sale, the availability of adequate pipeline and other transportation and processing facilities and the marketing of competitive fuels. For example, a productive gas well may be "shut-in" because of an over-supply of gas or lack of an available gas pipeline in the areas in which we may conduct operations. State and Federal regulations generally are intended to prevent waste of oil and gas, protect rights to produce oil and gas between owners in a common reservoir, control the amount of oil and gas produced by assigning allowable rates of production and control contamination of the environment. Pipelines and gas plants also are subject to the jurisdiction of various Federal, state and local agencies. -50- 53 Our sales of natural gas are affected by the availability, terms and costs of transportation. The rates, terms and conditions applicable to the interstate transportation of gas by pipelines are regulated by the Federal Energy Regulatory Commission under the Natural Gas Acts, as well as under Section 311 of the Natural Gas Policy Act. Since 1985, the Federal Energy Regulatory Commission has implemented regulations intended to increase competition within the gas industry by making gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis. Our sales of oil are also affected by the availability, terms and costs of transportation. The rates, terms, and conditions applicable to the interstate transportation of oil by pipelines are regulated by the Federal Energy Regulatory Commission under the Interstate Commerce Act. In this connection, the Federal Energy Regulatory Commission has implemented a simplified and generally applicable ratemaking methodology for interstate oil pipelines to fulfill the requirements of Title VIII of the Energy Policy Act of 1992 comprised of an indexing system to establish ceilings on interstate oil pipeline rates. The Federal Energy Regulatory Commission will also, under defined circumstances, permit alternative ratemaking methodologies for interstate oil pipelines such as the use of cost of service rates, settlement rates, and market-based rates. Market-based rates will be permitted to the extent the oil pipeline can demonstrate that it lacks significant market power in the market in which it proposes to charge market-based rates. Environmental Regulation General. Our activities are subject to existing Federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing Federal, state and local laws, rules and regulations regulating the release of materials in the environment or otherwise relating to the protection of the environment will not have a material effect upon our operations, capital expenditures, earnings or competitive position. Our activities with respect to exploration, drilling and production from wells, natural gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing natural gas and other products, are subject to stringent environmental regulation by state and Federal authorities including the Environmental Protection Agency, the Department of Transportation and the Federal Energy Regulatory Commission. Such regulation can increase the cost of planning, designing, installing and operating such facilities. In most instances, the regulatory requirements relate to water and air pollution control measures. Waste Disposal. We currently own or lease, and have in the past owned or leased, numerous properties that have been used for production of oil and gas for many years. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties we owned or leased. In addition, many of these properties have been operated by third parties over whom we had no control as to such entities' treatment of hydrocarbons or other wastes or the manner in which such substances may have been disposed of or released. State and Federal laws applicable to oil and gas wastes and properties have become more strict. Under these new laws, we could be required to remove or remediate previously disposed wastes, including wastes disposed of or released by prior owners or operators, or property contamination, including groundwater contamination, or to perform remedial plugging operations to prevent future contamination. We may generate wastes, including hazardous wastes that are subject to the Federal Resource Conservation and Recovery Act and comparable state statutes. The Environmental Protection Agency has limited the disposal options for certain hazardous wastes and is considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, certain wastes generated by our oil and gas operations that are currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes," and therefore be subject to more rigorous and costly operating and disposal requirements. Superfund. The Federal Comprehensive Environmental Response, Compensation and Liability Act, also known as the "Superfund" law, imposes joint and several liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the current owner and operator of a facility and persons that disposed of or arranged for the disposal of the hazardous substances found at a facility. The Federal Comprehensive Environmental Response, Compensation and Liability Act also authorizes the Environmental Protection Agency and, in some cases, third parties, -51- 54 to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs of such action. In the course of our operations, we may have generated and may generate wastes that fall within the Superfund's definition of "hazardous substances". We may also be an owner of facilities on which "hazardous substances" have been released by previous owners or operators. We may be responsible under the Federal Comprehensive Environmental Response, Compensation and Liability Act for all or part of the costs to clean up facilities at which such wastes have been released. Neither we nor, to our knowledge, our predecessor partnerships have been named a potentially responsible person under the Federal Comprehensive Environmental Response, Compensation and Liability Act nor do we know of any prior owners or operators of our properties that are named as potentially responsible parties related to their ownership or operation of such property. Air Emissions. Our operations are subject to local, state and Federal regulations for the control of emissions of air pollution. Administrative enforcement actions for failure to comply strictly with air pollution regulations or permits are generally resolved by payment of monetary fines and correction of any identified deficiencies. Alternatively, regulatory agencies could require us to forego construction, modification or operation of certain air emission sources, although we believe that in the latter cases we would have enough permitted or permittable capacity to continue our operations without a material adverse effect on any particular producing field. Oil Pollution Act. The Oil Pollution Act of 1990 and regulations thereunder impose certain duties and liabilities on "responsible parties" related to the prevention of oil spills and damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which a facility covered by the Oil Pollution Act is located. The Oil Pollution Act assigns joint and several liability to each responsible party for oil removal costs and a variety of public and private damages. Few defenses exist to the liability imposed by the Oil Pollution Act. The Oil Pollution Act of 1990 also imposes ongoing requirements on a responsible party, including proof of financial responsibility to cover at least some costs in a potential spill. Certain amendments to the Oil Pollution Act that were enacted in 1996 require owners and operators of offshore facilities that have a worst case oil spill potential of more than 1,000 barrels to demonstrate financial responsibility in amounts ranging from $10.0 million in specified state waters to $35.0 million in federal Outer Continental Shelf waters, with higher amounts, up to $150.0 million in certain limited circumstances, where the Mineral Management Service believes such a level is justified by the risks posed by the quantity or quality of oil that is handled by the facility. On March 25, 1997, the Mineral Management Service promulgated a proposed rule implementing these Oil Pollution Act financial responsibility requirements. We believe that we currently have established adequate proof of financial responsibility for our offshore facilities. However, we cannot predict whether the financial responsibility requirements under the Oil Pollution Act amendments or the proposed rule will result in the imposition of substantial additional annual costs to us in the future or otherwise materially adversely affect us. The impact of the financial responsibility requirements is not expected to be any more burdensome to us than it will be to our similarly or less capitalized competitors. We believe that we are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on us. COMPETITION We operate in the highly competitive areas of oil and gas exploration, development and production. The availability of funds and information relating to a property, the standards established by us for the minimum projected return on investment and the availability of alternate fuel sources are factors that affect our ability to compete in the marketplace. Our competitors include major integrated oil companies and a substantial number of independent energy companies, many of which possess greater financial and other resources than we possess. PERSONNEL At December 31, 1998, we employed 58 full time employees who represent our executive officers and key operating, exploration, financial and accounting management. We outsource certain administrative and operational functions to Torch Energy Advisors Incorporated, which maintains a large technical, operating, accounting and administrative staff. Pursuant to an agreement with Torch, Torch administered certain of our business activities for a monthly fee based on a fixed -52- 55 percentage of operating cash flow and total assets during 1998. Torch and our combined personnel consisted of 861 employees at December 31, 1998. BENEFICIAL OWNERSHIP OF OUR COMMON STOCK The following tables show the ownership of our common stock by (i) anyone who is known by us to beneficially own 5% of more of our outstanding of common stock, (ii) each of our non-employee directors, (iii) our five most highly compensated executive officers and (iv) all of our executive officers and directors taken together as a group. Unless otherwise indicated, each person named in the following table has the sole power to vote and dispose of the shares listed next to their name. Information in the tables has been obtained from filings made with the SEC or, in the case of our directors and executive officers, has been provided by such individual. Unless otherwise indicated, the information provided below is based on information available to us as of April 5, 1999. OUR 5% STOCKHOLDERS
NUMBER OF SHARES PERCENT ---------------- ----------- Franklin Resources, Inc. 2,781,639 13.1(1) 777 Mariners Island Boulevard San Mateo, California 94404 Relational Investors, LLC 1,914,300 9.6(2) David H. Batchelder Joel L. Reed Ralph V. Whitworth Suite 220 4330 La Jolla Village Drive San Diego, California 92122 State Street Research & Management Company 1,482,700 7.5(3) One Financial Center, Thirtieth Floor Boston, Massachusetts 02111 Crabbe Huson Group, Inc. 1,039,400 5.2(4) 121 Southwest Morrison, Suite 1400 Portland, Oregon 97204
MEMBERS OF OUR BOARD OF DIRECTORS WHO ARE NOT EMPLOYEES
SHARES BENEFICIALLY OWNED ---------------------------------- UNDER STOCK OUTSTANDING OPTIONS** TOTAL PERCENT ------------- ------------ ------- --------- Isaac Arnold, Jr............................. 50,820(5) 52,500 103,320 * David H. Batchelder.......................... 1,914,300(2) -- 1,914,300 9.6 Thomas D. Barrow............................. 30,800(6) 52,500 83,300 * Charles M. Elson............................. 2,778 7,500 10,278 * Robert L. Gerry III.......................... 6,500 272,500 279,000 1.4 Gary R. Petersen............................. 2,500 15,000 17,500 * David Ross III............................... 10,000 7,500 17,500 * Robert W. Shower............................. 10,000 7,500 17,000 *
-53- 56 OUR EXECUTIVE OFFICERS
SHARES BENEFICIALLY OWNED ---------------------------------------------------------------------------- UNDER UNDER UNDER STOCK DEFERRED RESTRICTED OUTSTANDING 401(k) PLAN OPTIONS** COMPENSATION STOCK TOTAL PERCENT ------------ ----------- ---------- ------------ ---------- -------- --------- Douglas L. 5,100 8,134 435,000 15,214 -- 463,448 2.3% Foshee............ Michael P. -- 1,839 25,000 5,317 -- 32,156 * Darden............ Robert S. 5,726(7) 1,940 70,000 11,059 2,000 90,725 * Gaston............ Dennis A. 428(8) 2,431 81,855 12,394 4,000 101,108 * Hammond........... Robert M. 3,684(9) 1,802 69,650 11,441 4,000 90,577 * King..............
ALL DIRECTORS AND EXECUTIVE OFFICERS TOGETHER
TOTAL PERCENT --------- ------- 3,220,712 16.2%
- ---------- * Under 1% ** Stock options include only options which may be exercised within 60 days. (1) Of the shares reported for Franklin Resources, Inc., Franklin Advisers, Inc. is reported to have sole voting power over 2,427,139 shares and Franklin Advisers Services, Inc. has sole voting power over 94,000. In addition, Franklin Advisers, Inc. is reported to have sole dispositive power over 2,427,139 shares and Franklin Advisers Services, Inc. is reported to have sole dispositive over 354,500 shares. Franklin Advisers, Inc. and Franklin Advisers Services, Inc. are both wholly owned investment advisory subsidiaries of Franklin Resources, Inc. Each of Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. own in excess of 10% of the outstanding common stock of Franklin Resources, Inc. As the principal shareholders of Franklin Resources, Inc., each of Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. may be deemed for certain purposes to be beneficial owners of the shares beneficially owned by Franklin Resources, Inc. Shares beneficially owned by Franklin Resources, Inc. include 1,338,939 shares which may be received upon conversion of our outstanding term convertible securities ("TECONS"). (2) Relational Investors, LLC, reported sole dispositive and voting power with respect to all 1,914,300 shares. These shares are owned by an account managed at Relational Investors, LLC and by the following limited partnerships of which Relational Investors, LLC is the sole general partner: Relational Investors, L.P., Relational Fund Partners, L.P., Relational Coast Partners, L.P. and Relational Partners, L.P. Each of Messrs. Batchelder, Whitworth and Reed are managing members of Relational Investors, LLC, and may be deemed for certain purposes to beneficially own shares beneficially owned by Relational Investors, LLC. (3) State Street Research & Management Company ("State Street") is an investment adviser registered under the Investment Advisers Act of 1940. State Street has sole dispositive power with respect to all 1,482,700 shares and sole voting power with respect to 1,373,800 shares. In its report filed with the SEC, State Street disclaims any beneficial interest in such shares. (4) Crabbe Huson Group, Inc. is a registered investment advisor. It does not directly own any shares of our common stock. Crabbe Huson Group reported the shared power to vote 941,500 shares of common stock and the shared power to dispose of or direct the disposition of 1,039,400 shares. (5) Includes 5,820 shares owned indirectly by The Arnold Corporation, of which Mr. Arnold owns an approximate 25% equity interest. (6) Includes indirect ownership of 6,200 shares owned by individual retirement accounts for Mr. Barrow and his wife, his minor children or a corporation he controls. (7) Includes 200 shares owned by Mr. Gaston's spouse and 2,526 shares that would be received upon conversion of 3,000 convertible preferred shares. -54- 57 (8) Includes 168 shares of common stock that would be received upon conversion of 200 convertible preferred shares. (9) Includes 1,684 shares of common stock that would be received upon conversion of 2,000 convertible preferred shares. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of our current executive officers and directors. In 1999 we amended our certificate of incorporation to provide for the annual election of directors.
NAME Age Company Position - --------------------------- --- ---------------- Douglas L. Foshee.......... 39 Chairman of the Board of Directors, President and Chief Executive Officer Robert M. King............. 38 Senior Vice President and Chief Financial Officer Dennis A. Hammond.......... 43 Vice President-- Engineering Michael P. Darden.......... 41 Vice President-- Business Development Sandra D. Kraemer.......... 31 Controller and Corporate Secretary Bruce K. Murchison......... 49 General Counsel Isaac Arnold, Jr........... 62 Director Thomas D. Barrow........... 55 Director David H. Batchelder........ 49 Director Charles M. Elson........... 39 Director Robert L. Gerry III........ 61 Director Gary R. Petersen........... 52 Director David Ross III............. 58 Director Robert W. Shower........... 61 Director
BIOGRAPHICAL INFORMATION Directors Mr. Foshee joined our board of directors in August 1997 concurrent with his assumption of the position of president and chief executive officer. In December 1997, Mr. Foshee was also appointed chairman of our board of directors. Mr. Foshee served from 1993 until 1997 in various capacities for Torch Energy Advisors Incorporated, including vice president special projects, executive vice president acquisitions and financial analysis, president, chief operating officer, and ultimately chief executive officer. Prior to his tenure at Torch, Mr. Foshee was employed by ARCO International Oil and Gas Company in various positions in finance and new business ventures. His finance background also includes seven years in commercial banking, primarily as an energy lender for major financial institutions. Mr. Foshee serves on the board of Small Steps Nurturing Center, and is a member of the Independent Petroleum Association of America, the National Petroleum Council, and the Council of Overseers for the Jones Graduate School at Rice University. Mr. Foshee received his B.B.A. from Southwest Texas State University in 1982 and his M.B.A. from the Jesse H. Jones Graduate School at Rice University in 1992. He is also a graduate of the Southwestern Graduate School of Banking at Southern Methodist University (1991). Mr. Arnold has, since 1984, been chairman of the board of Quintana Petroleum Corporation, a privately held production company which does not compete with us. He is also chairman of the board of Legacy Trust Company. He has been a director of Cullen Center Bank & Trust since its inception in 1969 and is a director of Cullen/Frost Bankers, Inc. Mr. Arnold is a trustee of the Museum of Fine Arts of Houston and The Texas Heart Institute. Mr. Arnold received his B.B.A. from the University of Houston in 1959. Mr. Barrow is president of Barrow Energy Corporation, a position he has held since its formation in 1988. Barrow Energy is a privately held company in the business of exploring for oil and gas primarily in East Texas which does not compete with us. Mr. Barrow is also a director of Bargo Energy Company, a small public oil and gas company. Bargo does not compete with us. Mr. Batchelder has been chairman and chief executive officer of Batchelder & Partners, Inc., a financial advisory and investment banking firm, since 1988. He also has been a managing member of Relational Investors LLC, the general partner of an active investment fund, since March 1996. Mr. Batchelder is also a director of Morrison Knudson Corporation and Apria Healthcare Group Inc. Mr. -55- 58 Batchelder received a B.S. in accounting from Oklahoma State University in 1971 and is a certified public accountant. Mr. Elson has been a professor of law at Stetson University College of Law since 1990 and serves as of counsel to the law firm of Holland & Knight (since 1995). He is a member of the American Law Institute and the Advisory Council and Commissions on Director Compensation, Audit Committees, and Director Professionalism of the National Association of Corporate Directors. Mr. Elson is widely regarded as an expert on corporate governance and has served on panels and blue ribbon commissions on such issues as executive compensation, director compensation, director professionalism, chief executive officer succession and others. He is a trustee of Talledega College and a Salvatori Fellow of the Heritage Foundation. Mr. Elson currently serves as a director of Sunbeam Corporation, a consumer products company, a position he has held since 1996. He also served as a director of Circon Corporation, a medical products manufacturer, from 1996 until its sale in 1999. Mr. Elson received his B.A. from Harvard College in 1981 and his J.D. from the University of Virginia in 1985. Mr. Gerry has, since 1997, been chairman of the board of directors and chief executive officer of VAALCO Energy, Inc., a public independent oil and gas company which does not compete with us. From 1994 to 1997, Mr. Gerry was our vice chairman. Prior to that, he was our president and chief operating officer since our formation in 1990. Mr. Gerry currently serves as a trustee of Texas Children's Hospital. Mr. Petersen is a co-founder and has been a partner of EnCap Investments, Inc., a firm which provides capital in the form of both debt and equity to the energy industry. From 1984 to 1988, he served as senior vice president and manager of the corporate finance division of the energy banking group for RepublicBanc Houston. From 1979 to 1984, he was executive vice president and a director of Nicklos Oil and Gas Company. He also served as a group vice president in the petroleum and minerals division of RepublicBanc Dallas. He is a member of the board of Harken Energy Corporation, Energy Capital Investment Company, Equus II Incorporated and the Petroleum Club of Houston. Mr. Petersen received his B.B.A from Texas Tech University in 1968 and his M.B.A. from Texas Tech University in 1970. Mr. Ross is a private investor. From 1987 to 1993, Mr. Ross was chairman and chief executive officer of Sterling Consulting Group, which provided corporate planning, treasury management and economic evaluation to the oil and gas industry. He was a principal of The Sterling Group, a firm specializing in leveraged buyouts, from 1986 to 1987. He currently serves on the Council of Overseers and is an Adjunct Professor of Finance at the Jesse H. Jones Graduate School of Administration at Rice University, where he has served since 1994 and 1979, respectively. Mr. Ross is a member of the board of Cooper Cameron Corporation, an oilfield services equipment manufacturer. He also serves as vice president and a board member of Da Camera of Houston, a nonprofit arts organization. Mr. Ross received his B.A. from Yale University in 1962 and his M.B.A. from Harvard University in 1970. Mr. Shower served as executive vice president and chief financial officer of Seagull Energy Corporation, an oil and gas company, from 1994 until his retirement in 1996. From 1992 to 1994, he served as Seagull's senior vice president and chief financial officer. From 1991 to 1992, Mr. Shower served as senior vice president, corporate development, for Albert Fisher, Inc., a company engaged in produce distribution. Mr. Shower served for 10 years as chief financial officer for the Williams Companies and also served on its board from 1977 to 1986. Mr. Shower currently serves on the boards of Lear Corporation, one of the world's largest automotive suppliers; Breed Technologies, a worldwide leader in automotive occupant safety systems; Highlands Insurance Group, Inc.; and Edge Petroleum Corporation, a technology-oriented exploration company. Mr. Shower received his B.S. from the University of Tulsa in 1960. He also attended the Program for Management Development at Harvard Business School in 1972. Executive Officers Robert M. King joined us as senior vice president and chief financial officer in January 1996. Prior to that, Mr. King was vice president, corporate development and treasurer of Seagull Energy Corporation, which he joined in 1990 after having spent over seven years in energy finance with The First National Bank of Chicago and Mellon Bank, N.A. Mr. King has a B.A. in economics and political science from Southern Methodist University and an M.B.A. in finance from the Cox School of Business at Southern Methodist University. Dennis A. Hammond joined us as vice president -- engineering in 1990. In 1983, he was a co-founder of IDM Engineering, Inc., a petroleum engineering consulting firm. He has held various -56- 59 reservoir engineering positions with Chevron and Pogo Producing Company. He holds a B.S. degree in petroleum engineering from Texas A&M University and is a registered professional engineer in the State of Texas. Mr. Hammond is a member of the Society of Petroleum Engineers and the American Petroleum Institute. Michael P. Darden joined us as vice president -- business development in May 1998. Prior to that he was special counsel for Baker & Botts, L.L.P., a law firm, since 1993, where his practice focused on international and domestic oil and gas ventures, asset acquisitions and sales, and energy-based financings. Mr. Darden was employed by Hunt Oil Company from 1990 to 1993 where he was senior international counsel. From 1988 to 1990, he was employed by BHP Petroleum (Americas) Inc. as attorney-international/offshore and from 1986 to 1988 he was employed by Tenneco Oil Company as senior international negotiator. Mr. Darden has worked extensively on petroleum projects outside the United States and in all regions of the world. His experience encompasses petroleum projects at all stages, working with governments, industry partners, contractors, suppliers, lenders and insurers. Mr. Darden received a B.B.A. in Petroleum Land Management from The University of Texas in 1980 and a J.D. from the University of Houston Law Center in 1986. Sandra D. Kraemer has been our controller since 1993 and our corporate secretary since 1997. Prior to 1993, she was employed by Torch Energy Advisors Incorporated since 1991. From 1990 to 1991, Ms. Kraemer was employed by Price Waterhouse in its audit department, specializing in the oil and gas industry. She graduated summa cum laude from Stephen F. Austin State University with a B.B.A. in accounting in 1990 and is a certified public accountant. Bruce K. Murchison has been our general counsel since June 1999. Prior to that, Mr. Murchison was a consultant to Plains Resources senior management regarding transactional matters. From 1994 to 1998, he was president of Celeron Corporation. Prior to that, he was general counsel of Celeron for six years. From 1991 to 1994, in addition to his general counsel responsibilities at Celeron, Mr. Murchison served as chief operating officer of All American Pipeline Company. He began his career with Goodyear as an attorney in 1985. From 1981 to 1985, Mr. Murchison practiced corporate law and litigation at Texaco Inc. Mr. Murchison received his J.D. degree from St. John's School of Law in 1981. All of our executive officers and directors are United States citizens. TRANSACTIONS WITH RELATED PERSONS In January 1995, we loaned International Testing Services, Inc., a company involved in the safety testing of oil and gas pipelines, the sum of $500,000. The president of International Testing is John B. Connally III, a former director until his resignation in January 1998. The loan bears interest at the rate of 2.5% over the prime rate. The loan was initially due on July 1, 1995 and was extended to May 1997. The loan is unsecured and subordinated to certain existing indebtedness. Outstanding principal on the loan as of January 15, 1998 was $500,000. International Testing filed for bankruptcy protection in 1998. The loan was written off for financial reporting purposes in December 1997. In connection with the loan, we acquired a five-year warrant to acquire 350,000 shares of International Testing common stock, the exercise price of which is substantially in excess of the current market price of such common stock. -57- 60 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following summary compensation table sets forth cash compensation for the past three years for our chief executive officer and our four other most highly compensated officers in 1998.
LONG-TERM RESTRICTED COMPENSATION- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS - ----------------------------------------- ---- ------ ----- ------------ ------------- Douglas L. Foshee 1998 $ 375,000 $ -- $ -- 220,000(2) Chairman, Chief Executive Officer 1997 143,466(1) 317,500 -- 330,000 and President Robert M. King 1998 160,000 30,000 -- 66,250 Senior Vice President and 1997 160,000 130,000 79,856 32,500 Chief Financial Officer 1996 156,970 178,000 95,750 70,000 Dennis A. Hammond 1998 160,000 -- -- 66,250 Vice President--Engineering 1997 160,000 130,000 79,856 32,500 1996 140,000 162,000 95,750 40,000 Robert S. Gaston(3) 1998 160,000 -- 39,928 66,250 Vice President--Exploration 1997 160,000 130,000 47,875 32,500 1996 150,000 75,000 15,000 Michael D. Darden 1998 99,950(4) 100,000(5) -- 91,250 Vice President Business Development
- ------------------ (1) Mr. Foshee became an employee in August 1997. Information regarding Mr. Foshee is for periods during which he was employed by Nuevo. (2) Mr. Foshee was granted 100,000 options in August 1998 as part of his employment agreement. (3) Mr. Gaston resigned on June 30, 1999. (4) Mr. Darden became an employee in May 1998. Information regarding Mr. Darden is for the periods during which he was employed by us. (5) Mr. Darden was hired by us in May 1998 and was paid a signing bonus of $100,000. Mr. Darden contributed 75% of his bonus to the company's deferred compensation plan in order to purchase shares of our common stock. -58- 61 1998 STOCK OPTION GRANTS The following table sets forth information concerning grants of options to purchase our common stock made during 1998 to the executive officers named in the summary compensation table. The exercise price of options granted to our executive officers is the closing price of the common stock on the date of grant.
% OF TOTAL NUMBER OF OPTIONS PER SHARE GRANT DATE OPTIONS GRANTED TO EXERCISE EXPIRATION PRESENT NAME GRANTED EMPLOYEES PRICE DATE VALUE(1) - ----------------------------------- --------- ----------- ------------ ---------- --------------- Douglas L. Foshee.................. 130,000(2) 11.6% $ 21.31 08/11/08 $ 1,391,000 81,000 7.2% 11.13 12/14/08 451,980 9,000 0.8% 16.13 12/14/08 39,690 Robert M. King..................... 16,250 1.5% 21.31 08/11/08 173,875 45,000 4.0% 11.13 12/14/08 251,100 5,000 0.4% 16.13 12/14/08 22,050 Dennis A. Hammond.................. 16,250 1.5% 21.31 08/11/08 173,875 45,000 4.0% 11.13 12/14/08 251,100 5,000 0.4% 16.13 12/14/08 22,050 Robert S. Gaston(3)................ 16,250 1.5% 21.31 08/11/08 173,875 45,000 4.0% 11.13 12/14/08 251,100 5,000 0.4% 16.13 12/14/08 22,050 Michael P. Darden.................. 25,000 2.2% 35.88 05/11/08 450,250 16,250 1.5% 21.31 08/11/08 173,875 45,000 4.0% 11.13 12/14/08 251,100 5,000 0.4% 16.13 12/14/08 22,050
- --------------------------- (1) We calculated the granted date present value using the "Black Scholes" model, a widely accepted method of valuing options. This valuation model is hypothetical; the actual value, if any, depends on the excess of the market price of the shares over the exercise price on the date the option is exercised. If the market price does not increase above the exercise price, compensation to the grantee will be zero. The Black-Scholes option pricing model is a mathematical formula used for estimating option values that incorporates various assumptions. The "Grant Date Present Value" set out in the above table is based on the following assumptions: (a) a ten-year option term; (b) 50.9% expected future annual stock volatility for the options; (c) a risk-free rate of return of 5.0% for the options granted; and (d) no expected dividend yield. The above model does not include any reduction in value for non-transferability, forfeiture or vesting of options. (2) Mr. Foshee was granted 100,000 options in August of 1998 as part of his employment agreement. (3) Mr. Gaston resigned on June 30, 1999. During 1998, we repriced options owned by our employees who are not officers. These options had been granted over a number of years. Under the SEC's rules for preparing the option grant table, we treat all of the repriced options as having been granted in 1998. As a result, the amounts set forth under "% of total options granted to employees" are lower for the named executive officers than they would have been had we not repriced options. -59- 62 The following table shows the number of options owned by our named executives. Options in the column marked "unexercisable" are subject to vesting and will be forfeit if the named executive's employment with us is terminated for certain reasons. The value of unexercised options is calculated using an $11.50 per share closing for our stock on December 31, 1998. None of our named executives exercised options in 1998.
VALUE OF UNEXERCISED IN-THE-MONEY NUMBER OF UNEXERCISED OPTIONS OPTIONS AT DECEMBER 31, 1998(1) ----------------------------- --------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------ ----------- ------------- ----------- ------------- Douglas L. Foshee........................ 435,000 130,000 -- $ 30,375 Robert M. King........................... 69,650 83,750 -- 16,875 Dennis A. Hammond........................ 81,855 83,750 -- 16,875 Robert S. Gaston(2)...................... 70,000 83,750 -- 16,875 Michael P. Darden........................ 25,000 66,250 -- 16,875
- --------------------------- (1) Based on $11.50 per share which was the closing price per share of our common stock on the New York Stock Exchange Composite Tape on December 31, 1998. (2) Mr. Gaston resigned on June 30, 1999. COMPENSATION COMMITTEE REPORT Our compensation committee consists of three directors who are not employees or executive officers. The members of the compensation committee in 1998 were Mr. Elson, who was chairman, and Messrs. Arnold and Petersen. Our Executive Compensation Program Our executive compensation program reflects a policy of attracting highly-qualified executives who strive to achieve outstanding individual performance and who collectively seek outstanding corporate and share price performance versus that of peer group companies. The committee believes that Nuevo should seek executives who desire a work environment characterized by a high level of "at-risk" compensation, which rewards excellent performance and aligns overall compensation with the objectives of our stockholders. Accordingly, our compensation system consists of the following elements: Base salary. The base salaries for our named executive officers are established by employment agreements with those officers. The base salaries in these agreements are intended to represent approximately 50% to 60% of the executives' total salary and cash bonus. Incentive bonus. Under the employment agreements with most of our executives, bonuses are awarded at the discretion of the compensation committee. It is the committee's overall objective that the sum of base salaries plus cash bonuses should generally be at or about the 50th to 60th percentile of peer group companies. Stock options. Each of our employees receives stock options as a component of his or her compensation, in order to align the interests of employees with those of our stockholders. The number of options granted to an employee is based on the committee's view of the employee's capacity to impact the value of Nuevo's shares. We believe that because we outsource non-strategic functions, resulting in substantially fewer employees eligible to receive options, we have a substantial advantage over peer companies in the number of options that we can grant to our employees. It is the committee's overall objective that the sum of base salaries plus incentive bonuses plus options should generally compare at or about the 80th to 90th percentile of peer group companies. During 1997, the compensation committee established a stock ownership program for its senior executives that provides incentives for each executive to achieve and maintain a targeted level of ownership of Nuevo common stock. These target levels of ownership are set by the committee for each executive. Counted against this stock ownership are shares owned directly by the executive or owned beneficially through an immediate family member, including shares acquired through the exercise of options and shares acquired through our deferred compensation and 401(k) plans. Shares that may be received upon exercise of options do not count toward the ownership objectives. Under the -60- 63 program, each executive's common stock ownership is reported to the committee twice a year. An executive's progress toward meeting stated ownership objectives is a meaningful element of his performance review. Overview 1998 was a difficult year for Nuevo. Oil prices during 1998 and into 1999 have reached historic lows when adjusted for inflation. Because a substantial part of our oil production is heavy oil, these low prices affected our revenues and cash flows more than conventional oil and gas producers. Our executive team, however, has positioned us to survive this low price environmental and, as importantly, positioned Nuevo to benefit quickly when oil prices return to normal levels. For example, during 1998 we completed an offering of $100 million of senior subordinated notes which mature in 2008. These notes more closely align our indebtedness with the long lives of our assets. In addition, we sold our East Texas gas properties for a very attractive price. These transactions reduced our net bank debt to zero following the closing of the sale of the East Texas assets and application of proceeds. Additionally, even with a reduced capital expenditure budget, we replaced our 1998 production without making any material acquisitions. Chief Executive Officer. Douglas L. Foshee was appointed chief executive officer in August 1997, at which time he entered into an employment agreement providing for a base salary of $375,000 during 1998. Mr. Foshee did not receive a bonus during 1998 because of Nuevo's share price performance. Mr. Foshee was granted options to purchase 90,000 shares of common stock. Key Executive Officers. The compensation committee continues to review on an individual level each such executive's leadership in his area of expertise, and also evaluates years of service, experience level, position and general economic and industry conditions. However, no specific weight is assigned to these factors. The committee also studies peer group compensation levels for comparable positions. With respect to bonus compensation, the committee has historically followed a philosophy of allocating a significant portion of the total compensation paid to executive officers as "at risk" compensation in order to emphasize pay for performance. During 1998, our executive officers were not granted incentive bonuses due to our share price performance. Mr. King received a cash bonus payment of $30,000 under his employment contract, and Mr. Darden received a bonus of $100,000 in connection with his acceptance of employment with us in 1998. Base salaries for 1999 were not increased for the second consecutive year. Stock Based Compensation The compensation committee believes the stock options that it has granted in the past, and those granted in 1998, serve a valuable purpose by attracting and retaining key executives, and encouraging increased job performance by the recipients of such grants. The committee bases the number of awards granted to executed officers on no predetermined formula, but rather on each individual's accomplishments, level of responsibility, and that person's impact on Nuevo's performance for the year. Messrs. Foshee, King, Hammond, Gaston and Darden, were granted a total of 220,000, 66,250, 66,250, 66250, and 91,250 options in 1998, respectively. Ten percent of these grants were made at a $5.00 premium to the market price on date of grant and the remainder were made at the market price of the common stock on the date of the grant. Executive Employment Contracts In 1997, we entered into an employment contract with Mr. Foshee, our chief executive officer. The agreement provided for the following compensation during 1998: o a base salary of $375,000, o discretionary bonuses based upon performance to be determined by our compensation committee, o reimbursement for membership fees to the Houston Center Club, the Petroleum Club and the Young Presidents Organization, and -61- 64 o a grant of options to purchase 100,000 shares of our common stock on August 14, 1998, at a stock price equal to the closing price on that date. Mr. Foshee's employment agreement is terminable by either party but, in the event that his employment is terminated for reasons other than just cause or his voluntary resignation, we are obligated to pay him a sum equal to two times the aggregate of: o his salary for the twelve months immediately preceding the date of termination (less applicable withholdings and deductions required by law), plus o any bonus paid to Mr. Foshee in the twelve-month period. In the agreement, just cause is generally defined as the failure to render services to Nuevo as provided in the agreement or the commission of fraud or other specified illegal acts. In 1998, we entered into a two year employment agreement with Robert M. King providing for the following compensation during 1998: o an annual salary of $160,000, o reimbursement for reasonable country club dues. Mr. King's employment agreement is terminable by either party but, in the event his employment is terminated for reasons other than just cause or at his option, we must pay him the greater of two times his annual salary and bonus or $320,000. Just cause has the same meaning in Mr. King's contract as in Mr. Foshee's. In 1997, we entered into identical employment agreements with Dennis A. Hammond and Robert S. Gaston providing for a monthly salary of $13,333.34, payable in semi-monthly installments and an annual discretionary bonus, stock option and stock bonus awards as determined by our compensation committee. Each of Mr. Hammond's and Mr. Gaston's Employment Agreement is for no definitive term and is terminable by either party at any time for any lawful reason. In the event that Mr. Hammond's or Mr. Gaston's employment is terminated as a result of a change of control, then each of Mr. Hammond and Mr. Gaston is entitled to receive two years salary and bonus (calculated based on the average of the last two year's bonus award) if they are not offered an equivalent job with our successor. Long-Term Incentive Plan Awards We do not have a long-term incentive plan for our employees, other than the 1990 stock option plan and the 1993 stock incentive plan. Under the 1990 stock option plan and the 1993 stock incentive plan, our executive officers, directors and employees are eligible to receive awards of stock options or of shares of stock or other awards which have a value which increases or decreases with the price of our stock. Deferred Compensation Plan During 1996, we adopted the Nuevo Energy Deferred Compensation Plan to encourage senior executive officers to personally invest in our shares. Executives at the level of vice president and above are eligible to participate in the plan. The plan allows our senior executives to defer all or a portion of their annual salaries and bonuses. Currently, such deferred salaries and bonuses must be invested in our common stock or a money market account until the employee satisfies the stock ownership criteria established by the compensation committee. After the stock ownership thresholds are met (the "target"), deferred amounts may be invested in any equity indexed investment selected by the compensation committee. Stock is acquired under the plan at a discount of 25% to the then current market price, and is subject to restrictions on transfer. -62- 65 The following table shows the targeted stock ownership amounts under our Deferred Compensation Plan. The shares owned column includes shares owned directly or indirectly in our 401(k) plan and deferred compensation plan, but does not include shares which may be issued pursuant to stock options.
NAME SHARES OWNED TARGET - ------------------------------------------------------- ------------ ------ Douglas L. Foshee...................................... 28,448 46,875 Robert M. King......................................... 20,928 16,667 Dennis A. Hammond...................................... 19,253 13,333 Robert S. Gaston....................................... 19,883 13,333 Michael P. Darden...................................... 7,156 12,917
Proposed Revisions in Stock Based Compensation Director Compensation. The compensation committee has proposed changes to the compensation paid to non-employee directors in order to encourage greater stock ownership by directors and to bring director compensation in line with the compensation paid by peer group companies. Currently directors receive an annual cash retainer of $30,000. While the amount of the cash retainer will remain unchanged, directors will be given the option to elect to receive all or a portion of their retainer in shares of restricted stock. Elections will be made in 25% increments with a 33% increase in value for the amounts invested in restricted stock, so that a director electing to convert $7,500 in cash retainer will be awarded $10,000 in restricted stock. In addition to the cash retainer, directors also receive a semi-annual grant of 3,750 options. This grant will be amended to provide for a grant of 3,500 options and 2,500 shares of restricted stock. Stock options will be granted for a ten year term with an exercise price equal to the fair market value of a share of stock on the date of grant. Restricted stock will be subject to a three year restricted period and directors will have the option to rollover this period until their retirement from the board. Other Stock Options. The compensation committee plans to amend existing stock option grants to change the treatment of options when a change of control occurs. Currently, if a change in control occurs, all options vest and may be exercised. The committee proposes that, under certain circumstances, in connection with a change of control, if the exercise price of the options is greater than the consideration to be received in the change of control transaction, the option holder will be entitled to receive the Black-Sholes model value of his or her options. The compensation committee anticipates that grants to directors and officers in the future will have this provision. We anticipate that these changes will become effective commencing after our 1999 annual meeting of stockholders. We anticipate that these changes will become effective commencing after our 1999 annual meeting of stockholders. CHARLES M. ELSON, CHAIRMAN ISAAC ARNOLD, JR. GARY R. PETERSEN -63- 66 PERFORMANCE GRAPH The following graph compares the yearly percentage change in our cumulative total stockholder return on our common stock to the total return on the New York Stock Exchange and the cumulative total return on a peer group of oil and gas exploration companies selected by us from January 1, 1994 until December 31, 1998.
1993 1994 1995 1996 1997 1998 -------- -------- ------- ------ ------- -------- Nuevo..................................... 100.00 92.31 114.74 266.67 208.97 58.97 NYSE Market Index......................... 100.00 98.06 127.15 153.16 201.50 239.77 Peer group................................ 100.00 110.89 169.84 211.88 151.22 63.78 WTI....................................... 100.00 92.97 99.57 119.10 111.53 78.08 Dow Jones Oil Secondary Index............. 100.00 100.85 116.66 154.69 163.15 107.80
For 1998 and in future years, we will include a comparison to a "peer group." In prior years, in addition to the NYSE market index, we included a comparison to the Dow Jones Oil Secondary Index. We have changed to a peer group in place of the secondary index because the secondary index included a number of companies which were not engaged in the exploration and production of oil and gas. Our peer group is composed of the following companies: Benton Oil and Gas Company, Coho Energy, Inc., EEX Corporation, Forcenergy Inc., HS Resources, Inc., Newfield Exploration Company, Plains Resources Inc., Pogo Producing Company, Range Resources Corporation, Vintage Petroleum, Inc. and Triton Energy Ltd. We have also included the Dow Jones Oil Secondary Index this year for comparative purposes. -64- 67 USE OF PROCEEDS We will not receive any cash proceeds from the issuance of the exchange notes. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange existing notes in like principal amount. The existing notes surrendered in exchange for exchange notes will be retired and canceled and cannot be reissued. Issuance of the exchange notes will not result in a change in our amount of outstanding debt. THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER We issued $257,310,000 in principal amount of existing notes on August 20, 1999 in exchange for $157,460,000 aggregate principal amount of our 9 1/2% Senior Subordinated Notes due 2006 and $99,850,000 aggregate principal amount of our 87/8% Senior Subordinated Notes due 2008. The existing notes were issued to qualified institutional buyers and institutional accredited investors in reliance upon the exemption from registration provided by Regulation D under the Securities Act. In connection with the issuance of the existing notes, we agreed with Banc of America Securities LLC and Salomon Smith Barney Inc., who acted as co-dealer managers for the issuance of the existing notes, that promptly following the issuance of the existing notes, we would: o file with the SEC a registration statement related to the exchange notes; o use our reasonable best efforts to cause the registration statement to become effective under the Securities Act; and o offer to the holders of the existing notes the opportunity to exchange their existing notes for a like principal amount of exchange notes upon the effectiveness of the registration statement. A copy of the agreements with Banc of America Securities and Salomon Smith Barney have been filed as exhibits to the registration statement of which this prospectus is a part. Based on existing interpretations of the Securities Act by the staff of the SEC described in several no-action letters, and subject to the following sentence, we believe that the exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by their holders, other than broker-dealers or our "affiliates," without further compliance with the registration and prospectus delivery provisions of the Securities Act. However, any holder of existing notes who is an affiliate of ours, who is not acquiring the exchange notes in the ordinary course of such holder's business or who intends to participate in the exchange offer for the purpose of distributing the exchange notes: o will not be able to rely on the interpretations by the staff of the SEC described in the above-mentioned no-action letters; o will not be able to tender existing notes in the exchange offer; and o must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the existing notes unless the sale or transfer is made under an exemption from these requirements. -65- 68 We do not intend to seek our own no-action letter, and there is no assurance that the staff of the SEC would make a similar determination regarding the exchange notes as it has in these no-action letters to third parties. See "Plan of Distribution." As a result of the filing and effectiveness of the registration statement of which this prospectus is a part, we will not be required to pay an increased interest rate on the existing notes. Following the closing of the exchange offer, holders of existing notes not tendered will not have any further registration rights except in limited circumstances requiring the filing of a shelf registration statement, and the existing notes will continue to be subject to restrictions on transfer. Accordingly, the liquidity of the market for the existing notes could be adversely affected. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions stated in this prospectus and in the letter of transmittal, we will accept all existing notes properly tendered and not withdrawn prior to 5:00 p.m. New York City time, on the expiration date. After authentication of the exchange notes by the trustee or an authenticating agent, we will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding existing notes accepted in the exchange offer. Holders my tender some or all of their existing notes in denominations of $1,000 or any integral multiple of $1,000. If you wish to exchange your existing notes for exchange notes in the exchange offer, you will be required to represent that: o you are not our affiliate, as defined in Rule 405 of the Securities Act; o any exchange notes will be acquired in the ordinary course of your business; o you have no arrangement with any person to participate in the distribution of the exchange notes; o if you are not a broker-dealer, that you are not engaged in and do not intend to engage in the distribution of the exchange notes; and o if you are a broker-dealer that will receive exchange notes for your own account in exchange for existing notes that were acquired as a result of market-making or other trading activities, that you will deliver a prospectus, as required by law, in connection with any resale of those exchange notes. You will make these representations to us by signing or agreeing to be bound by the letter of transmittal. Broker-dealers that are receiving exchange notes for their own account must have acquired the existing notes as a result of market-making or other trading activities in order to participate in the exchange offer. Each broker-dealer that receives exchange notes for its own account under the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be admitting that it is an "underwriter" within the meaning of the Securities Act. We will be required to allow broker-dealers to use this prospectus following the exchange offer in connection with the resale of exchange notes received in exchange for existing notes acquired by broker-dealers for their own account as a result of market-making or other trading activities. If required by applicable securities laws, we will, upon written request, make this -66- 69 prospectus available to any broker-dealer for use in connection with a resale of exchange notes for a period of 90 days after the consummation of the exchange offer. See "Plan of Distribution." The exchange notes will evidence the same debt as the existing notes and will be issued under and entitled to the benefits of the same indenture. The form and terms of the exchange notes are identical in all material respects to the form and terms of the existing notes except that: o the exchange notes will be issued in a transaction registered under the Securities Act; o the exchange notes will not be subject to transfer restrictions; and o provisions providing for an increase in the stated interest rate on the existing notes will be eliminated. As of the date of this prospectus, $257,310,000 aggregate principal amount of the existing notes was outstanding. In connection with the issuance of the existing notes, we arranged for the existing notes to be issued and transferable in book-entry form through the facilities of DTC, acting as depositary. The exchange notes will also be issuable and transferable in book-entry form through DTC. This prospectus, together with the accompanying letter of transmittal, is initially being sent to all registered holders as of the close of business on , 1999. We intend to conduct the exchange offer as required by the Exchange Act, and the rules and regulations of the SEC under the Exchange Act, including Rule 14e-1, to the extent applicable. Rule 14e-1 describes unlawful tender practices under the Exchange Act. This section requires us, among other things: o to hold our exchange offer open for twenty business days; o to give ten days notice of any change in the terms of this offer; and o to issue a press release in the event of an extension of the exchange offer. The exchange offer is not conditioned upon any minimum aggregate principal amount of existing notes being tendered, and holders of the existing notes do not have any appraisal or dissenters' rights under the General Corporation Law of the State of Delaware or under the indenture in connection with the exchange offer. We shall be considered to have accepted existing notes tendered according to the procedures in this prospectus when, as and if we have given oral or written notice of acceptance to the exchange agent. See "--Exchange Agent." The exchange agent will act as agent for the tendering holders for the purpose of receiving exchange notes from us and delivering exchange notes to those holders. If any tendered existing notes are not accepted for exchange because of an invalid tender or the occurrence of other events described in this prospectus, certificates for these unaccepted existing notes will be returned, at our cost, to the tendering holder of the existing notes or, in the case of existing notes tendered by book-entry transfer, into the holder's account at DTC according to the procedures described below, as promptly as practicable after the expiration date. Holders who tender existing notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes related to the exchange of existing notes in the exchange offer. We will pay all charges and expenses, other -67- 70 than applicable taxes, in connection with the exchange offer. See "--Solicitation of Tenders; Fees and Expenses." NEITHER WE NOR OUR BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO HOLDERS OF EXISTING NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR EXISTING NOTES TO THE EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION. HOLDERS OF EXISTING NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER IN THE EXCHANGE OFFER AND, IF SO, THE AMOUNT OF EXISTING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "expiration date" shall mean 5:00 p.m., New York City time, on ____________, 1999, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" shall mean the latest date to which the exchange offer is extended. We expressly reserve the right, in our sole discretion: o to delay acceptance of any existing notes or to terminate the exchange offer and to refuse to accept existing notes not previously accepted, if any of the conditions described under "--Conditions" shall have occurred and shall not have been waived by us; o to extend the expiration date of the exchange offer; o to amend the terms of the exchange offer in any manner; o to purchase or make offers for any existing notes that remain outstanding subsequent to the expiration date; o to the extent permitted by applicable law, to purchase existing notes in the open market, in privately negotiated transactions or otherwise. The terms of the purchases or offers described in the fourth and fifth clauses above may differ from the terms of the exchange offer. Any delay in acceptance, termination, extension, or amendment will be followed as promptly as practicable by oral or written notice to the exchange agent and by making a public announcement. If the exchange offer is amended in a manner determined by us to constitute a material change, we will promptly disclose the amendment in a manner reasonably calculated to inform the holders of the amendment. Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, termination, extension, or amendment of the exchange offer, we shall have no obligation to publish, advise, or otherwise communicate any public announcement, other than by making a timely release to the Dow Jones News Service. You are advised that we may extend the exchange offer because some of the holders of the existing notes do not tender on a timely basis. In order to give these noteholders the ability to participate in the exchange and to avoid the significant reduction in liquidity associated with holding an unexchanged note, we may elect to extend the exchange offer. -68- 71 INTEREST ON THE EXCHANGE NOTES The exchange notes will bear interest from the date of issuance of the existing notes that are tendered in exchange for the exchange notes or the most recent date on which interest was paid or provided for on the existing notes surrendered for the exchange notes. Accordingly, holders of existing notes that are accepted for exchange will not receive interest that is accrued but unpaid on the existing notes at the time of tender. Interest on the exchange notes will be payable semi-annually on each June 1 and December 1, commencing on December 1, 1999. PROCEDURES FOR TENDERING Only a holder may tender its existing notes in the exchange offer. Any beneficial owner whose existing notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee or are held in book-entry form and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on his behalf. If the beneficial owner wishes to tender on his own behalf, the beneficial owner must, prior to completing and executing the letter of transmittal and delivering his existing notes, either make appropriate arrangements to register ownership of the existing notes in the owner's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. The tender by a holder will constitute an agreement between the holder, us and the exchange agent according to the terms and subject to the conditions described in this prospectus and in the letter of transmittal. A holder who desires to tender existing notes and who cannot comply with the procedures set forth herein for tender on a timely basis or whose existing notes are not immediately available must comply with the procedures for guaranteed delivery set forth below. THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDERS. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT OR DEEMED RECEIVED UNDER THE ATOP PROCEDURES DESCRIBED BELOW. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO US. HOLDERS MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES EFFECT THE TENDER FOR HOLDERS IN EACH CASE AS DESCRIBED IN THIS PROSPECTUS AND IN THE LETTER OF TRANSMITTAL. EXISTING NOTES HELD IN CERTIFICATED FORM For a holder to validly tender existing notes held in physical form, the exchange agent must receive, prior to 5:00 p.m. New York city time on the expiration date, at its address set forth in this prospectus: o a properly completed and validly executed letter of transmittal, or a manually signed facsimile thereof, together with any signature guarantees and any other documents required by the instructions to the letter of transmittal, and o certificates for tendered existing notes. -69- 72 EXISTING NOTES HELD IN BOOK-ENTRY FORM We understand that the exchange agent will make a request promptly after the date of the prospectus to establish accounts for the existing notes at DTC for the purpose of facilitating the exchange offer, and subject to their establishment, any financial institution that is a participant in DTC may make book-entry delivery of existing notes by causing DTC to transfer the existing notes into the exchange agent's account for the existing notes using DTC's procedures for transfer. If you desire to transfer existing notes held in book-entry form with DTC, the exchange agent must receive, prior to 5:00 p.m. New York City time on the expiration date, at its address set forth in this prospectus, a confirmation of book-entry transfer of the existing notes into the exchange agent's account at DTC, which is referred to in this prospectus as a "book-entry confirmation," and: o a properly completed and validly executed letter of transmittal, or manually signed facsimile thereof, together with any signature guarantees and other documents required by the instructions in the letter of transmittal; or o an agent's message transmitted pursuant to DTC's Automated Tender Offer Program. TENDER OF EXISTING NOTES USING DTC'S AUTOMATED TENDER OFFER PROGRAM (ATOP) The exchange agent and DTC have confirmed that the exchange offer is eligible for DTC's Automated Tender Offer Program. Accordingly, DTC participants may electronically transmit their acceptance of the exchange offer by causing DTC to transfer existing notes held in book-entry form to the exchange agent in accordance with DTC's ATOP procedures for transfer. DTC will then send a book-entry confirmation, including an agent's message to the exchange agent. The term "agent's message" means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, which states that DTC has received an express acknowledgment from the participant in DTC tendering existing notes that are the subject of that book-entry confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce such agreement against such participant. If you use ATOP procedures to tender existing notes you will not be required to deliver a letter of transmittal to the exchange agent, but you will be bound by its terms just as if you had signed it. SIGNATURES Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act, unless the existing notes tendered with the letter of transmittal are tendered: o by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" in the letter of transmittal; or o for the account of an institution eligible to guarantee signatures. If the letter of transmittal is signed by a person other than the registered holder or DTC participant who is listed as the owner, the existing notes must be endorsed or accompanied by appropriate bond powers which authorize the person to tender the existing notes on behalf of the registered holder or DTC participant who is listed as the owner, in either case signed as the name of the registered holder(s) who appears on the existing notes or the DTC participant who is listed as the -70- 73 owner. If the letter of transmittal or any existing notes or bond powers are signed or endorsed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, those persons should so indicate when signing, and unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. If you tender your notes through ATOP, signatures and signature guarantees are not required. DETERMINATIONS OF VALIDITY All questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of the tendered existing notes will be determined by us in our sole discretion. This determination will be final and binding. We reserve the absolute right to reject any and all existing notes not properly tendered or any existing notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any irregularities or conditions of tender as to particular existing notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of existing notes must be cured within the time we shall determine. Although we intend to notify holders of defects or irregularities related to tenders of existing notes, neither we, the exchange agent nor any other person shall be under any duty to give notification of defects or irregularities related to tenders of existing notes nor shall any of them incur liability for failure to give notification. Tenders of existing notes will not be considered to have been made until the irregularities have been cured or waived. Any existing notes received by the exchange agent that we determine are not properly tendered or the tender of which is otherwise rejected by us and as to which the defects or irregularities have not been cured or waived by us will be returned by the exchange agent to the tendering holder unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their existing notes and: o whose existing notes are not immediately available; o who cannot complete the procedure for book-entry transfer on a timely basis; o who cannot deliver their existing notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date; or o who cannot complete a tender of existing notes held in book-entry form using DTC's ATOP procedures on a timely basis; may effect a tender if they tender through an eligible institution described under "--Procedures for Tendering--Signatures," or, if they tender using ATOP's guaranteed delivery procedures. A tender of existing notes made by or through an eligible institution will be accepted if: o prior to 5:00 p.m., New York City time, on the expiration date, the exchange agent receives from an eligible institution a properly completed and duly executed notice of guaranteed delivery, by facsimile transmittal, mail or hand delivery, that: -71- 74 (1) sets forth the name and address of the holder, the certificate number or numbers of the holder's existing notes and the principal amount of the existing notes tendered, (2) states that the tender is being made, and (3) guarantees that, within five business days after the expiration date, a properly completed and validly executed letter of transmittal or facsimile, together with a certificate(s) representing the existing notes to be tendered in proper form for transfer, or a confirmation of book-entry transfer into the exchange agent's account at DTC of existing notes delivered electronically, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and o the properly completed and executed letter of transmittal or a facsimile, together with the certificate(s) representing all tendered existing notes in proper form for transfer, or a book-entry confirmation, and all other documents required by the letter of transmittal are received by the exchange agent within five business days after the expiration date. A tender made through DTC's Automated Tender Offer Program will be accepted if: o prior to 5:00 p.m., New York City time, on the expiration date, the exchange agent receives an agent's message from DTC stating that DTC has received an express acknowledgment from the participant in DTC tendering the existing notes that they have received and agree to be bound by the notice of guaranteed delivery; and o the exchange agent receives, within five business days after the expiration date, either: (1) a book-entry conformation, including an agent's message, transmitted via DTC's ATOP procedures; or (2) a properly completed and executed letter of transmittal or a facsimile, together with the certificate(s) representing all tendered existing notes in proper form for transfer, or a book-entry confirmation, and all other documents required by the letter of transmittal are received by. Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their existing notes according to the guaranteed delivery procedures described above. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, tenders of existing notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of existing notes in the exchange offer: o a written or facsimile transmission of a notice of withdrawal must be received by the exchange agent at its address listed below prior to 5:00 p.m., New York City time, on the expiration date; or o you must comply with the appropriate procedures of DTC's Automated Tender Offer Program. -72- 75 Any notice of withdrawal must: o specify the name of the person having deposited the existing notes to be withdrawn; o identify the existing notes to be withdrawn, including the certificate number or numbers and principal amount of the existing notes or, in the case of existing notes transferred by book-entry transfer, the name and number of the account at the depositary to be credited; o be signed by the same person and in the same manner as the original signature on the letter of transmittal by which the existing notes were tendered, including any required signature guarantee, or be accompanied by documents of transfer sufficient to permit the trustee for the existing notes to register the transfer of the existing notes into the name of the person withdrawing the tender; and o specify the name in which any of these existing notes are to be registered, if different from that of the person who deposited the existing notes to be withdrawn. All questions as to the validity, form and eligibility, including time of receipt, of the withdrawal notices will be determined by us, whose determination shall be final and binding on all parties. Any existing notes so withdrawn will be judged not to have been tendered according to the procedures in this prospectus for purposes of the exchange offer, and no exchange notes will be issued in exchange for those existing notes unless the existing notes so withdrawn are validly retendered. Any existing notes that have been tendered but are not accepted for exchange will be returned to the holder of the existing notes without cost to the holder or, in the case of existing notes tendered by book-entry transfer into the holder's account at DTC according to the procedures described above. This return or crediting will take place as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn existing notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS The exchange offer is subject only to the following conditions: o the compliance of the exchange offer with securities laws; o the tender of the existing notes; o the representation by the holders of the existing notes that they are not our affiliate, that the exchange notes they will receive are being acquired by them in the ordinary course of their business and that at the time the exchange offer is completed the holder had no plan to participate in the distribution of the exchange notes; and o no judicial or administrative proceeding is pending or shall have been threatened that would limit us from proceeding with the exchange offer. EXCHANGE AGENT State Street Bank and Trust Company, the trustee under the indenture, has been appointed as exchange agent for the exchange offer. In this capacity, the exchange agent has no fiduciary duties and will be acting solely on the basis of our directions. Requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to the -73- 76 exchange agent. You should send certificates for existing notes, letters of transmittal and any other required documents to the exchange agent addressed as follows: By Mail: State Street Bank and Trust Company Corporate Trust P. O. Box 778 Boston, Massachusetts 02110-0778 By Hand Delivery or Overnight Courier: State Street Bank and Trust Company 2 Avenue de Lafayette 5th Floor, Corporate Trust Division Boston, Massachusetts 02110-1724 Facsimile Transmission: (617) 662-1525 Confirm by Telephone: (617) 662-1452
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS DESCRIBED ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL. SOLICITATION OF TENDERS; FEES AND EXPENSES We will bear the expenses of requesting that holders of existing notes tender those notes for exchange notes. The principal solicitation under the exchange offer is being made by mail. Additional solicitations may be made by our officers and regular employees and our affiliates in person, by telegraph, telephone or telecopier. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or other persons soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket costs and expenses in connection with the exchange offer and will indemnify the exchange agent for all losses and claims incurred by it as a result of the exchange offer. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the existing notes and in handling or forwarding tenders for exchange. We will pay the expenses to be incurred in connection with the exchange offer, including fees and expenses of the exchange agent and trustee and accounting and legal fees and printing costs. You will not be obligated to pay any transfer tax in connection with the exchange, except if you instruct us to register exchange notes in the name of, or request that notes not tendered or not accepted in the exchange offer be returned to, a person other than you, you will be responsible for the payment of any applicable transfer tax. ACCOUNTING TREATMENT The exchange notes will be recorded at the same carrying value as the existing notes, as reflected in our accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized by us upon the closing of the exchange offer. We will amortize the expenses of the exchange offer over the term of the exchange notes. -74- 77 FEDERAL INCOME TAX CONSEQUENCES The following discussion generally summarizes the principal U.S. federal income tax consequences of the exchange of existing notes for exchange notes. This discussion is based upon the U.S. federal income tax laws in effect and available on the date of this prospectus, including the Internal Revenue Code of 1986, as amended, the related Treasury Regulations and judicial and administrative interpretations of the Internal Revenue Code and Treasury Regulations. All of these laws are subject to change, possibly retroactively, or different interpretation. We cannot assure you that the Internal Revenue Service will not challenge one or more of the tax consequences described in this prospectus. We have not obtained, nor do we intend to obtain, a ruling from the Internal Revenue Service with respect to the U.S. federal income tax consequences of the exchange offer. This discussion does not purport to address all aspects of U.S. federal income taxation that may be relevant to you in light of your specific circumstances, or if you are subject to special treatment under the Internal Revenue Code. This discussion also does not address the effect of any applicable U.S. federal estate and gift tax laws or state, local or foreign tax laws. The exchange of existing notes for exchange notes pursuant to the exchange offer will not be a taxable event for U.S. federal income tax purposes. You will not recognize gain or loss upon the receipt of exchange notes. If you are not exempt from U.S. federal income tax you will be subject to such tax on the same amount, in the same manner and at the same time as you would have been as a result of holding the existing notes. If you are a cash-basis holder who is exchanging existing notes for exchange notes, you will not recognize in income any accrued and unpaid interest on the existing notes by reason of the exchange. The basis and holding period of the exchange notes will be the same as the basis and holding period of the corresponding existing notes. THIS DESCRIPTION IS INCLUDED IN THIS PROSPECTUS FOR GENERAL INFORMATION ONLY. ACCORDINGLY, YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISOR CONCERNING THE U. S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER WITH RESPECT TO YOUR PARTICULAR SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS. PARTICIPATION IN THE EXCHANGE OFFER; UNTENDERED NOTES Participation in the exchange offer is voluntary. Holders of the existing notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. As a result of the making of, and upon acceptance for exchange of all existing notes tendered under the terms of, this exchange offer, we will have fulfilled a covenant contained in the terms of the registration agreement. Holders of the existing notes who do not tender in the exchange offer will continue to hold their existing notes and will be entitled to all the rights, and subject to the limitations, applicable to the existing notes under the indenture. Holders of existing notes will not longer be entitled to any rights under the registration agreement that by their term terminate or cease to have further effect as a result of the making of this exchange offer. See "Description of the Exchange Notes." All untendered existing notes will continue to be subject to the restrictions on transfer described in the indenture. To the extent that existing notes are tendered and accepted in the exchange offer, the trading market for untendered existing notes could be adversely affected. This is because there will probably be many fewer remaining existing notes outstanding following the exchange, significantly reducing the liquidity of the untendered notes. We may in the future seek to acquire untendered existing notes in the open market or through privately negotiated transactions, through subsequent exchange offers or otherwise. We intend to make any acquisitions of existing notes following the applicable requirements of the Exchange Act, and the rules and regulations of the SEC under the Exchange Act, including Rule 14e-1, -75- 78 to the extent applicable. We have no present plan to acquire any existing notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any existing notes that are not tendered in the exchange offer. DESCRIPTION OF THE EXCHANGE NOTES We will issue the exchange notes under an indenture to be entered into between us and State Street Bank and Trust Company, as trustee. The following description is a summary of selected provisions of the indenture and the exchange notes. We have not restated the indenture in its entirety. We will provide you a copy of the indenture for the exchange notes without charge if you request it from us. You should read the indenture because the indenture, and not this description, will control your rights as a holder of exchange notes. For purposes of this section of this prospectus, references to the "Company," "Nuevo," "we," "us," "our" or "ours" means Nuevo Energy Company, excluding our subsidiaries. The definitions of some of the terms used in the following summary are set forth below under "--Material Definitions." The exchange notes and the existing notes will be treated as a single class for all purposes of the indenture, and references in this section to the exchange notes include the existing notes. The indenture provides for the issuance of up to $400,000,000 of notes, We will issue a maximum principal amount of $257,310,000 of exchange notes in exchange for the existing notes in the exchange offer. All other issuances of notes in the future will be subject to the debt incurrence test described under "--Material Covenants--Incurrence of Indebtedness." All of the notes will be identical in all respects other than the price at which we issue the notes and the date an which we issue the notes. PRINCIPAL, MATURITY AND INTEREST OF THE EXCHANGE NOTES The exchange notes will be our general unsecured senior subordinated obligations. The exchange notes will mature on June 1, 2008. Interest on the exchange notes will accrue at the rate of 9 1/2% per annum and will be payable semiannually in arrears on June 1 and December 1, commencing on December 1, 1999. Interest payments will be made to the person in whose names the exchange notes are registered at the close of business on the May 15 or November 15 preceding the interest payment date. Interest on the exchange notes will accrue from the date of issuance of the existing notes or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, interest and premium on the exchange notes will be paid as described under "--Book-Entry, Delivery and Form" below. SUBORDINATION The payment of the principal of, and premium and interest on, the exchange notes will be subordinated in right of payment to the prior payment in full of Senior Indebtedness (Section 14. 1 ). The subordination provisions prohibit us from making payments with respect to the exchange notes if the events described below occur. If triggered, the subordination provisions prohibit us from paying any amounts with respect to the exchange notes, including: o payments of principal or interest; o payments of any premium; and -76- 79 o repurchases of the exchange notes, including repurchases in connection with a Change of Control or Asset Sale, as described under "--Repurchase at the Options of Holders--Change of Control" and "--Asset Sales." If we: o become subject to insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or similar case; o liquidate, dissolve or otherwise wind-up our business; or o make an assignment for the benefit of our creditors or marshal our assets or liabilities; the holders of Senior Indebtedness will be entitled to receive full payment of all amounts owed to them prior to any payments being made to the holders of exchange notes. We will not be required to repay all Senior Indebtedness in full in connection with our consolidation or merger or our liquidation or dissolution following the disposition of all or substantially all of our properties upon the terms described under the subheading "--Material Covenants--Merger, Consolidation or Sale of Assets" as a condition to any payments on the exchange notes. If the trustee for the exchange notes receives any payment from us when the subordination provisions prohibit payment of amounts owed on the exchange notes, the trustee is required to return the payments to us or our receiver or custodian for payment to holders of Senior Indebtedness. The subordination provisions apply to payments of any nature, including payments: o of cash; o of property, assets or securities; and o by way of set-off. The subordination provisions, however, do not prohibit the payment of principal, interest and premium on the exchange notes if the payment is made in Permitted Junior Securities. Additionally, we may not make any payment in respect of the exchange notes, other than payments of Permitted Junior Securities, if a Payment Event of Default occurs on our Specified Senior Indebtedness and the trustee receives written notice of the default. We must resume payment in respect of the exchange notes, including any missed payments, when we cure or obtain a waiver of the Payment Event of Default or it otherwise ceases to exist. We must also resume payment in respect of the exchange notes, including any missed payments, if we pay in full or discharge the Specified Senior Indebtedness. We also may not make any payment in respect of the exchange notes, other than payments of Permitted Junior Securities, for the period specified below ("Payment Blockage Period") if a Nonpayment Event of Default occurs on our Specified Senior Indebtedness and the trustee and we receive written notice of the default from any holder of Specified Senior Indebtedness. The Payment Blockage Period will commence upon the earlier of the date of receipt by the trustee or us of such notice of the default (the "Payment Blockage Notice") and will end on the earliest of: o 179 days after it begins; -77- 80 o the date on which the holders of Specified Senior Indebtedness notify the trustee or us that the Non-payment Event of Default no longer exists or that the Specified Senior Indebtedness has been discharged; and o the date we or the trustee receives notice from the person initiating the Payment Blockage Period that the period has been terminated. We must resume making payments in respect of the exchange notes after the Payment Blockage Period ends, including any missed payments, unless we are otherwise prohibited by the other subordination provisions of the indenture. No more than one Payment Blockage Period may commence during any period of 360 consecutive days. No Non-payment Event of Default that existed on the date of delivery of a Payment Blockage Notice to the trustee can be made the basis for a subsequent Payment Blockage Notice. (Section 14.3) If we fail to make any payment on the exchange notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions described above, the failure will constitute an Event of Default under the indenture and will entitle the holders of the exchange notes to exercise the rights described under "--Events of Default and Remedies." (Section 5.1) As a result of such subordination provisions described above, in the event of a distribution of assets upon our liquidation, receivership, reorganization or insolvency, our creditors who are holders of Senior Indebtedness may recover more, ratably, than the holders of the exchange notes, and assets which would otherwise be available to pay obligations in respect of the exchange notes will be available only after we have paid all Senior Indebtedness in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the exchange notes. The subordination provisions described above will cease to be applicable to the exchange notes upon any Legal Defeasance or Covenant Defeasance of the exchange notes as described under "--Legal Defeasance and Covenant Defeasance." SUBSIDIARY GUARANTEES OF NOTES None of our Restricted Subsidiaries will guarantee the exchange notes unless the Restricted Subsidiary also guarantees or secures any of our Pari Passu Indebtedness or Subordinated Indebtedness. If one of our Restricted Subsidiaries guarantees or secures any of our Pari Passu Indebtedness or Subordinated Indebtedness, we will cause it to be bound by the terms of the indenture and to unconditionally guarantee the performance of our obligations under the indenture and the exchange notes. (Sections 10.13 and 13.1) The obligations of each Subsidiary Guarantor will be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or made by or on behalf of any other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the indenture, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under its Subsidiary Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor, if any, in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. (Section 13.4) Each Subsidiary Guarantor may consolidate with or merge into or sell or otherwise dispose of all or substantially all of its properties and assets to us or another Subsidiary Guarantor without -78- 81 limitation, except to the extent any such transaction is subject to the "Merger, Consolidation or Sale or Assets" covenant of the indenture. Each Subsidiary Guarantor may consolidate with or merge into or sell all or substantially all of its properties and assets to a Person other than us or another Subsidiary Guarantor, whether or not Affiliated with the Subsidiary Guarantor, provided that: o if the surviving Person is not the Subsidiary Guarantor, the surviving Person agrees to assume the Subsidiary Guarantor's Subsidiary Guarantee and all its obligations pursuant to the indenture, except to the extent the following paragraph would result in the release of such Subsidiary Guarantee; and o such transaction does not violate any of the covenants described under the heading "--Material Covenants" or result in a Default or Event of Default immediately thereafter that is continuing. (Section 13.2) Upon the sale or other disposition, by merger or otherwise, of a Subsidiary Guarantor of all or substantially all of its assets to a Person other than us or another Subsidiary Guarantor and pursuant to a transaction that is otherwise in compliance with the indenture, including as described in the foregoing paragraph, such Subsidiary Guarantor shall be deemed released from its Subsidiary Guarantee and the related obligations set forth in the indenture. Any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, our or our Restricted Subsidiaries' other Indebtedness shall also terminate upon such sale or other disposition. In addition, all of the Subsidiary Guarantors shall be deemed released from their respective Subsidiary Guarantees and the related obligations set forth in the indenture in the event that all obligations of the Subsidiary Guarantors under all of their guarantees of, and under all of their pledges of assets or other security interests which secure our or our Restricted Subsidiaries' other Indebtedness, excluding any Senior Indebtedness, shall also terminate. (Section 13.3) The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will be subordinated to the prior payment in full of all Guarantor Senior Indebtedness of such Subsidiary Guarantor to substantially the same extent as the exchange notes are subordinated to Senior Indebtedness. (Section 13.8) REDEMPTION AT THE OPTION OF NUEVO We may not redeem the exchange notes at our option prior to June 1, 2003. Thereafter, we may redeem the exchange notes at our option, in whole or in part, at the redemption prices expressed as percentages of principal amount set forth below. If we redeem the notes at our option, we must also pay interest accrued and unpaid to the applicable redemption date. The redemption prices during the twelve-month period beginning on June 1 of the years indicated are set forth below:
YEAR PERCENTAGE ---- ---------- 2003 ........................................................... 104.750% 2004 ........................................................... 103.167% 2003 ........................................................... 101.583% 2006 and thereafter ............................................ 100.000%
In addition, prior to June 1, 2001 we may redeem up to 33 1/3% of the aggregate principal amount of the exchange notes originally issued at a redemption price of 109.5% of the principal amount, plus accrued and unpaid interest to the date of redemption, with the net proceeds of one or -79- 82 more Equity Offerings. We may not cause a redemption from the proceeds of the Equity Offering unless: o at least 66 2/3% of the aggregate principal amount of the exchange notes originally issued under the indenture at any time prior to such redemption remain outstanding after the redemption; and o the redemption occurs within 90 days after the closing of the Equity Offering. (Section 11.1) If we redeem less than all of the exchange notes, selection of exchange notes for redemption will be made by the trustee on a pro rata basis. We will not, however, redeem notes in principal amounts of less than $10. (Section 11.4) We will mail notice of a redemption at least 30 and not more than 60 days before the redemption date. The notice will describe the amount of notes being redeemed, if less than the entire principal amount. (Section 11.5) Interest will cease to accrue on exchange notes which are redeemed on the redemption date. (Section 11.7) MANDATORY REDEMPTION We will not be required to make mandatory redemption or sinking fund payments with respect to the exchange notes. REPURCHASE AT THE OPTION OF HOLDERS Change of Control If a Change of Control occurs, we will be obligated to make an offer to purchase all of the outstanding exchange notes. The purchase price we are required to offer is 101% of the aggregate principal amount plus accrued and unpaid interest to the date of purchase. We are required to purchase all exchange notes tendered under the offer which are not withdrawn. In order to effect a Change of Control offer, we must mail a notice of the Change of Control to the trustee and each holder of exchange notes no later than 30 days after the Change of Control occurs. We are obligated to close the purchase of notes tendered under the Change of Control offer no less than 30 and no more than 60 days after the notice is mailed. The notice will describe the Change of Control and the procedures that must be followed to participate in the offer. Our bank credit facility states that events which constitute a Change of Control constitute a default under the bank credit facility. In addition, our bank credit facility prohibits the repurchase of both the existing notes and the exchange notes. Future agreements relating to our Senior Indebtedness may contain similar provisions. In the event a Change of Control occurs at a time when we are prohibited from purchasing exchange notes, we could seek the consent of our lenders to the purchase of exchange notes or could attempt to refinance the borrowings that contain a prohibition. If we do not obtain a consent or repay the borrowings, we will be prohibited from purchasing exchange notes, which will constitute an Event of Default under the Indenture. A default under the indenture for the exchange notes will also be a default under the bank credit facility and may be a default under other current and future agreements to which we are or may become a party. In such circumstances, the subordination provisions in the indenture may prevent payments to the holders of exchange notes required by the Change of Control. We will not be required to make a Change of Control offer if a third party makes the Change of Control offer at the same purchase price, at the same times and otherwise in substantial -80- 83 compliance with the requirements applicable to a Change of Control offer made by us and purchases the exchange notes properly tendered and not withdrawn. (Section 10.16) Asset Sales We may not, and may not permit our Restricted Subsidiaries to, engage in any Asset Sale unless the consideration received equals the fair market value of the assets and properties sold or otherwise disposed of as determined by our board of directors, and the consideration is either: o cash, Cash Equivalents, Liquid Securities or Exchanged Properties ("Permitted Consideration"); or o the property or assets received that do not constitute Permitted Consideration have an aggregate fair market value of no more than 10.0% of our Adjusted Consolidated Net Tangible Assets. If we do not invest the Net Cash Proceeds of Asset Sales which occur after the date of the indenture in properties and assets that will be used in the Oil and Gas Business within 365 days after the closing of the Asset Sale, we must either: o repay Indebtedness under the Credit Facility; o repay or purchase other Indebtedness (other than Subordinated Indebtedness or Pari Passu Indebtedness) of ourself or a Restricted Subsidiary, provided that any related loan commitment is permanently reduced by the amount of such Indebtedness repaid; or o offer to repurchase exchange notes as described below. The amount of Net Cash Proceeds from all Asset Sales which occur after the date of the indenture not used for one of the purposes described in this paragraph will constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds is equal to or more than $10 million: o we must make an Offer to purchase the exchange notes and any outstanding Pari Passu Indebtedness required to be repurchased in connection with an Asset Sale, provided that the amount of the Pari Passu Indebtedness repurchased is permanently reduced; o we must make an offer to purchase exchange notes in the principal amount calculated by multiplying the Excess Proceeds by a fraction, the numerator of which is the outstanding principal amount of the exchange notes and the denominator of which is the sum of the outstanding principal amount of the exchange notes plus any Pari Passu Indebtedness that we must offer to repurchase; o the offer price for the exchange notes will be payable in cash in an amount equal to 100% of the principal amount of the exchange notes tendered, plus accrued and unpaid interest to the date of payment; and o if more exchange notes are tendered than we have Excess Proceeds to purchase, we will pro rate the exchange notes tendered. If the amount of exchange notes tendered is less than the amount of exchange notes we offered to purchase, we may use the Excess Proceeds not used to repurchase exchange notes for general -81- 84 corporate purposes. The use of Excess Proceeds for general corporate purposes must comply with the other provisions of the indenture, including the covenant described under "--Material Covenants--Restricted Payments." After we make an Excess Proceeds offer as described above, the amount of Excess Proceeds will be reset to zero. We will not permit any of our Restricted Subsidiaries to be a party to any agreement that would place any restriction on our right to make an offer to repurchase exchange notes following an Asset Sale. (Section 10.17) Securities Law Compliance We will comply with the requirements of Rule 14e-1 under the Securities Exchange Act of 1934 and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the exchange notes as a result of a Change of Control or Asset Sale. These rules require that we keep the offer open for 20 business days. They also require that we notify holders of exchange notes of changes in the offer and extend the offer for specified time periods if we amend the offer. If the provisions of any securities laws or regulations conflict with the provisions in the indenture relating to a Change of Control or Asset Sale offer, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the indenture. MATERIAL COVENANTS Ownership of Capital Stock We may not permit any Restricted Subsidiary to issue any Capital Stock other than to us or a Wholly Owned Restricted Subsidiary. Also, we may not permit any Person other than us or a Wholly Owned Restricted Subsidiary to own any Capital Stock of a Restricted Subsidiary, except for: o directors' qualifying shares; o Capital Stock of a Restricted Subsidiary organized in a foreign jurisdiction required to be owned by the government of the foreign jurisdiction or citizens of the foreign jurisdiction in order for the Restricted Subsidiary to transact business in the foreign jurisdiction; o a sale of all or substantially all of the Capital Stock of a Restricted Subsidiary effected in accordance with the "Asset Sales" covenant; o Qualifying TECONS; and o the Capital Stock of a Restricted Subsidiary owned by a Person at the time the Restricted Subsidiary became a Restricted Subsidiary or which is acquired by the Person in connection with the formation of the Restricted Subsidiary. The Capital Stock owned by us or another Restricted Subsidiary will be treated as an Investment for purposes of the "Restricted Payments" covenant, if the amount of such Capital Stock represents less than a majority of the Voting Stock of such Restricted Subsidiary. (Section 10.14) Restricted Payments The indenture will define the following as Restricted Payments if done by us or any of our Restricted Subsidiaries: -82- 85 o the declaration or payment of any dividend or distribution on our Capital Stock, including Eligible Convertible Securities and Qualifying TECONS, other than dividends or distributions payable solely in shares of our Qualified Capital Stock or in options, warrants or other rights to purchase our Qualified Capital Stock; o the purchase or acquisition of our Capital Stock, including Eligible Convertible Securities and Qualifying TECONS, or that of our Affiliates, other than Capital Stock issued by a Wholly Owned Restricted Subsidiary, or any options, warrants or other rights to acquire such Capital Stock; o making any principal payment on, or repurchase or other acquisition of, any Subordinated Indebtedness prior to any scheduled principal payment, scheduled sinking fund payment or maturity, except using the Excess Proceeds remaining after compliance with the provisions described under "--Repurchase at the Option of Holders--Asset Sales," and to the extent required by the indenture or other agreement or instrument pursuant to which such Subordinated Indebtedness was issued; o the declaration or payment of any dividend or other distribution on shares of Capital Stock of any Restricted Subsidiary, other than to us or any Wholly Owned Restricted Subsidiary, or the purchase, redemption or other acquisition or retirement of any Capital Stock of any Restricted Subsidiary or any options, warrants or other rights to acquire any such Capital Stock, other than for Capital Stock held by us or any Wholly Owned Restricted Subsidiary; or o making of any Investment, other than any Permitted Investment. We may not make a Restricted Payment, unless at the time of and after giving effect to the proposed Restricted Payment: o no Default or Event of Default shall have occurred and be continuing, o we could incur $1.00 of additional Indebtedness, other than Permitted Indebtedness, in accordance with the covenant described under "--Incurrence of Indebtedness"; and o the aggregate amount of all Restricted Payments declared or made after June 8, 1999 shall not exceed the sum, without duplication, of the following: (1) 50% of our aggregate Consolidated Net Income accrued on a cumulative basis during the period beginning on April 1, 1998 and ending on the last day of our last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate Consolidated Net Income shall be a loss, minus 100% of such loss); plus 2) the aggregate net cash proceeds or the fair market value of any property or assets other than cash, received after June 8, 1998 by us as capital contributions to us, other than from any Restricted Subsidiary; plus (3) the aggregate net cash proceeds or the fair market value of any property or assets other than cash, received by us after June 8, 1998 from the issuance or sale, other than to any of our Restricted Subsidiaries, of our Qualified Capital Stock or any option, warrants or rights to purchase our Qualified Capital Stock; plus -83- 86 (4) the aggregate net cash proceeds received after June 8, 1999 by us, other than from any of our Restricted Subsidiaries, upon the exercise of any options, warrants or rights to purchase our Qualified Capital Stock; plus (5) the aggregate net cash proceeds received after June 8, 1998 by us from the issuance or sale, other than to any of our Restricted Subsidiaries, of debt securities or shares of Redeemable Capital Stock that have been converted into or exchanged for our Qualified Capital Stock, together with the aggregate cash received by us at the time of such conversion or exchange; plus (6) the aggregate net cash proceeds or the fair market value of any property or assets received after June 8, 1999 by us or our Restricted Subsidiaries, computed on a consolidated basis, constituting a return of capital on an Investment, other than a Permitted Investment, made by us or any of our Restricted Subsidiaries after June 8, 1998; plus (7) $25.0 million. However, we and our Restricted Subsidiaries may take the following actions so long as, at the time thereof, no Default or Event of Default shall have occurred and be continuing, except in the case of the first clause below, and, in the case of the sixth clause below, we could incur $1.00 of additional Indebtedness, excluding Permitted Indebtedness, in accordance with the covenant described under "--Incurrence of Indebtedness": o the payment of any dividend on any of our or any Restricted Subsidiary's Capital Stock within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the covenant, and such payment shall be deemed to have been paid on such date of declaration for purposes of making any calculation under this covenant; o the repurchase or other acquisition or retirement of any shares of our or of any of our Restricted Subsidiaries' Capital Stock, in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale of our Qualified Capital Stock, other than a sale to a Restricted Subsidiary; o the repurchase or other acquisition or retirement for value of any Subordinated Indebtedness, other than Redeemable Capital Stock, in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale of our Qualified Capital Stock, other than to a Restricted Subsidiary; o the purchase or other acquisition or retirement for value of Subordinated Indebtedness in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent incurrence, other than to a Restricted Subsidiary, of Subordinated Indebtedness so long as: (1) the principal amount of such new Indebtedness does not exceed the principal amount, or, if such Subordinated Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination, of the Indebtedness being so purchased, acquired or retired, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount -84- 87 of any premium reasonably determined by us as necessary to accomplish such refinancing, plus the amount of our expenses incurred in connection with such refinancing, (2) such new Indebtedness is subordinated to the exchange notes at least to the same extent as such Indebtedness so purchased, acquired or retired, (3) such new Indebtedness has an Average Life to Stated Maturity that is longer than the Average Life to Stated Maturity of the exchange notes, and (4) such new Indebtedness has a Stated Maturity for its final scheduled principal payment that is at least 91 days later than the Stated Maturity for the final scheduled principal payment of the exchange notes; o the repurchase or other acquisition or retirement for value of any of our or our Subsidiaries' Qualified Capital Stock held by any of our or our Subsidiaries' current or former officers, directors or employees pursuant to the terms of agreements, including employment agreements, or plans approved by our board of directors, including any such repurchase, acquisition or retirement of such Qualified Capital Stock that is deemed to occur upon the exercise of stock options or similar rights if such shares represent all or a portion of the exercise price or are surrendered in connection with satisfying Federal income tax obligations; provided, however, that the aggregate amount of such repurchases, acquisitions and retirements shall not exceed the sum of: (1) $1.0 million in any twelve-month period, and (2) the aggregate net proceeds, if any, received by us during such twelve-month period from any issuance of such Qualified Capital Stock pursuant to such agreements or plans; and o the repurchase or other acquisition of our Qualified Capital Stock in an amount not to exceed 50% of the net after-tax gain from Specified Property Sales. The actions described in the first clause of this paragraph are Restricted Payments that will be permitted to be taken in accordance with this paragraph but shall reduce the amount that would otherwise be available for Restricted Payments. The actions described in the second through the sixth clauses above will be Restricted Payments that will be permitted to be taken in accordance with this paragraph and will not reduce the amount that would otherwise be available for Restricted Payments. We or any of our Restricted Subsidiaries may make a Restricted Payment, if at the time we first incurred a commitment for the Restricted Payment the Restricted Payment could have been made, if all commitments incurred and outstanding are treated as if they were Restricted Payments expended by us or a Restricted Subsidiary at the time the commitments were incurred, except that commitments incurred and outstanding which are treated as a Restricted Payment and which are ultimately not made shall no longer be treated as a Restricted Payment expended by us; and provided, further, that at the time such Restricted Payment is made no Default or Event of Default shall have occurred and be continuing and we must be able to incur $1.00 of additional Indebtedness, other than Permitted Indebtedness, in accordance with the "Incurrence of Indebtedness" covenant. (Section 10.10) -85- 88 Incurrence of Indebtedness We may not, and may not permit any of our Restricted Subsidiaries to, create, incur, assume, guarantee or otherwise become directly or indirectly liable for the payment of (collectively, "incur") any Indebtedness, including any Acquired Indebtedness but excluding Permitted Indebtedness, unless at the time of such event and after giving effect thereto on a pro forma basis: o if such incurrence occurs on or before March 31, 2000, the Consolidated Fixed Charge Coverage Ratio for the applicable period would have been at least 2.0 to 1.0; and o if such incurrence occurs after March 31, 2000, the Consolidated Fixed Charge Coverage Ratio for the applicable period would have been at least equal to 2.5 to 1.0. (Section 10.12) Liens We may not, and may not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, except for Permitted Liens, upon any of our or any Restricted Subsidiary's assets or properties, whether now owned or acquired after the date of the indenture, or any income or profits therefrom to secure any Pari Passu Indebtedness or Subordinated Indebtedness, unless prior to or contemporaneously therewith the exchange notes are directly secured equally and ratably, provided that: o if such secured Indebtedness is Pari Passu Indebtedness, the Lien securing such Pari Passu Indebtedness shall be subordinate and junior to, or pari passu with, the Lien securing the exchange notes; and o if such secured Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness shall be subordinate and junior to the Lien securing the exchange notes at least to the same extent as such Subordinated Indebtedness is subordinated to the exchange notes. The foregoing covenant will not apply to any Lien securing Acquired Indebtedness, provided that any such Lien extends only to the properties or assets that were subject to such Lien prior to the related acquisition and was not created, incurred or assumed in contemplation of such transaction. (Section 10.15) Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries We may not, and may not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to: o pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock to us or any other Restricted Subsidiary; o pay any Indebtedness owed to us or any other Restricted Subsidiary; o make an Investment in us or any other Restricted Subsidiary; or o transfer any of its properties or assets to us or any other Restricted Subsidiary. However, with respect to the fourth clause of this paragraph only, -86- 89 o our Restricted Subsidiaries may have restrictions in the form of Liens which are not prohibited as described in the "Liens" covenant and which contain customary limitations on the transfer of collateral; and o our Restricted Subsidiaries may have customary restrictions contained in asset sale agreements limiting the transfer of such assets pending the closing of such sale. In addition, the indenture will not prohibit the following encumbrances and restrictions which exist pursuant to: o the indenture, the Credit Facility or any other agreement in effect as of the date of the indenture; o any agreement or other instrument of a Person acquired by us or any Restricted Subsidiary in existence at the time of such acquisition which was not created in contemplation of the acquisition which encumbrance or restriction is not applicable to any other Person, or the properties or assets of any other Person, other than the Person, or the property or assets of the Person, so acquired; o customary restrictions in leases and licenses relating to the property covered thereby and entered into in the ordinary course of business; or o any agreement that extends, renews, refinances or replaces the agreements containing the foregoing restrictions, if the terms and conditions of those restrictions are not materially less favorable to the holders of the exchange notes than those under or pursuant to the agreements so extended, renewed, refinanced or replaced. (Section 10.19) Limitation on Layering Debt We may not have any Indebtedness, including Acquired Indebtedness and Permitted Indebtedness, that is subordinated in right of payment to Senior Indebtedness, unless such Indebtedness also ranks equal with, or subordinated in right of payment to, the exchange notes pursuant to subordination provisions substantially similar to those applicable to the exchange notes. (Section 10.11) Merger, Consolidation or Sale of Assets We may not, in any single transaction or series of related transactions, consolidate or merge with or into any other Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of our and our Restricted Subsidiaries' properties and assets on a consolidated basis to any person or group of Affiliated Persons, and we may not permit any of our Restricted Subsidiaries to enter into any such transaction or series of related transactions if such transaction or series of related transactions would result in such a disposition of all or substantially all of our and our Restricted Subsidiaries' properties and assets on a consolidated basis, unless at the time and after giving effect thereto: o either: (1) if the transaction is a merger or consolidation, we are the surviving Person of the merger or consolidation, or -87- 90 (2) the Person formed by the consolidation or into which we are merged or to which our or our Restricted Subsidiaries' properties and assets are disposed of (referred to as the "Surviving Entity") is a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and, in either case, expressly assumes by a supplemental indenture to the indenture executed and delivered to the trustee, in form satisfactory to the trustee, all of our obligations under the exchange notes and the indenture and the indenture remains in effect; o immediately after giving effect to the transaction or series of transactions on a pro forma basis and treating any Indebtedness not previously an obligation of ours or our Restricted Subsidiaries in connection with or as a result of such transaction as having been incurred at the time of the transaction or series of transactions, no Default or Event of Default shall have occurred and be continuing; o except in the case of the consolidation or merger of any Restricted Subsidiary with or into us, immediately after giving effect to the transaction or series of transactions on a pro forma basis, our or the Surviving Entity's Consolidated Net Worth is at least equal to our Consolidated Net Worth immediately before such transaction or transactions; o except in the case of our consolidation or merger with or into a Wholly Owned Restricted Subsidiary or any Restricted Subsidiary with or into us or any of our Wholly Owned Restricted Subsidiaries, immediately after giving effect to the transaction or transactions on a pro forma basis assuming that the transaction or transactions occurred on the first day of the relevant period of fiscal quarters under the "Incurrence of Indebtedness" covenant ending immediately prior to the consummation of the transaction or transactions, with the appropriate adjustments with respect to the transaction or transactions being included in the pro forma calculation, we or the Surviving Entity could incur $1.00 of additional Indebtedness other than Permitted Indebtedness pursuant to such covenant; o if any of our or our Restricted Subsidiaries' properties or assets would upon the transaction or series of related transactions become subject to any Lien, other than a Permitted Lien, the creation or imposition of such Lien shall have been in compliance with the "Liens" covenant; and o if we are not the continuing obligor under the Indenture, then any Subsidiary Guarantor, unless it is the Surviving Entity, shall have confirmed that its Subsidiary Guarantee will continue to apply following the transaction or transactions. If we are not the continuing or surviving corporation following any of the foregoing transaction or transactions, the Surviving Entity shall be substituted for us under the indenture with the same effect as if the Surviving Entity had been named as Nuevo therein, and thereafter we will be discharged from all obligations and covenants under the indenture and the exchange notes, except in the case of a lease. (Article VIII) Transactions with Affiliates We may not, and may not permit any of our Restricted Subsidiaries to, directly or indirectly, engage in any transaction or series of related transactions with any of our Affiliates, other than us or a Restricted Subsidiary, unless: -88- 91 o such transaction or series of related transactions is on terms that are no less favorable to us or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party; and o with respect to a transaction or series of related transactions involving payments in excess of $1.0 million in the aggregate, we deliver an officers' certificate to the trustee certifying that such transaction complies with the foregoing clause. In addition, if the transaction or series of related transactions involves payments in excess of $5.0 million in the aggregate, the officers' certificate also must state that such transaction or series of related transactions has been approved by a majority of our Disinterested Directors. If the transaction or series of related transactions involves payments of $25.0 million or more in the aggregate, we must also have received the written opinion of a nationally recognized investment banking firm or appraisal firm in the United States that such transaction or series of transactions is fair, from a financial point of view, to us or our Restricted Subsidiary. The foregoing restriction shall not apply to o the provision of services and payments under any of the existing agreements with Torch Energy Advisors Incorporated or its subsidiaries so long as each of the agreements, including any modifications or amendments entered into on or after the date of the indenture, has been approved by a majority of our Disinterested Directors; o loans or advances to our or our Restricted Subsidiaries' officers, directors and employees made in the ordinary course of business and consistent with past practices in an aggregate amount not to exceed $3,000,000 outstanding at any one time; o the payment of reasonable and customary regular fees to our or our Restricted Subsidiaries' directors who are not our employees or employees of our Affiliates; o our employee compensation and other benefit arrangements; o indemnities of our and any Subsidiary's officers and directors consistent with applicable bylaws and statutory provisions; or o Restricted Payments permitted by the indenture. (Section 10.18) Reports We must file on a timely basis with the SEC, to the extent such filings are accepted by the SEC and whether or not we have a class of securities registered under the Exchange Act, the annual reports, quarterly reports and other documents that we would be required to file if we were subject to Section 13 or 15 of the Exchange Act. These include an annual report on Form 10-K and quarterly reports on Form 10-Q. We will also be required: o to file with the trustee, with exhibits, and provide to each holder of exchange notes, without cost to such holder, copies of reports and documents, without exhibits, within 30 days after the date on which we file the reports and documents with the SEC or the date on which we would be required to file the reports and documents if we were required to, and -89- 92 o if filing such reports and documents with the SEC is not accepted by the SEC or is prohibited under the Exchange Act, to supply at our cost copies of such reports and documents, including any exhibits, to any holder of exchange notes, securities analyst or prospective investor promptly upon written request. (Section 10.09) EVENTS OF DEFAULT AND REMEDIES Each of the following will be an "Event of Default": o failure to pay interest on the exchange notes when due for 30 days, whether or not prohibited by the subordination provisions of the exchange notes; o failure to pay the principal of or premium on the exchange notes, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control offer or an Asset Sales offer, upon acceleration or otherwise, whether or not prohibited by the subordination provisions; o failure to comply with the covenant described under "--Material Covenants--Merger, Consolidation or Sale of Assets"; o failure to comply with the covenant described under "--Repurchase at the Option of Holders--Change of Control"; o failure to comply with the covenant described under "--Repurchase at the Option of Holders--Asset Sales"; o failure by us or any Subsidiary Guarantor to comply with any other covenant contained in the exchange notes, any Subsidiary Guarantee or the indenture for a period of 60 days after written notice of such failure given to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount of the exchange notes then outstanding; o the occurrence and continuation beyond any applicable grace period of any default in the payment of the principal of, premium, if any, on or interest on any of our or any Restricted Subsidiary's Indebtedness, other than the exchange notes, for money borrowed when due, or any other default resulting in acceleration of any of our or any Restricted Subsidiary's Indebtedness for money borrowed, if the aggregate principal amount of such Indebtedness exceeds $10,000,000, or, in the case of Non-Recourse Purchase Money Indebtedness, $40,000,000, and provided, further, that if any such default is cured or waived or any such acceleration rescinded, or such Indebtedness is repaid, within a period of 10 days from the continuation of such default beyond the applicable grace period or the occurrence of such acceleration, as the case may be, such Event of Default under the indenture and any consequential acceleration of the exchange notes shall be automatically rescinded, so long as such rescission does not conflict with any judgment or decree; o any Subsidiary Guarantor shall for any reason cease to be, or be asserted by us or any Subsidiary Guarantor not to be, in full force and effect and enforceable in accordance with its terms, except pursuant to the release or termination of such Subsidiary Guarantee in accordance with the indenture; -90- 93 o final judgments or orders rendered against us or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $10,000,000 over the coverage under applicable insurance policies and either: (1) commencement by any creditor of an enforcement proceeding upon such judgment, other than a judgment that is stayed by reason of pending appeal or otherwise, or (2) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; o the entry of a decree or order by a court haying jurisdiction in the premises: (1) for relief in respect of us or any Material Subsidiary in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or (2) adjudging us or any Material Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of us or any Material Subsidiary under any applicable federal or state law, or appointing under any such law a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of us or any Material Subsidiary or of a substantial part of our or any Material Subsidiary's consolidated assets, or ordering the winding up or liquidation of our or any Material Subsidiary's affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or o the commencement by us or any Material Subsidiary of a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or any other case or proceeding to be adjudicated bankrupt or insolvent, or the consent by us or any Material Subsidiary to the entry of a decree or order for relief in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against us or any Material Subsidiary, or the filing by us or any Material Subsidiary of a petition or consent seeking reorganization or relief under any applicable federal or state law, or the consent by us or any Material Subsidiary under any such law to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of us or any Material Subsidiary or of any substantial part of our or any Material Subsidiary's consolidated assets, or the making by us or any Material Subsidiary of an assignment for the benefit of creditors under any such law, or the admission by us or any Material Subsidiary in writing of our or any Material Subsidiary's inability to pay debts generally as they become due or the taking of corporate action by us or any Material Subsidiary in furtherance of any such action. (Section 5. 1) If any Event of Default, other than those specified in the last two clauses above, occurs and is continuing, the trustee, by written notice to us, or the holders of at least 25% in aggregate principal amount of the exchange notes then outstanding, by notice to the trustee and us, may, and the trustee upon the request of the holders of not less than 25% in aggregate principal amount of the exchange notes then outstanding shall, declare the principal of, premium, if any, and accrued interest on all of the exchange notes due and payable immediately, upon which declaration all amounts payable in -91- 94 respect of the exchange notes shall be immediately due and payable. If an Event of Default specified in the last two clauses above occurs and is continuing, then the principal of, premium, if any, and accrued interest on all of the exchange notes shall automatically become and be immediately due and payable without any declaration, notice or other act on the part of the trustee or any holder of exchange notes. After a declaration of acceleration under the indenture, but before a judgment or decree for payment of the money due has been obtained by the trustee, the holders of a majority in aggregate principal amount of the outstanding exchange notes, by written notice to us, any Subsidiary Guarantors and the trustee, may rescind such declaration if: o we or any Subsidiary Guarantor has paid or deposited with the trustee a sum sufficient to pay (1) all sums paid or advanced by the trustee under the indenture and the reasonable compensation, expenses, disbursements and advances of the trustee, its agents and counsel, (2) all overdue interest on all exchange notes, (3) the principal of and premium, if any, on any exchange notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the exchange notes, and (4) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the exchange notes without duplication of any amount paid or deposited pursuant to sub-clause (2) or (3); o the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and o all Events of Default, other than the nonpayment of principal of, premium, if any, on or interest on the exchange notes that has become due solely by such declaration of acceleration, have been cured or waived. (Section 5.2) No holder of the exchange notes will have any right to institute any proceeding with respect to the indenture or any remedy thereunder, unless o such holder has notified the trustee or a continuing Event of Default, o the holders of at least 25% in aggregate principal amount of the outstanding exchange notes have made written request, and offered reasonable indemnity, to the trustee to institute such proceeding, o the trustee has failed to institute such proceeding within 60 days after receipt of such notice, and o the trustee, within such 60-day period, has not received directions inconsistent with such written request by holders of a majority in aggregate principal amount of the outstanding exchange notes. (Section 5.7) -92- 95 Such limitations will not apply, however, to a suit instituted by a holder of a exchange note for the enforcement of the payment of the principal of, premium or interest on a exchange note on or after the respective due dates expressed in the exchange note. (Section 5.8) During the existence of an Event of Default, the trustee will be required to exercise the rights and powers vested in it under the indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. Subject to the provisions of the indenture relating to the duties of the trustee in case an Event of Default shall occur and be continuing, the trustee will not be under any obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders of exchange notes unless such holders shall have offered to the trustee reasonable security or indemnity. (Sections 6.1 and 6.2) Subject to certain provisions concerning the rights of the trustee, the holders of a majority in aggregate principal amount of the outstanding exchange notes will 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 under the indenture. (Section 5.12) If a Default occurs and is continuing and is known to the trustee, the trustee shall mail to each holder of exchange notes notice of the Default within 60 days after the occurrence thereof. Except in the case of a Default in payment of principal of, premium on or interest on any exchange notes, the trustee may withhold the notice to the holders of exchange notes if the trustee determines in good faith that withholding the notice is in the interest of such holders. (Section 6.13) We will be required to deliver to the trustee annual and quarterly statements regarding compliance with the indenture. We also will be required, upon becoming aware of any Default or Event of Default, to deliver to the trustee a statement specifying such Default or Event of Default. (Section 10.8) LEGAL DEFEASANCE AND COVENANT DEFEASANCE Legal Defeasance As long as we take steps to make sure that you receive all of your payments under the exchange notes and are able to transfer the exchange notes, we can elect to legally release ourselves and any of our Subsidiaries that may guarantee the exchange notes from any obligations on the exchange notes (called "legal defeasance") other than: o the, rights of holders of outstanding notes to receive payments in respect of the principal of, premium on and interest on the exchange notes when these payments are due; o our obligation to replace any temporary exchange notes, register the transfer or exchange of any exchange notes, replace mutilated, lost or stolen exchange notes, compensate and reimburse the trustee, remove and appoint a successor trustee, maintain an office or agency for payments in respect of the notes and qualify the indenture under the Trust Indenture Act; o the rights, powers, trusts, duties and immunities of the trustee, and o the legal defeasance provisions of the indenture. (Section 12.2) In order to accomplish legal defeasance, the following must occur: -93- 96 o We or any Subsidiary Guarantor must irrevocably deposit with the trustee cash and/or U.S. government and/or U.S. government agency securities that will generate enough cash to make interest, principal and any other payments on the exchange notes on their various due dates. o Such defeasance shall not cause the trustee to have a conflict of interest. o There must be a change in current U.S. federal tax law or an IRS ruling that lets us make that deposit without causing you to be taxed on the exchange notes any differently than if we did not make the deposit and just repaid the exchange notes ourselves. Under current U.S. federal tax law, the deposit and our legal defeasance from the notes would be treated as though we took back your notes and gave you your share of the cash and/or securities deposited in trust. In that event, you could recognize gain or loss on the notes you give back to us. o We must deliver to the trustee a legal opinion of our counsel confirming the tax law change described above and that all of the conditions to legal defeasance in the indenture have been fulfilled. We will not be able to achieve legal defeasance if there is a continuing Default or Event of Default under the indenture or if doing so would violate any other material agreement to which we are a party. (Section 12.4) If we ever did accomplish legal defeasance as described above, you would have to rely solely on the trust deposit for repayment of the exchange notes. You could not look to us for repayment in the unlikely event of any shortfall. Covenant Defeasance Under current federal tax law, we can make the same type of deposit described above and be released from covenants relating to the exchange notes. The release from these covenants is called covenant defeasance. In that event, you would lose the protection of these covenants but would gain the protection of having money and/or securities set aside in trust to repay the exchange notes. In order to achieve covenant defeasance, we must: o Deposit in trust for the benefit of the holders of exchange notes cash and/or U.S. government or U.S. government agency securities that will generate enough cash to make interest, principal and any other payments on the exchange notes on their various due dates. o Deliver to the trustee a legal opinion of our counsel confirming that under current U.S. federal tax law we may make that deposit without causing you to be taxed on the exchange notes any differently than if we did not make the deposit and just repaid the exchange notes ourselves. The opinion also must state that all of the conditions to covenant defeasance in the indenture have been fulfilled. Further, such defeasance shall not cause the trustee to have a conflict of interest. We will not be able to achieve covenant defeasance if there is a continuing Default or Event of Default under the indenture or if doing so would violate any other material agreements to which we are a party. The indenture describes the covenants we may fail to comply with without causing an Event of Default if we accomplish covenant defeasance. (Sections 12.3 and 12.4) -94- 97 If we elect to make a deposit resulting in covenant defeasance, the amount of money and/or U.S. government or U.S. government agency securities deposited in trust would be sufficient to pay amounts due on the notes at the time of their maturity. However, if the maturity of the exchange notes is accelerated due to the occurrence of an Event of Default, the amount in trust may not be sufficient to pay all amounts due on the notes. We would remain liable for the shortfall as described in the indenture. SATISFACTION AND DISCHARGE OF THE INDENTURE We will have no further obligations under the indenture as to all outstanding exchange notes, other than surviving rights of registration of transfers of the exchange notes, when: o all exchange notes have been delivered to the trustee for cancellation, except lost, stolen or destroyed exchange notes that we have replaced or paid or exchange notes for which we have deposited in trust money and/or U.S. government obligations; or all exchange notes have become due and payable or, within one year, will become due and payable or be redeemed and we have deposited with the trustee funds sufficient to pay interest, principal and any other payments on all outstanding exchange notes on their various due dates; o we have paid all other sums then due and payable under the indenture by us; and o we have delivered to the trustee an officers' certificate and an opinion of counsel, which, taken together, state that we have complied with all conditions precedent under the indenture relating to the satisfaction and discharge of the indenture. (Section 4.1) AMENDMENT AND WAIVER We generally may amend the indenture with the written consent of the holders of at least a majority in aggregate principal amount of the outstanding exchange notes. The holders of at least a majority in aggregate principal amount also may waive our compliance with most covenants. (Section 10.20) We must, however, obtain the consent of each holder of exchange notes affected by an amendment or waiver which does any of the following. o reduces the principal amount of exchange notes that must consent to an amendment or waiver; o reduces the principal of or changes the Stated Maturity of any exchange note or alter the provisions with respect to the redemption of the exchange notes, other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"; o reduces the rate of or changes the time for payment of interest on any exchange note; o waives a Default or Event of Default in the payment of principal of, premium, if any, on or interest on the exchange notes, except a rescission of acceleration of the exchange notes by the holders of at least a majority in aggregate principal amount of the exchange notes and a waiver of the payment default that resulted from such acceleration; o makes any exchange note payable in money other than that stated in the exchange notes; -95- 98 o makes any change in the provisions of the indenture relating to waivers of past Defaults or the rights of holders of exchange notes to receive payments of principal of, premium, if any, on or interest on the exchange notes; o waives a redemption payment with respect to any exchange note, other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"; o reduces the relative ranking of the exchange notes or any Subsidiary Guarantees; or o makes any change in the foregoing amendment and waiver provisions. (Section 9.2) In addition, without the consent of any holder of exchange notes we and the trustee may amend the indenture: o to cure any ambiguity, defect or inconsistency; o to add or release any Subsidiary Guarantor pursuant to the terms of the indenture; o to provide for uncertificated exchange notes in addition to or in place of certificated exchange notes; o to provide for the assumption of our obligations to holders of exchange notes in the case of a merger or consolidation; o to make any change that would provide any additional rights or benefits to the holders of exchange notes; o to add any additional Events of Default; o to appoint a successor trustee; o to secure the exchange notes; or o to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act. (Section 9.1) We may not change the indenture in a manner that would adversely affect the rights of the holders of Senior Indebtedness under the subordination provisions described under "--Subordination" or the holders of Guarantor Senior Indebtedness under the subordination provisions described under "--Subsidiary Guarantees of Notes," unless we obtain the consent of such holders that are required to consent to such change pursuant to the agreements evidencing such Senior Indebtedness or Guarantor Senior Indebtedness. (Section 9.8) CONCERNING THE TRUSTEE State Street Bank and Trust Company will serve as trustee under the indenture. State Street Bank and Trust Company currently serves as trustee under the indentures for the existing notes, our 9-1/2% Senior Subordinated Notes due 2006 and our 8-7/8% Senior Subordinated Notes due 2008. Such bank also maintains normal banking relationships with us and may perform services for and transact other business with us from time to time in the ordinary course of business. -96- 99 The indenture and the provisions of the Trust Indenture Act incorporated by reference into the indenture will contain limitations on the rights of the trustee, should it become a creditor of ours, to obtain payment of claims or to realize on certain property received by it in respect of any such claims, as security or otherwise. The indenture will permit the trustee to engage in other transactions. If the trustee acquires any conflicting interest as defined in the Trust Indenture Act it must eliminate such conflict or resign. (Sections 6.8 and 6.9) GOVERNING LAW The Indenture, the exchange notes and any Subsidiary Guarantees will be governed by the laws of the State of New York. (Section 15.10) BOOK-ENTRY, DELIVERY AND FORM The existing notes were, and any exchange notes issued in exchange for existing notes tendered pursuant to The Depository Trust Company's Automated Tender Offer Program will be, issued in the form of one or more fully registered global certificates. Each global certificate will be deposited with the trustee who will hold the global certificate for The Depository Trust Company ("DTC"). Each global certificate will be registered in the name of DTC or its nominee. Except as set forth below, a global certificate may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. (Section 3.6) DTC has advised us as follows: It is a limited-purpose trust company which was created to hold securities for its participating organizations and to facilitate the clearance and settlement of transactions in such securities between its participants through electronic book-entry changes in accounts of its participants. Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Persons who are not participants may beneficially own securities held by DTC only through participants or indirect participants. DTC has also advised that pursuant to procedures established by it: o upon our issuance of the exchange notes, DTC will credit the accounts of participants designated by the exchange agent with the principal amount of the exchange notes exchanged for existing notes, and o ownership of beneficial interests in any global certificate will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC, with respect to participants' interests, the participants and the indirect participants. The laws of some states require that certain persons take physical delivery in definitive form of securities which they own. Consequently, the ability to transfer beneficial interests in a global certificate is limited to such extent. So long as DTC or its nominee is the registered owner of a global certificate, DTC or such nominee will be considered the sole owner or holder of the exchange notes for all purposes under the indenture. Except as provided below, owners of beneficial interests in a global certificate will not be entitled to have exchange notes registered in their names, will not receive or be entitled to receive -97- 100 physical delivery of exchange notes in definitive form and will not be considered the owners or holders thereof under the indenture. (Section 3.6) Neither us, the trustee, the paying agent nor the registrar of the exchange notes will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a global certificate, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Principal and interest payments on a global certificate registered in the name of DTC or its nominee will be made by us, either directly or through a paying agent, to DTC or its nominee as the registered owner of such global certificate. Under the terms of the indenture, we and the trustee will treat the persons in whose names the exchange notes are registered as the owners of those notes for the purpose of receiving payments of principal and interest on those notes and for all other purposes whatsoever, (Section 3.8) Therefore, neither us, the trustee nor any paying agent has any direct responsibility or liability for the payment of principal or interest on the exchange notes to owners of beneficial interests in a global certificate. DTC has advised us and the trustee that its present practice is, upon receipt of any payment of principal or interest to credit immediately the accounts of the participants with payment in amounts proportionate to their respective holdings in principal amount of beneficial interests in a global certificate as shown on the records of DTC. Payments by participants and indirect participants to owners of beneficial interests in a global certificate will be governed by standing instructions and customary practices, as is now the cast with securities held for the accounts of customers in bearer form or registered in "street name" and will be the responsibility of such participants or indirect participants. As long as the exchange notes are represented by a global certificate, DTC's nominee will be the holder of the exchange notes and therefore will be the only entity that can exercise a right to repayment or repurchase of the exchange notes. See "--Repurchase at the Option of Holders--Change of Control" and "--Asset Sales." Notice by participants or indirect participants or by owners of beneficial interests in a global certificate held through such participants or indirect participants of the exercise of the option to elect repayment of beneficial interests in exchange notes represented by a global certificate must be transmitted to DTC in accordance with its procedures on a form required by DTC and provided to participants. In order to ensure that DTC's nominee will timely exercise a right to repayment with respect to a particular exchange note, the beneficial owner of such exchange note must instruct the broker or other participant or indirect participant through which it holds an interest in such exchange note to notify DTC of its desire to exercise a right to repayment. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other participant or indirect participant through which it holds an interest in a exchange note in order to ascertain the cutoff time by which such an instruction must be given in order for timely notice to be delivered to DTC. We will not be liable -for any delay in delivery of notices of the exercise of the option to elect repayment. CERTIFICATED NOTES We will issue exchange notes in definitive form in exchange for a global certificate if, and only if, either: o DTC is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by us within 90 days; or -98- 101 o an Event of Default has occurred and is continuing and the exchange notes registrar has received a request from DTC to issue exchange notes in definitive form in lieu of all or a portion of such global certificate. In either instance, an owner of a beneficial interest in a global certificate will be entitled to have exchange notes equal in principal amount to such beneficial interest registered in its name and will be entitled to physical delivery of such exchange notes in definitive form. Exchange notes so issued in definitive form will be issued in denomination of $10 and integral multiples thereof and will be issued in registered form only, without coupons. (Section 3.6) MATERIAL DEFINITIONS Set forth below are definitions of some of the terms used in the indenture which we believe are material to an understanding of the indenture. "Acquired Indebtedness" means Indebtedness of a Person: o assumed in connection with an acquisition of properties or assets from such Person; or o outstanding at the time such Person becomes a Subsidiary of any other Person. Acquired Indebtedness does not include Indebtedness incurred in connection with, or in contemplation of, such acquisition or such Person becoming a Subsidiary. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of properties or assets from any Person or the date the acquired Person becomes a Subsidiary. "Adjusted Consolidated Net Tangible Assets" means, without duplication, as of the date of determination, the sum of: o Discounted future net cash flows from our and our Restricted Subsidiaries' proved oil and gas reserves calculated in accordance with SEC guidelines but before any state or federal income taxes, as estimated by a nationally recognized firm of independent petroleum engineers in a reserve report prepared as of the end of our most recently completed fiscal year. Discounted future net cash flows will be increased pursuant to clauses (1) and (2) below and decreased pursuant to clauses (3) and (4) below, as of the date of determination, by the estimated discounted future net cash flows, calculated in accordance with SEC guidelines but before any state or federal income taxes and utilizing the prices utilized in such year-end reserve report, from: (1) estimated proved oil and gas reserves acquired since the date of such year-end reserve report; (2) estimated oil and gas reserves attributable to extensions, discoveries and other additions and upward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to exploration, development, exploitation, production or other activities; (3) estimated proved oil and gas reserves produced or disposed of since the date of such year-end reserve report; and -99- 102 (4) 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 exploration, development, exploitation, production or other activities. In the case of each of the determinations made pursuant to clauses (1) through (4) above, such increases and decreases shall be as estimated by our petroleum engineers, except that in the event there is a Material Change as a result of such acquisitions, dispositions, or revisions, then the discounted future net cash flows utilized for purposes of this clause shall be confirmed in writing by a nationally recognized firm of independent petroleum engineers. o The capitalized costs that are attributable to our and our Restricted Subsidiaries' oil and gas properties to which no proved oil and gas reserves are attributable, based on our books and records as of a date no earlier than the date of our latest annual or quarterly financial statements. o The Net Working Capital on a date no earlier than the date of our latest annual or quarterly financial statements. o The greater of: (1) the net book value on a date no earlier than the date of our latest annual or quarterly financial statements, or (2) the appraised value, as estimated by independent appraisers, of our or our Restricted Subsidiaries' other tangible assets, including, without duplication, Investments in unconsolidated Restricted Subsidiaries, as of the date no earlier than the date of our latest audited financial statements. Minus the sum of: o Minority interests, other than a minority interest in a Finance Person. o Any of our or our Restricted Subsidiaries' net gas balancing liabilities reflected in our latest audited financial statements. o To the extent included in the first clause of this definition, the discounted future net cash flows, calculated in accordance with SEC guidelines but before any state or federal income taxes and 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 our and our Restricted Subsidiaries' obligations with respect to Volumetric Production Payments on the schedules specified with respect thereto. o The discounted future net cash flows, calculated in accordance with SEC guidelines but before any state or federal income taxes, 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 not revenues specified in the first clause of this definition, would be necessary to fully satisfy our and our Restricted Subsidiaries' payment obligations with respect to Dollar-Denominated Production Payments on the schedules specified with respect thereto. "Adjusted Net Assets" of a Subsidiary Guarantor at any date means the amount by which the fair value of the properties and assets of such Subsidiary Guarantor exceeds the total amount of -100- 103 liabilities, including, without limitation, contingent liabilities, after giving effect to all other fixed and contingent liabilities incurred or assumed on such date, but excluding liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such date. "Affiliate" of any specified Person means: o any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; or o any other Person who is a director or executive officer of: (1) such specified Person; or (2) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition to any Person other than us or any of our Restricted Subsidiaries, including, without limitation, by way of merger or consolidation, (collectively, for purposes or this definition, a "transfer"), directly or indirectly, in one or a series of related transactions, of: o any Capital Stock of any Restricted Subsidiary held by us or any Restricted Subsidiary, other than directors' qualifying shares and shares owned by foreign shareholders to the extent required by applicable local laws in the foreign countries; o all or substantially all of our or any of our Restricted Subsidiaries' properties and assets; or o any other of our or any of our Restricted Subsidiaries' properties or assets other than: (1) a disposition of hydrocarbons or other mineral products, inventory, accounts receivable, cash, Cash Equivalents or other property in the ordinary course of business; (2) any lease, abandonment, disposition, relinquishment or farm-out of any oil and gas property in the ordinary course of business; (3) the liquidation of property or assets received in settlement of debts owing to us or any Restricted Subsidiary as a result of foreclosure, perfection or enforcement of any Lien or debt, which debts were owing to us or any Restricted Subsidiary in the ordinary course of our or such Restricted Subsidiary's business; or (4) the issuance and sale of Qualified Capital Stock by a Finance Person. For the purposes of this definition, the term "Asset Sale" shall not include: -101- 104 o any transfer of properties or assets that is governed by, and made in accordance with, the provisions described under "--Material Covenants--Merger, Consolidation or Sale of Assets"; o any transfer of properties or assets to an Unrestricted Subsidiary, if permitted under the "Restricted Payments" covenant of the indenture; or o any transfer, in one or a series of related transactions, of properties or assets having a fair market value of less than $2,500,000. "Average Life" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing: o The sum of the products of: (1) the number of years, and any portion thereof, from the date of determination to the date or dates of each successive scheduled principal payment, including, without limitation, any sinking fund or mandatory redemption payment requirements, of such Indebtedness, multiplied by (2) the amount of each such principal payment; by o the sum of all such principal payments. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents in the equity interests, however designated, in such Person, and any rights other than debt securities convertible into an equity interest, warrants or options exercisable for, exchangeable for or convertible into such an equity interest in such Person. Our Capital Stock includes any Qualifying TECONS and any Eligible Convertible Securities. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of or other agreement conveying the right to use any property, whether real, personal or mixed, that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purpose of the indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means: o any evidence of Indebtedness with a maturity of 180 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof, provided that the full faith and credit of the United States of America is pledged in support thereof; o demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500,000,000; o commercial paper with a maturity of 180 days or less issued by a corporation that is not an Affiliate of us and is organized under the laws of any state of the United States or the District or Columbia and rated at least A-1 by S&P or at least P-1 by Moody's; -102- 105 o repurchase obligations with a term of not more than seven days for underlying securities of the types described in the first clause above entered into with any commercial bank meeting the specifications of the second clause above; o overnight bank deposits and bankers' acceptances at any commercial bank meeting the qualifications specified in the second clause above; o deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in the second clause above but which is organized under the laws of any country in which we or any Restricted Subsidiary maintains an office or is engaged in the Oil and Gas Business, provided that: (1) all such deposits am required to be made in such accounts in the ordinary course of business, (2) such deposits do not at any one time exceed $5,000,000 in the aggregate, and (3) no funds so deposited remain on deposit in such bank for more than 30 days; o deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in the second clause above but which is a lending bank under any of our or any Restricted Subsidiary's credit facilities, provided all such deposits do not exceed $5,000,000 in the aggregate at any one time; and o investments in money market funds substantially all of whose assets comprise securities of the types described in any of the first five clauses above. "Change of Control" means the occurrence of any of the following events: o any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of our total Voting Stock; o we are merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation: (1) less than 50% of the total voting power of the outstanding Voting Stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by our stockholders immediately prior to such merger or consolidation, and (2) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the Voting Stock of the surviving or resulting Person; o we, either individually or in conjunction with one or more Restricted Subsidiaries, sell, assign, convey, transfer, lease or otherwise dispose of, or the Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of our and the Restricted Subsidiaries' properties and assets, taken as a whole, either in one transaction or a series of related transactions, including Capital Stock of the Restricted Subsidiaries, to any Person other than us or a Wholly Owned Restricted Subsidiary, -103- 106 o during any consecutive two-year period, individuals who at the beginning of such period constituted our board of directors, together with any new directors whose election by such board of directors or whose nomination for election by our stockholders 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 our board of directors then in office; or o our liquidation or dissolution; or o so long as any Existing Notes are outstanding, any other event constituting a Change of Control pursuant to the Indentures for the Existing Notes. "Common Stock" of any Person means Capital Stock of such Person that does not rank prior, as to the payment of dividends 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. "Consolidated Exploration Expenses" means, for any period, our and our Restricted Subsidiaries' exploration expenses for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio of: o the sum of our and our Restricted Subsidiaries' Consolidated Net Income, Consolidated Interest Expense, the portion of Consolidated Exploration Expenses deducted in computing Consolidated Net Income, Consolidated Income Tax Expense and Consolidated Non-cash Charges deducted in computing Consolidated Net Income, in each case, for such period, on a consolidated basis, all determined in accordance with GAAP, decreased, to the extent included in determining Consolidated Net Income, by the sum of: (1) the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments, and (2) amounts recorded in accordance with GAAP as repayments of principal and interest pursuant to Dollar-Denominated Production Payments; to o the sum of such Consolidated Interest Expense for such period. Provided, however, that o the Consolidated Fixed Charge Coverage Ratio shall be calculated on the assumption that: (1) the Indebtedness to be incurred and all other Indebtedness incurred after the first day of the relevant period of fiscal quarters under the covenant described under "--Material Covenants--Incurrence of Indebtedness" through and including the date of determination and, if applicable, the application of the net proceeds therefrom, and from any other such Indebtedness, including to refinance other Indebtedness, had been incurred on the first day of, such period and, in the case of Acquired Indebtedness, on the assumption that the related transaction, whether by means of purchase merger or otherwise, also had -104- 107 occurred on such date with the appropriate adjustments with respect to such acquisition being included in such pro forma calculation, and (2) any acquisition or disposition by us or any Restricted Subsidiary of any properties or assets outside the ordinary course of business, or any repayment of any principal amount of any of our or any Restricted Subsidiary's Indebtedness prior to the Stated Maturity thereof, in either case since the first day of such period through and including the date of determination, had been consummated on such first day of such period; o in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness required to be computed on a pro forma basis in accordance with the covenant described under "--Material Covenants--Incurrence of Indebtedness" and: (1) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period, and (2) which was not outstanding during the period for which the computation is being made but which bears, at our option, a fixed or floating rate of interest, shall be computed by applying, at our option, either the fixed or floating rate; o in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness under a revolving credit facility required to be computed on a pro forma basis in accordance with the covenant described under "--Material Covenants--Incurrence of Indebtedness" shall be computed based upon the average daily balance of such Indebtedness during the applicable period, provided that such average daily balance shall be reduced by the amount of any repayment of Indebtedness under a revolving credit facility during the applicable period, which repayment permanently reduced the commitments or amounts available to be reborrowed under such facility, o notwithstanding the second and third clauses of this proviso, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Rate Protection Obligations, shall be deemed to have accrued at the rate per annum resulting after giving effect to the operation of such agreements; o in making such calculation, Consolidated Interest Expense shall exclude interest attributable to Dollar-Denominated Production Payments; and o if after the first day of the period referred to in the first clause of this definition, we have retired any Indebtedness out of the net cash proceeds of the issue and sale of our Qualified Capital Stock within 30 days of such issuance and sale, Consolidated Interest Expense shall be calculated on a pro forma basis as if such Indebtedness had been retired on the first day of such period. For the purpose of the covenant described under "--Material Covenants--Incurrence of Indebtedness," if we incur Indebtedness, including Acquired Indebtedness but excluding Permitted Indebtedness: o on any date which is on or before March 31, 2000, we will determine our Consolidated Fixed Charge Coverage Ratio for the full fiscal quarter or quarters, as the case may be, commencing on April 1, 1999 and ending on or prior to such date; and -105- 108 o on any date which is after March 31, 2000, we will determine our Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such date. "Consolidated Income Tax Expense" means, for any period, the provision for our and our Restricted Subsidiaries' federal, state, local and foreign income taxes, including any state franchise taxes accounted for as income taxes in accordance with GAAP, for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, without duplication, the sum of: o our and our Restricted Subsidiaries' interest expense for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, to the extent attributable to such period: (1) any amortization of debt discount, (2) the net cost under Interest Rate Protection Obligations, including any amortization of discounts, (3) the interest portion of any deferred payment obligation constituting Indebtedness, (4) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, and (5) all accrued interest; o to the extent any Indebtedness of any Person other than us or a Restricted Subsidiary is guaranteed by us or any Restricted Subsidiary, the aggregate amount of interest paid, to the extent not accrued in a prior period, or accrued by such other Person during such period attributable to any such Indebtedness, in each case to the extent attributable to that period; o the aggregate amount of the interest component of Capitalized Lease Obligations paid, to the extent not accrued in a prior period, accrued and/or scheduled to be paid or accrued by us and our Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; and o the aggregate amount of dividends paid, to the extent not accrued in a prior period, or accrued on our and our Restricted Subsidiaries' Redeemable Capital Stock, to the extent such Redeemable Capital Stock is owned by Persons other than us or our Restricted Subsidiaries, and to the extent such dividends are not paid in Common Stock. The following shall not be included in the calculation of Consolidated Interest Expense: o Amortization of our and our Restricted Subsidiaries' capitalized debt issuance costs during such period; o fees and expenses associated with the exchange offer; o dividends on Qualifying TECONS; and -106- 109 o non-cash interest on Eligible Convertible Securities. "Consolidated Net Income" means, for any period, our and our Restricted Subsidiaries' consolidated net income (or loss) for such period as determined in accordance with GAAP, adjusted by excluding: o net after-tax extraordinary gains or losses, less all fees and expenses relating thereto; o net after-tax gains or losses, less all fees and expenses relating thereto, attributable to Asset Sales; o the net income (or net loss) of any Person, other than us or any of our Restricted Subsidiaries, in which we or any of our Restricted Subsidiaries has an ownership interest, except to the extent of the amount of dividends or other distributions or interest on indebtedness actually paid to us or any of our Restricted Subsidiaries in cash by such other Person during such period, regardless of whether such cash dividends, distributions or interest on indebtedness is attributable to net income (or net loss) of such Person during such period or during any prior period; o net income (or net loss) of any Person combined with us of any of our Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination; o the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary is not at the date of determination permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders; o fees and expenses associated with the exchange offer, to the extent deducted in determining consolidated net income (or loss); o dividends paid on Qualifying TECONS; o non-cash interest on Eligible Convertible Securities, to the extent deducted in determining consolidated net income (or loss); o Consolidated Exploration Expenses and any writedowns or impairments of noncurrent assets less an amount equal to the amortization on a quarterly basis of the cumulative Consolidated Exploration Expenses and writedowns or impairments of non-current assets, calculated as two and one-half percent of the cumulative net balance of such costs; and o for purposes of calculating the Consolidated Fixed Charge Coverage Ratio with respect to periods ending on or prior to March 31, 2000, net gains or losses on oil and natural gas price hedging arrangements during such periods. "Consolidated Net Worth" means, at any date, our and our Restricted Subsidiaries' consolidated stockholders' equity less the amount of such stockholders' equity attributable to our and our Restricted Subsidiaries' Redeemable Capital Stock or treasury stock, as determined in accordance with GAAP. -107- 110 "Consolidated Non-Cash Charges" means, for any period, our and our Restricted Subsidiaries' aggregate depreciation, depletion, amortization and other non-cash expenses reducing Consolidated Net Income for such period, determined on a consolidated basis in accordance with GAAP, excluding any such non-cash charge to the extent required as an accrual of or reserve for cash charges for any future period. "Credit Facility" means that certain Second Restated Credit Agreement among us, certain of our Subsidiaries, Bank of America, N.A., as Administrative Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and certain lenders named therein, as the same may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time. "Default" means any event that is or with the passage or time or the giving of notice or both would be an Event of Default. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which our board of directors is required to deliver a resolution of the board of directors under the indenture, a member of our board of directors who does not have any material direct or indirect financial interest other than an interest arising solely from the beneficial ownership of our Capital Stock in or with respect to such transaction or series of transactions. "Dollar-Denominated Production Payments" means production payment obligations recorded as liabilities in accordance with GAAP, together with all undertakings and obligations in connection therewith. "Eligible Convertible Securities" means any security issued by us that: o is subordinated in right of payment to the exchange notes, o has a final Stated Maturity at least 91 days after the final Stated Maturity of the exchange notes, and o by its terms or by the terms of any security into which it is convertible or by contract or otherwise requires no scheduled payments, including principal, premium, interest and fees, prior to its final Stated Maturity, other than payments payable only in shares of our Common Stock or in options, warrants or other rights to purchase our Common Stock. "Equity Offering" means a bona fide underwritten sale to the public of our Common Stock pursuant to a registration statement, other than on Form S-8 or any other form relating to securities issuable under any employee benefit plan of ours, that is declared effective by the SEC following the Issue Date. "Event of Default" has the meaning set forth above under the caption "--Events of Default and Remedies." "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor act thereto. "Exchanged Properties" means properties or assets used or useful in the Oil and Gas Business received by us or a Restricted Subsidiary, whether directly or indirectly through the acquisition of the Capital Stock of a Person holding such assets so that such Person becomes our -108- 111 Wholly Owned Restricted Subsidiary, in trade or as a portion of the total consideration for such other properties or assets. "Existing TECONS" means our Obligated Mandatorily Redeemable Convertible Preferred Securities issued by Nuevo Financing I, a statutory business trust wholly owned by us, on December 23, 1996, in an aggregate liquidation amount of $115.0 million. "Finance Person" means a Subsidiary of ours, the Common Stock of which is owned by us, that does not engage In any activity other than: o the holding of Subordinated Indebtedness with respect to which payments of interest on such Subordinated Indebtedness can, at the election of the issuer thereof, be deferred for one or more payment periods; o the issuance of Qualifying TECONS and Common Stock and/or debt securities; and o any activity necessary, incidental or related to the foregoing "GAAP" means generally accepted accounting principles, consistently applied, that are set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States of America, which were effective as of June 8, 1998. The term "guarantee" means, as applied to any obligation: o a guarantee, other than by endorsement of negotiable instruments or documents for collection in the ordinary course of business, direct or indirect, in any manner, of any part or all of such obligation; and o an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance, or payment of damages in the event of non-performance, of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit; A guarantee by any Person shall not include a contractual commitment by one Person to invest in another Person provided that such Investment is otherwise permitted by the indenture. When used as a verb, "guarantee" shall have a corresponding meaning. "Guarantor Senior Indebtedness" means the principal of, premium, if any, on, interest on, including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law, and other amounts due on or in connection with, including any fees, premiums, expenses, including costs of collection, and indemnities, any Indebtedness of a Subsidiary Guarantor, whether outstanding on the date of the indenture or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness will be pari passu with or subordinated in right of payment to its Subsidiary Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness of a Subsidiary Guarantor will not include: o Indebtedness of such Subsidiary Guarantor evidenced by its Subsidiary Guarantee; -109- 112 o Indebtedness of such Subsidiary Guarantor that is expressly pari passu with its Subsidiary Guarantee or is expressly subordinated in right of payment to any Guarantor Senior Indebtedness of such Subsidiary Guarantor or its Subsidiary Guarantee; o Indebtedness of such Subsidiary Guarantor to the extent incurred in violation of the "Incurrence of Indebtedness" covenant of the indenture; o Indebtedness of such Subsidiary Guarantor to us or any of our other Subsidiaries or to any Affiliate of us or any Subsidiary of such Affiliate; and o any Indebtedness which when incurred and without regard to any election under Section 1111(b) of the Federal Bankruptcy Code is without recourse to such Subsidiary Guarantor. "Holder" means a Person in whose name an exchange note is registered in the Note Register. "Indebtedness" means, with respect to any Person, without duplication: o all liabilities of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade accounts payable and other accrued current liabilities incurred in the ordinary course of business, and all liabilities of such Person incurred in connection with any letters of credit, bankers' acceptances or other similar credit transactions or any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock outstanding on the date of the indenture or thereafter, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP; o all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP; o all Indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property, but excluding trade accounts payable arising in the ordinary course of business; o all Capitalized Lease Obligations of such Person; o all Indebtedness referred to in the preceding clauses of other Persons and all dividends of other Persons, the payment of which is secured by, or for which the holder of such Indebtedness has an existing right to be secured by, any Lien upon property, including, without limitation, accounts and contract rights, owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured); o all guarantees by such Person of Indebtedness referred to in this definition, including, with respect to any Production Payment, any warranties or guaranties of production or payment by such Person with respect to such Production Payment but excluding other contractual obligations of such Person with respect to such Production Payment; -110- 113 o all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends; and o all obligations of such Person under or in respect of currency exchange contracts, oil or natural gas price hedging arrangements and Interest Rate Protection Obligations. Indebtedness shall not include either Eligible Convertible Securities or Qualifying TECONS and Indebtedness, including guarantees thereof, relating to Qualifying TECONS and held by a Finance Person; provided, however, Indebtedness shall include Existing TECONS and, for purposes of the seventh clause under "--Events of Default and Remedies" only, debt securities issued in connection with Eligible Convertible Securities and debt securities issued in connection with Qualifying TECONS shall be deemed to be Indebtedness. Subject to the sixth clause of the first sentence of this definition, neither Dollar-Denominated Production Payments nor Volumetric Production Payments shall be deemed to be Indebtedness. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the indenture, and if such price is based upon, or measured by, the fair market value of such Redeemable Capital Stock, such fair market value shall be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock; provided, however, that if such Redeemable Capital Stock is not at the date of determination permitted or required to be repurchased, the "maximum fixed repurchase price" shall be the book value of such Redeemable Capital Stock. "Interest Rate Protection Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by Such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements or arrangements designed to protect against or manage such Person's and any of its Subsidiaries' exposure to fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect advance, loan, guarantee of Indebtedness or other extension of credit or capital contribution by means of any transfer of cash or other property or assets to others or any payment for property, assets or services for the account or use of others, or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities, including derivatives, or evidences of Indebtedness issued by, any other Person. In addition, the fair market value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed to be an "Investment" made by us in such Unrestricted Subsidiary at such time, and the designation of any Unrestricted Subsidiary as a Restricted Subsidiary shall result in a return of an "Investment" in an amount not to exceed the lesser of (x) the book value of the Investments previously made in such Unrestricted Subsidiary that were treated as Restricted Payments, and (y) the fair market value of such Unrestricted Subsidiary. "Investments" shall exclude: o extensions of trade credit under a joint operating agreement or otherwise in the ordinary course of business, workers' compensation, utility, lease and similar deposits and prepaid expenses made in the ordinary course of business; -111- 114 o Interest Rate Protection Obligations entered into in the ordinary course of business or as required by any Permitted Indebtedness or any other Indebtedness incurred in compliance with the "Incurrence of Indebtedness" covenant, but only to the extent that the stated aggregate notional amounts of such Interest Rate Protection Obligations do not exceed 105% of the aggregate principal amount of such Indebtedness to which such Interest Rate Protection Obligations relate; o bonds, notes, debentures or other securities received in compliance with the "Asset Sales" covenant; and o endorsements of negotiable instruments and documents for collection in the ordinary course of business. "Issue Date" means the date on which the exchange notes were first issued under the indenture. "Lien" means any mortgage, charge, pledge, statutory or other, lien, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever, including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing, upon or with respect to any property of any kind. A Person shall be deemed to own subject to a Lien any property which such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Liquid Securities" means securities: o of an issuer that is not an Affiliate of us; and o that are publicly traded on the New York Stock Exchange, the American Stock Exchange, the Toronto Stock Exchange, the Australian Stock Exchange, the London Stock Exchange or the NASDAQ National Market. Securities meeting the requirements of the two preceding clauses shall be treated as Liquid Securities from the date of receipt thereof until and only until the earlier of: o the date on which such securities, or securities exchangeable for, or convertible into, such securities, are sold or exchanged for cash or Cash Equivalents; and o 180 days following the date of receipt of such securities. If such securities, or securities exchangeable for, or convertible into, 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 we or a Restricted Subsidiary received the securities was in compliance with the provisions of the indenture described under "--Repurchase at the Option or Holders--Asset Sales," such securities shall be deemed not to have been Liquid Securities until 181 days following the date of receipt of such securities. "Material Change" means an increase or decrease, excluding changes that result solely from changes in prices, of more than 30% during a fiscal quarter in the estimated discounted future net cash flows from our and our Restricted Subsidiaries' proved oil and gas reserves, calculated in accordance with the first clause of the definition of Adjusted Consolidated Net Tangible Assets; provided, however, that the following will be excluded from the calculation of Material Change: -112- 115 o any acquisitions during the quarter of oil and gas reserves that have been estimated by a nationally recognized firm of independent petroleum engineers and on which a report or reports exist; and o any disposition of properties held at the beginning of such quarter that have been disposed of as provided in the covenant described under the caption "--Repurchase at the Option of Holders--Asset Sales." "Material Subsidiary" means, at any particular time, as shown on our and our Restricted Subsidiaries' consolidated financial statements for our most recently completed fiscal year, any Restricted Subsidiary that, together with its Subsidiaries: o accounted for more than 5% of our and our Restricted Subsidiaries' consolidated revenues for such fiscal year; or o was the owner of more than 5% of our and our Restricted Subsidiaries' consolidated assets at the end of such fiscal year. "Maturity" means, with respect to any new note, the date on which any principal of such exchange note becomes due and payable as provided therein or in the indenture, whether at the Stated Maturity with respect to such principal or by declaration of acceleration, call for redemption or purchase or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form or cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents except to the extent that such obligations are financed or sold with recourse to us or any Restricted Subsidiary, net of: o brokerage commissions and other fees and expenses, including fees and expenses of legal counsel and investment banks related to such Asset Sale, o provisions for all taxes payable as a result of such Asset Sale; o amounts required to be paid to any Person other than us or any Restricted Subsidiary owning a beneficial interest in the assets subject to the Asset Sale; and o appropriate amounts to be provided by us or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP consistently applied against any liabilities associated with such Asset Sale and retained by us or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the trustee; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Cash Proceeds. "Net Working Capital" means, as set forth in our consolidated financial statements prepared in accordance with GAAP: o all of our and our Restricted Subsidiaries' current assets, less -113- 116 o all of our and our Restricted Subsidiaries' current liabilities, except current liabilities included in Indebtedness. "Non-payment Event of Default" means any event, other than a Payment Event of Default, the occurrence of which, with or without notice or the passage of time, entities one or more Persons to accelerate the maturity of any Specified Senior Indebtedness. "Non-Recourse Purchase Money Indebtedness" means: o our and any Restricted Subsidiary's Indebtedness, other than Capital Lease Obligations, incurred in connection with the acquisition by us or such Restricted Subsidiary in the ordinary course of business of fixed assets used in the Oil and Gas Business, including office buildings and other real property used by us or such Restricted Subsidiary in conducting our or its operations; and o any renewals and refinancings of such Indebtedness. For Indebtedness described in the two preceding clauses to qualify as Non-Recourse Purchase Money Indebtedness, the holders of such Indebtedness must agree that they will look solely to the fixed assets so acquired which secure such Indebtedness, subject to customary exceptions such as indemnifications for environmental, title, fraud and other matters, and neither we nor any Restricted Subsidiary may; (1) be directly or indirectly liable for such Indebtedness; or (2) provide credit support, including any undertaking, guarantee, agreement or instrument that would constitute Indebtedness, other than the grant of a Lien on such acquired fixed assets. "Note Register" means the register maintained by or for us in which we shall provide for the registration of the exchange notes and of transfer of the notes. "Oil and Gas Business" means: o the acquisition, exploration, development, operation and disposition of interests in oil, gas and other hydrocarbon properties; o the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or properties; o any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith; o any power generation and electrical transmission business in a jurisdiction outside of North America where fuel required by such business is supplied, directly or indirectly, from production reserves substantially from blocks in which we or our Restricted Subsidiaries participate; and o any activity necessary, appropriate or incidental to the activities described in the foregoing clauses of this definition. -114- 117 "OPIC Facility" means that certain Finance Agreement dated December 28, 1994, among The Nuevo Congo Company, The Congo Holding Company, and the Overseas Private Investment Corporation, as such agreement may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time in one or more credit agreements, loan agreements, instruments or similar agreements, as such may be further amended, modified, extended, restated, replaced, renewed or refinanced. "Pari Passu Indebtedness" means any of our Indebtedness that is pari passu in right of payment to the exchange notes, including, without limitation, the existing notes, our 8 7/8% Senior Subordinate Notes due 2008, Series B and our 9 1/2% Senior Subordinate Notes due 2006. "Payment Event of Default" means any default in the payment or required prepayment of principal of, premium, if any, on or interest on any Specified Senior Indebtedness when due, whether at final maturity, upon scheduled installment, upon acceleration or otherwise. "Permitted Indebtedness" means any of the following: o Indebtedness under the Credit Facility in an aggregate principal amount at any one time outstanding not to exceed the greater of: (1) $400,000,000, less any amounts of principal of such Indebtedness repaid using the Net Cash Proceeds of an Asset Sale pursuant to the covenant described under "--Repurchase at the Option of Holders--Asset Sales" and any amounts of principal of such Indebtedness refinanced pursuant to the tenth clause of this definition; or (2) the borrowing base thereunder, provided, both subclauses (1) and (2) shall include any guarantee of any such Indebtedness and any fees, premiums, expenses, including costs of collection, indemnities and other amounts payable in connection with such Indebtedness; o Indebtedness under the existing notes issued in the exchange offer and any Subsidiary Guarantees relating thereto or to any exchange notes; o Indebtedness outstanding on June 8, 1998, including, without limitation, the existing notes, our 8 7/8% Senior Subordinate Notes due 2008, Series B and our 9 1/2% Senior Subordinate Notes due 2006, and additional Indebtedness permitted to be incurred pursuant to commitments existing under the OPIC Facility on June 8, 1998; o our and our Restricted Subsidiaries' obligations pursuant to Interest Rate Protection Obligations, but only to the extent that the stated aggregate notional amounts of such obligations do not exceed 105% of the aggregate principal amount of the Indebtedness covered by such Interest Rate Protection Obligations; obligations under currency exchange contracts entered into in the ordinary course of business and hedging arrangements that we or a Restricted Subsidiary enter into in the ordinary course of business for the purpose of protecting our or its production against fluctuations in oil or natural gas prices; o our Indebtedness to a Wholly Owned Restricted Subsidiary or a Finance Person and Indebtedness of a Restricted Subsidiary to us or a Wholly Owned Restricted Subsidiary or a Finance Person; provided, however, that upon any subsequent issuance or transfer of -115- 118 any Capital Stock or any other event which results in any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or such Finance Person ceasing to be a Finance Person, as the case may be, any other subsequent transfer of any such Indebtedness except to us or a Wholly Owned Restricted Subsidiary or Finance Person, such Indebtedness shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of the "Incurrence of Indebtedness" covenant at the time the Wholly Owned Restricted Subsidiary or Finance Person in question ceased to be a Wholly Owned Restricted Subsidiary or Finance Person, as the case may be; o in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; o Indebtedness in respect of bid, performance or surety bonds issued for our or any Restricted Subsidiary's account in the ordinary course of business, including guaranties and letters of credit supporting such bid, performance or surety obligations, in each case other than for an obligation for money borrowed; o any guarantee of Senior Indebtedness or Guarantor Senior Indebtedness, incurred in compliance with the "Incurrence of Indebtedness" covenant, by us or a Restricted Subsidiary; o Non-Recourse Purchase Money Indebtedness, o any renewals substitutions, exchanges, refinancings or replacements (each, for purposes of this clause, a "refinancing") by us or a Restricted Subsidiary of any Indebtedness incurred pursuant to the provisions of the "Incurrence of Indebtedness" covenant or pursuant to clause one, two or three of this definition, including any successive refinancings by us or such Restricted Subsidiary, so long as: (1) any such new Indebtedness shall be in a principal amount that does not exceed the principal amount, or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination, so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by us or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of our or such Restricted Subsidiary's expenses incurred in connection with such refinancing, (2) in the case or any refinancing of our Indebtedness that is not Senior Indebtedness, such new Indebtedness is either pari passu with the exchange notes or subordinated to the exchange notes at least to the same extent as the Indebtedness being refinanced, (3) in the case of any refinancing of our Indebtedness pursuant to clause one, such new Indebtedness is either Pari Passu Indebtedness or Subordinated Indebtedness and has a final Stated Maturity at least 91 days after the final Stated Maturity of the exchange notes, and -116- 119 (4) such new Indebtedness has an Average Life equal to or longer than the Average Life of the Indebtedness being refinanced and a final Stated Maturity equal to or later than the final Stated Maturity of the Indebtedness being refinanced; o any additional Indebtedness in an aggregate principal amount not to exceed $25.0 million. "Permitted Investments" means any of the following: o Investments in Cash Equivalents; o Investments in us or any of our Restricted Subsidiaries; o Investments in any amount not to exceed $10,000,000 at any one time outstanding; o Investments by us or any of our Restricted Subsidiaries in another Person, if as a result of such Investment: (1) such other Person becomes a Restricted Subsidiary, or (2) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its properties and assets to, us or a Restricted Subsidiary; o 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 a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit a Person to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of Oil and Gas Business jointly with third parties, including, without limitation: (1) ownership interests in oil and gas properties or gathering systems, and (2) 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, general or limited partnership agreements, subscription agreements, stock purchase agreements and other similar agreements with third parties, including Unrestricted Subsidiaries; o entry into any hedging arrangements in the ordinary course of business for the purpose of protecting our or any Restricted Subsidiary's production against fluctuations in oil or natural gas prices; o entry into any currency exchange contract in the ordinary course of business; o Investments in obligations or securities received as a result of any Asset Sale; o advances and loans to officers, directors and employees in the ordinary course of business; -117- 120 o Investments pursuant to any agreement or obligation in effect on June 8, 1998; o Investments in obligations or securities received in settlement of debts owing to us or a Restricted Subsidiary as a result of bankruptcy or insolvency proceeding or upon the foreclosure, perfection or enforcement of any Lien in favor of us or a Restricted Subsidiary, in each case as to debt owing to us or a Restricted Subsidiary that arose in the ordinary course of our or any such Restricted Subsidiary's business; and o contributions to Unrestricted Subsidiaries of our interests in 24 undeveloped federal leases offshore California, known as the COOGER acreage, included in seven units, Bonita, Sword, Point Sal, Gato Canyon, Lion Rock, Purisina Point and Santa Maria. "Permitted Junior Securities" means any of our or any successor obligor's equity securities or subordinated debt securities with respect to the Senior Indebtedness provided for by a plan of reorganization or readjustment that, in the case of any such subordinated debt securities, are subordinated in right of payment to all Senior Indebtedness that may at the time be outstanding to substantially the same degree as, or to a greater extent than, the exchange notes are so subordinated as provided in the indenture. "Permitted Liens" means the following types of Liens: o Liens existing as of Juno 8, 1998, and any renewal, extension, refunding, exchange or refinancing of any such Lien provided that thereafter such Lien extends only to the properties that were subject to such Lien prior to the renewal, extension, refunding, exchange or refinancing thereof, o Liens securing the exchange notes or the Subsidiary Guarantees relating thereto; and o Liens in favor of us. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents, however designated, of such Person's preferred or preference stock, whether now outstanding or issued after the date of the indenture, including, without limitation, all classes and series of preferred or preference stock of such Person. "Production Payments" means, collectively, Dollar-Denominated Production Payments and Volumetric Production Payments. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock, provided that, with respect to us, Qualified Capital Stock includes, without limitation, any Qualifying TECONS and any Eligible Convertible Securities. "Qualifying TECONS" means preferred trust securities or similar securities issued by a Finance Person after June 8, 1998. "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to the final -118- 121 Stated Maturity of the exchange notes or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided, however, that Redeemable Capital Stock shall not include any security by virtue of the fact that it may be exchanged or converted at the option of the holder or at our option for our Common Stock, "Restricted Subsidiary" means any Subsidiary of ours, whether existing on or after the date of the indenture, unless such Subsidiary is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms of the indenture. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors. "Senior Indebtedness" means the principal of, premium, if any, on, interest on, including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law, and other amounts due on or in connection with, including any fees, premiums, expenses, including costs of collection, and indemnities, any of our Indebtedness, whether outstanding on the date of the indenture or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness will be pari passu with or subordinated in right of payment to the exchange notes. Notwithstanding the foregoing, "Senior Indebtedness" will not include: o Indebtedness evidenced by the exchange notes; o our Indebtedness that is Pari Passu Indebtedness or is expressly subordinated in right of payment to any other of our Indebtedness; o Indebtedness that is represented by Redeemable Capital Stock, o our Indebtedness to the extent incurred in violation of the covenant described under "--Material Covenants--Incurrence of Indebtedness;" o our Indebtedness to any of our Subsidiaries or any other Affiliate of ours or any subsidiary of such Affiliate; and o Indebtedness which when incurred and without regard to any election under Section 1111(b) of the Federal Bankruptcy Code is without recourse to us. "Specified Property Sales" means the sales of any of our and our Restricted Subsidiaries' o East Texas Oil and gas properties sold in January 1999 and described under "Summary--Recent Developments;" and o real properties, other than our or our Restricted Subsidiaries' mineral interests, owned on the date of the indenture and located in the Counties of Fresno, Kern, Kings, Los Angeles, Orange, Santa Barbara, and Ventura in the State of California. "Specified Senior Indebtedness" means: o all of our Senior Indebtedness in respect of the Credit Facility and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings, or -119- 122 replacements (each, for purposes of this definition, a "refinancing") thereof by us, including any successive refinancings thereof by us; and o any other Senior Indebtedness and any refinancings thereof by us having a principal amount of at least $10,000,000 as of the date of determination and provided that the agreements, indentures or other instruments evidencing such Senior Indebtedness or pursuant to which such Senior Indebtedness was issued specifically designates such Senior Indebtedness as "'Specified Senior Indebtedness" for purposes of the indenture. For purposes of this definition, a refinancing of any Specified Senior Indebtedness shall be treated as a Specified Senior Indebtedness only if the Indebtedness issued in such refinancing ranks or would rank pari passu with the Specified Senior Indebtedness refinanced and only if Indebtedness issued in such refinancing is permitted by the covenant described under "--Material Covenants--Incurrence of Indebtedness." "Stated Maturity" means, when used with respect to any note or any installment of interest thereon, the date specified in such new note as the fixed date on which the principal of such exchange note or such installment of interest is due and payable, and, when used with respect to any other Indebtedness or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Subordinated Indebtedness" means our Indebtedness which is expressly subordinated in right of payment to the exchange notes. "Subsidiary" means, with respect to any Person: o a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof; or o any other Person other than a corporation, including, without limitation, a joint venture, in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, have at least majority ownership interest entitled to vote in the election of directors, managers, trustees or other Persons performing similar functions. "Subsidiary Guarantee" means an unconditional, unsecured, senior subordinated guarantee of the exchange notes by any Restricted Subsidiary pursuant to the terms of the indenture. "Subsidiary Guarantor" means, unless released from their Subsidiary Guarantees as permitted by the indenture, any Restricted Subsidiary that becomes a guarantor of the exchange notes in compliance with the provisions of the indenture and executes a supplemental indenture in which such Restricted Subsidiary agrees to be bound by the terms of the indenture. "Unrestricted Subsidiary" means: o any Subsidiary of ours that at the time of determination will be designated an Unrestricted Subsidiary by our board of directors as provided below; and o any Subsidiary of an Unrestricted Subsidiary. -120- 123 Our board of directors may designate any Subsidiary of ours as an Unrestricted Subsidiary so long as: o neither we nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness of such Subsidiary; o no default with respect to any Indebtedness of such Subsidiary would permit, upon notice, lapse of time or otherwise, any holder of any of our or any Restricted Subsidiary's other Indebtedness to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; o neither we nor any Restricted Subsidiary has made an Investment in such Subsidiary unless such Investment was made pursuant to, and in accordance with, the "Restricted Payments" covenant, other than Investments of the type described in the fourth and twelfth clauses of the definition of Permitted Investment; and o such designation shall not result in the creation or imposition of any Lien on any of our or any Restricted Subsidiary's properties, other than any Permitted Lien or any Lien the creation or imposition of which shall have been in compliance with the "Liens" covenant. With respect to the first clause of the second paragraph of this definition, we or a Restricted Subsidiary may be liable for Indebtedness of an Unrestricted Subsidiary if: o such liability constituted a Permitted Investment or a Restricted Payment permitted by the "Restricted Payments" covenant, in each case at the time of incurrence; or o the liability would be a Permitted Investment at the time of designation of such Subsidiary as an Unrestricted Subsidiary. Any such designation by our board of directors shall be evidenced to the trustee by filing a board resolution with the trustee giving effect to such designation. Our board of directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation: o no Default or Event of Default shall have occurred and be continuing; o we could incur $1.00 of additional Indebtedness, other than Permitted Indebtedness, under the "Incurrence of Indebtedness" covenant; and o if any of our or any of our Restricted Subsidiaries' properties or assets would upon such designation become subject to any Lien, other than a Permitted Lien, the creation or imposition of such Lien shall have been in compliance with the "Liens" covenant. "Volumetric Production Payments" means production payment obligations recorded as deferred revenue in accordance with GAAP, together with all undertakings and obligations in connection therewith. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person, irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency. -121- 124 "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the extent: o all of the Capital Stock or other ownership interests in such Restricted Subsidiary, other than any directors' qualifying shares mandated by applicable law, is owned directly or indirectly by us; or o such Restricted Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of such foreign jurisdiction to be partially owned by the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Restricted Subsidiary to transact business in such foreign jurisdiction, provided that we, directly or indirectly, own the remaining Capital Stock or ownership interest in such Restricted Subsidiary and, by contract or otherwise, control the management and business of such Restricted Subsidiary and derive the economic benefits of ownership of such Restricted Subsidiary to substantially the same extent as if such Restricted Subsidiary were a wholly owned Subsidiary. REGISTRATION RIGHTS We have entered into a registration agreement with the dealer managers under which we have agreed, for the benefit of the holders of the existing notes, at our cost, to use our reasonable best efforts: o to file with the SEC the registration statement of which this prospectus is a part related to the exchange offer of the exchange notes by November 11, 1999; o to cause this exchange offer registration statement to be declared effective under the Securities Act by January 17, 2000; o to keep this exchange offer registration statement effective until the closing of the exchange offer; and o to cause this exchange offer to be completed by February 16, 2000. The registration agreement shall be governed by, and construed under, the laws of the State of New York. If you have further questions about registration rights, you should refer to the registration agreement, a copy of which is available upon request to us. The registration agreement is also attached as an exhibit to this registration statement. In addition, the information described above under "The Exchange Offer" concerning interpretations of and positions taken by the staff of the SEC is not intended to constitute legal advice, and prospective investors should consult their own advisors on these matters. PLAN OF DISTRIBUTION Each broker-dealer that receives exchange notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for existing notes where the existing notes were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of 90 days after the consummation of the exchange offer, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale, if required under applicable securities laws and upon prior -122- 125 written request. In addition, until _________, 2000, all dealers effecting transactions in the exchange notes may be required to deliver a prospectus. We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-dealers for their own account in the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of these methods of resale, at market prices prevailing at the time of resale, at prices related to those prevailing market prices or at negotiated prices. Any resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer or the purchasers of any exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account in the exchange offer and any broker or dealer that participates in a distribution of the exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any resale of exchange notes and any commission or concessions received by such person may be considered underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be regarded as admitting that it is an "underwriter", within the meaning of the Securities Act. For a period of 90 days after the consummation of the exchange offer, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer, including the expenses of one counsel for the holders of the existing notes, other than commissions or concessions of any brokers or dealers and will indemnify the holders of the existing notes, including any broker-dealers, against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the issuance of the exchange notes will be passed upon by our attorneys, Haynes and Boone, L.L.P., Houston, Texas. EXPERTS The consolidated financial statements of Nuevo Energy Company as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998 incorporated by reference in the prospectus and the registration statement have been incorporated herein in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of such firm as experts in accounting and auditing. The report of KPMG LLP refers to the retroactive effect of a change in accounting for oil and gas properties from the full cost method to the successful efforts method. Information about our estimated net proved reserves and the future net cash flows attributable to these reserves as of December 31, 1998 and 1997 was prepared by Ryder Scott Company, L.P. and our estimated net proved reserves and future cash flows attributable to those reserves as of December 31, 1996 was prepared by Ryder Scott Company, L.P. and Poco Oil Co. Information about our estimated net proved reserves and the future net cash flows attributable to these reserves as of June 30, 1999 was prepared by our internal reserve engineers. -123- 126 GLOSSARY OF OIL AND GAS TERMS TERMS USED TO DESCRIBE QUANTITIES OF OIL AND NATURAL GAS o Bbl -- One stock tank barrel, or 42 US gallons liquid volume, of crude oil or other liquid hydrocarbons. o Bcf -- One billion cubic feet of natural gas. o Bcfe -- One billion cubic feet of natural gas equivalent. o BOE-- One barrel of oil equivalent, converting gas to oil at the ratio of 6 Mcf of gas to 1 Bbl of oil. o MBbl -- One thousand Bbls. o Mcf -- One thousand cubic feet of natural gas. o MMBbl -- One million Bbls of oil or other liquid hydrocarbons. o MMcf -- One million cubic feet of natural gas. o MBOE -- One thousand BOE. o MMBOE -- One million BOE. TERMS USED TO DESCRIBE OUR INTERESTS IN WELLS AND ACREAGE o Gross oil and gas wells or acres -- Our gross wells or gross acres represents the total number of wells or acres in which we own a working interest. o Net oil and gas wells or acres -- Determined by multiplying "gross" oil and natural gas wells or acres by the working interest that we own in such wells or acres represented by the underlying properties. TERMS USED TO ASSIGN A PRESENT VALUE TO OUR RESERVES o Standard measure of proved reserves -- The present value, discounted at 10%, of the pre-tax future net cash flows attributable to estimated net proved reserves. We calculate this amount by assuming that we will sell the oil and gas production attributable to the proved reserves estimated in our independent engineer's reserve report for the prices we received for the production on the date of the report, unless we had a contract to sell the production for a different price. We also assume that the cost to produce the reserves will remain constant at the costs prevailing on the date of the report. The assumed costs are subtracted from the assumed revenues resulting in a stream of future net cash flows. Estimated future income taxes using rates in effect on the date of the report are deducted from the net cash flow stream. The after-tax cash flows are discounted at 10% to result in the standardized measure of our proved reserves. The standardized measure of our proved reserves is disclosed in our audited financial statements at note 16. o Pre-tax discounted present value -- The discounted present value of proved reserves is identical to the standardized measure, except that estimated future income taxes are not -124- 127 deducted in calculating future net cash flows. We disclose the discounted present value without deducting estimated income taxes to provide what we believe is a better basis for comparison of our reserves to the producers who may have different tax rates. TERMS USED TO CLASSIFY OUR RESERVE QUANTITIES o Proved reserves -- The estimated quantities of crude oil, natural gas and natural gas liquids which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and natural gas reservoirs under existing economic and operating conditions. The SEC definition of proved oil and gas reserves, per Article 4-10(a)(2) of Regulation S-X, is as follows: Proved oil and gas reserves. Proved oil and gas reserves are the 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, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (a) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (b) Reserves which can be produced economically through application of improved recovery, techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (c) Estimates of proved reserves do not include the following: (1) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (2) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (3) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (4) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. o Proved developed reserves -- Proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. o Proved undeveloped reserves -- Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. -125- 128 TERMS WHICH DESCRIBE THE COST TO ACQUIRE OUR RESERVES o Finding costs -- Our finding costs compare the amount we spent to acquire, explore and develop our oil and gas properties, explore for oil and gas and to drill and complete wells during a period, with the increases in reserves during the period. This amount is calculated by dividing the net change in our evaluated oil and property costs during a period by the change in proved reserves plus production over the same period. Our finding costs as of December 31 of any year represent the average finding costs over the three-year period ending December 31 of that year. Our finding costs as of June 30, 1999 represent average finding costs over a two and one half year period ending on June 30, 1999. TERMS WHICH DESCRIBE THE PRODUCTIVE LIFE OF A PROPERTY OR GROUP OF PROPERTIES o Reserve life index -- A measure of the productive life of an oil and gas property or a group of oil and gas properties, expressed in years. Reserve life index for the years ended December 31, 1996, 1997 or 1998 equal the estimated net proved reserves attributable to a property or group of properties divided by production from the property or group of properties for the four fiscal quarters preceding the date as of which the proved reserves were estimated. In order to reflect the divestiture of the East Texas properties and the Star acquisition, our reserve life index for June 30, 1999 was calculated by dividing estimated net proved reserves at June 30, 1999 by our annualized pro forma production for the first six months of 1999, assuming we closed the Star acquisition on January 1, 1999. TERMS USED TO DESCRIBE THE LEGAL OWNERSHIP OF OUR OIL AND GAS PROPERTIES o Royalty interest -- A real property interest entitling the owner to receive a specified portion of the gross proceeds of the sale of oil and natural gas production or, if the conveyance creating the interest provides, a specific portion of oil and natural gas produced, without any deduction for the costs to explore for, develop or produce the oil and natural gas. A royalty interest owner has no right to consent to or approve the operation and development of the property, while the owners of the working interests have the exclusive right to exploit the mineral on the land. o Working interest -- A real property interest entitling the owner to receive a specified percentage of the proceeds of the sale of oil and natural gas production or a percentage of the production, but requiring the owner of the working interest to bear the cost to explore for, develop and produce such oil and natural gas. A working interest owner who owns a portion of the working interest may participate either as operator or by voting his percentage interest to approve or disapprove the appointment of an operator and drilling and other major activities in connection with the development and operation of a property. TERMS USED TO DESCRIBE SEISMIC OPERATIONS o Seismic data -- Oil and gas companies use seismic data as their principal source of information to locate oil and gas deposits, both to aid in exploration for new deposits and to manage or enhance production from known reservoirs. To gather seismic data, an energy source is used to send sound waves into the subsurface strata. These waves are reflected back to the surface by underground formations, where they are detected by geophones which digitize and record the reflected waves. Computers are then used to process the raw data to develop an image of underground formations. -126- 129 o 2-D seismic data -- 2-D seismic survey data has been the standard acquisition technique used to image geologic formations over a broad area. 2-D seismic data is collected by a single line of energy sources which reflect seismic waves to a single line of geophones. When processed, 2-D seismic data produces an image of a single vertical plane of sub-surface data. o 3-D seismic -- 3-D seismic data is collected using a grid of energy sources, which are generally spread over several miles. A 3-D survey produces a three dimensional image of the subsurface geology by collecting seismic data along parallel lines and creating a cube of information that can be divided into various planes, thus improving visualization. Consequently, 3-D seismic data is a more reliable indicator of potential oil and natural gas reservoirs in the area evaluated. -127- 130 INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER ---------- Condensed Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998............................................................ F-2 Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1999 and 1998............................................. F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998.............................................. F-4 Unaudited Notes to Condensed Consolidated Financial Statements................................................................................... F-5 Independent Auditors' Report................................................................... F-11 Consolidated Balance Sheets as of December 31, 1998 and 1997 (Restated)................................................................................... F-12 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)....................................... F-13 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated).............................................................................. F-14 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 (Restated) and 1996 (Restated)....................................... F-15 Notes to Consolidated Financial Statements..................................................... F-16
F-1 131 NUEVO ENERGY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
ASSETS JUNE 30, DECEMBER 31, 1999 1998 ----------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents ......................................................... $ 53,639 $ 7,403 Accounts receivable ............................................................... 26,555 25,096 Product inventory ................................................................. 4,992 5,998 Assets held for sale .............................................................. 10,000 120,055 Prepaid expenses and other ........................................................ 5,157 2,700 ----------- ----------- Total current assets ...................................................... 100,343 161,252 ----------- ----------- PROPERTY AND EQUIPMENT, at cost: Land .............................................................................. 51,038 51,038 Oil and gas properties (successful efforts method) ................................ 1,025,896 959,348 Gas plant facilities .............................................................. 17,786 17,112 Other facilities .................................................................. 9,130 6,696 ----------- ----------- 1,103,850 1,034,194 Accumulated depreciation, depletion and amortization .............................. (446,966) (417,622) ----------- ----------- 656,884 616,572 ----------- ----------- DEFERRED TAX ASSETS, net ............................................................ 22,010 27,534 OTHER ASSETS ........................................................................ 11,037 12,327 ----------- ----------- $ 790,274 $ 817,685 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .................................................................. $ 18,318 $ 24,393 Accrued interest .................................................................. 4,211 4,161 Accrued liabilities ............................................................... 19,846 17,917 Current maturities of long-term debt .............................................. 2,051 3,152 ----------- ----------- Total current liabilities ................................................. 44,426 49,623 ----------- ----------- OTHER LONG-TERM LIABILITIES ......................................................... 3,066 2,034 LONG-TERM DEBT, net of current maturities ........................................... 380,000 419,150 COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF NUEVO FINANCING I ......................................... 115,000 115,000 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 shares authorized, 20,308,462 shares issued at June 30, 1999 and December 31, 1998 .................................. 203 203 Additional paid-in capital ........................................................ 355,720 355,600 Treasury stock, at cost, 449,255 and 473,876 shares, at June 30, 1999 and December 31, 1998, respectively ................................................ (19,053) (19,335) Stock held by benefit trust, 71,630 and 47,759 shares, at June 30, 1999 and December 31, 1998, respectively .............................. (2,014) (1,732) Accumulated deficit ............................................................... (87,074) (102,858) ----------- ----------- Total stockholders' equity ................................................ 247,782 231,878 ----------- ----------- $ 790,274 $ 817,685 =========== ===========
See accompanying notes to condensed consolidated financial statements. F-2 132 NUEVO ENERGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, ----------------------- 1999 1998 --------- --------- REVENUES: Oil and gas revenues .......................................... $ 95,052 $ 123,045 Gas plant revenues ............................................ 1,288 1,405 Pipeline and other revenues ................................... 4 1,722 Gain on sale of assets, net ................................... 80,312 1,677 Interest and other income ..................................... 2,847 1,324 --------- --------- 179,503 129,173 --------- --------- COSTS AND EXPENSES: Lease operating expenses ...................................... 57,876 65,774 Gas plant operating expenses .................................. 2,336 1,423 Pipeline and other operating expenses ......................... 143 1,842 Exploration costs ............................................. 9,999 2,331 Depreciation, depletion and amortization ...................... 46,257 46,556 General and administrative expenses ........................... 7,199 8,526 Outsourcing fees .............................................. 6,846 7,199 Interest expense .............................................. 16,400 14,444 Dividends on Guaranteed Preferred Beneficial Interests in Company's Convertible Debentures (TECONS) .................. 3,306 3,306 Other expense ................................................. 2,836 1,846 --------- --------- 153,198 153,247 --------- --------- Income (loss) before income taxes ............................... 26,305 (24,074) Provision (benefit) for income taxes ............................ 10,521 (9,870) --------- --------- NET INCOME (LOSS) ............................................... $ 15,784 $ (14,204) ========= ========= EARNINGS (LOSS) PER SHARE: Earnings (loss) per common share-- Basic ...................... $ 0.80 $ (0.72) ========= ========= Weighted average common shares outstanding .................... 19,848 19,759 ========= ========= Earnings (loss) per common share-- Diluted .................... $ 0.79 $ (0.72) ========= ========= Weighted average common and dilutive potential common shares outstanding ......................................... 19,915 19,759 ========= =========
See accompanying notes to condensed consolidated financial statements. F-3 133 NUEVO ENERGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------ 1999 1998 --------- --------- Cash flows from operating activities: Net income (loss) ................................................................. $ 15,784 $ (14,204) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation, depletion and amortization ....................................... 46,257 46,556 Gain on sale of assets, net .................................................... (80,312) (1,677) Dry hole costs ................................................................. 7,297 138 Amortization of other costs .................................................... 811 758 Appreciation of deferred compensation plan ..................................... 111 -- Deferred revenues .............................................................. -- (1,227) Deferred taxes ................................................................. 5,521 (10,245) Other .......................................................................... 120 -- --------- --------- (4,411) 20,099 Change in assets and liabilities: Accounts receivable ............................................................ (1,459) 11,240 Accounts payable and accrued liabilities ....................................... (5,606) (5,149) Other .......................................................................... (1,680) (4,273) --------- --------- Net cash (used in) provided by operating activities ................................. (13,156) 21,917 --------- --------- Cash flows from investing activities: Additions to oil and gas properties ............................................... (35,497) (90,329) Acquisitions of oil and gas properties ............................................ (61,416) (7,810) Additions to gas plant facilities ................................................. (674) (1,091) Additions to other facilities ..................................................... (2,434) (1,184) Proceeds from sales of properties ................................................. 199,663 5,811 --------- --------- Net cash provided by (used in) investing activities ................................. 99,642 (94,603) --------- --------- Cash flows from financing activities: Proceeds from borrowings .......................................................... 120,090 193,000 Deferred financing costs .......................................................... -- (2,636) Payments of long-term debt ........................................................ (160,340) (121,902) Treasury stock sale ............................................................... -- 100 Proceeds from issuance of common stock ............................................ -- 1,280 --------- --------- Net cash (used in) provided by financing activities ................................. (40,250) 69,842 --------- --------- Net increase (decrease) in cash and cash equivalents .............................. 46,236 (2,844) Cash and cash equivalents at beginning of period .................................. 7,403 9,208 --------- --------- Cash and cash equivalents at end of period .......................................... $ 53,639 $ 6,364 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of amounts capitalized) .......................................... $ 15,646 $ 14,389 Income taxes ................................................................... $ 2,250 $ 475
See accompanying notes to condensed consolidated financial statements. F-4 134 NUEVO ENERGY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures required by generally accepted accounting principles. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position at June 30, 1999 and December 31, 1998 and the results of operations and changes in cash flows for the periods ended June 30, 1999 and 1998. These financial statements should be read in conjunction with the financial statements and notes to the financial statements in the 1998 Form 10-K of Nuevo Energy Company (the "Company") that was filed with the Securities and Exchange Commission. Use of Estimates In order to prepare these financial statements in conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and reserve information (which affects the depletion calculation). Actual results could differ from those estimates. Comprehensive Income Comprehensive income includes net income and all changes in an enterprise's other comprehensive income including, among other things, foreign currency translation adjustments, and unrealized gains and losses on certain investments in debt and equity securities. There are no differences between comprehensive income (loss) and net income (loss) for the periods presented. Derivative Financial Instruments The Company utilizes derivative financial instruments to reduce its exposure to changes in the market price of natural gas and crude oil. Commodity derivatives utilized as hedges include futures, swap and option contracts, which are used to hedge natural gas and oil prices. Commodity price and basis swaps are sometimes used to hedge the basis differential between the derivative financial instrument index price and the commodity field price. In order to qualify as a hedge, price movements in the underlying commodity derivative must be highly correlated with the hedged commodity. Settlement of gains and losses on price swap contracts are realized monthly, generally based upon the difference between the contract price and the average closing New York Mercantile Exchange ("NYMEX") price and are reported as a component of oil and gas revenues and operating cash flows in the period realized. Gains and losses on option and futures contracts that qualify as a hedge of firmly committed or anticipated purchases and sales of oil and gas commodities are deferred on the balance sheet and recognized in income and operating cash flows when the related hedged transaction occurs. Premiums paid on option contracts are deferred in other assets and amortized into oil and gas revenues over the terms of the respective option contracts. Gains or losses attributable to the termination of a derivative financial instrument are deferred on the balance sheet and recognized in revenue when the hedged crude oil and natural gas is sold. There were no such deferred gains or losses at June 30, 1999 or December 31, 1998. Gains or losses on derivative financial instruments that do not qualify as a hedge are recognized in income currently. As a result of hedging transactions, oil and gas revenues were reduced by $9.0 million and increased by $0.1 million in the second quarter of 1999 and 1998, respectively. During the first six months of 1999 and 1998, oil and gas revenues were reduced by $8.8 million and increased by $0.2 million, respectively, as a result of these transactions. The Company entered into a swap arrangement with a major financial institution that effectively converts the interest rate on $16.4 million notional amount of the 9 1/2% Senior Subordinated Notes due 2006 to a variable LIBOR-based rate through February 25, 2000. Based on LIBOR rates in effect at June 30, 1999, this amounted to a net reduction in the carrying cost of the 9 1/2% Senior Subordinated Notes due 2006 from 9.5% to 5.64%, or 386 basis points. In addition, the swap arrangement also effectively hedges the price at which these Notes can be repurchased by the Company at 101.16% of their face amount. Based on the market price of 101.23% for the Notes at June 30, 1999, an early termination of this arrangement would result in a payment of approximately $11,000 from the institution to Nuevo. F-5 135 For the second half of 1999, the Company is party to crude oil swaps on an average of 31,500 barrels of oil ("Bbls") per day, or 65% of its estimated crude oil production, at an average NYMEX price of $16.35 per Bbl. For calendar year 2000, the Company has entered into crude oil swaps on 16,500 Bbls per day, or 30% of its estimated crude oil production, at an average NYMEX price of $17.94 per Bbl. In addition, for calendar year 2000, the Company has hedged an additional 30% of its estimated crude oil production through the purchase of put options on 16,500 Bbls per day at a NYMEX price of $16.00 per Bbl, and the sale of call options on 16,500 Bbls per day at an average NYMEX price of $21.21 per Bbl. There was not net cost to the Company for these options. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement, as amended by SFAS No. 137, establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement requires all derivative instruments to be carried on the balance sheet at fair value and is effective for the Company beginning January 1, 2001, however, early adoption is permitted. The Company has not yet determined the impact of this statement on its financial condition or results of operations or whether it will adopt the statement early. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the current presentation. 2. PROPERTY AND EQUIPMENT The Company utilizes the successful efforts method of accounting for its investments in oil and gas properties. Under successful efforts, oil and gas lease acquisition costs and intangible drilling costs associated with exploration efforts that result in the discovery of proved reserves and costs associated with development drilling, whether or not successful, are capitalized when incurred. When a proved property is sold, ceases to produce or is abandoned, a gain or loss is recognized. When an entire interest in an unproved property is sold for cash or cash equivalent, gain or loss is recognized, taking into consideration any recorded impairment. When a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. Unproved leasehold costs are capitalized pending the results of exploration efforts. Significant unproved leasehold costs are reviewed periodically and a loss is recognized to the extent, if any, that the cost of the property has been impaired. An impairment of unproved leasehold costs of $8.1 million was recognized as of December 31, 1998. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charged to expense as incurred. Costs of productive wells, development dry holes and productive leases are capitalized and depleted on a unit-of-production basis over the life of the remaining proved reserves. Capitalized drilling costs are depleted on a unit-of-production basis over the life of the remaining proved developed reserves. Estimated costs (net of salvage value) of dismantlement, abandonment and site remediation are computed by the Company's independent reserve engineers and are included when calculating depreciation and depletion using the unit-of-production method. The Company reviews proved oil and gas properties on a depletable unit basis whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit is recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the undiscounted expected future net revenues computed by application of estimated future oil and gas prices, production and expenses, as determined by management, to estimated future production of oil and gas reserves over the economic life of the reserves. If the carrying value exceeds the undiscounted future net revenues, an impairment is recognized equal to the difference between the carrying value and the discounted estimated future net revenues of that depletable unit. The Company considers probable reserves and escalated commodity pricing in its estimate of future net revenues. A fair value impairment of $60.8 million was recognized as of December 31, 1998. Interest costs associated with non-producing leases and exploration and development projects are capitalized only for the period that activities are in progress to bring these projects to their intended use. The capitalization rates are based on the Company's weighted average cost of funds used to finance expenditures. 3. DEFERRED TAX ASSETS As a result of the net loss generated during 1998, the Company has deferred tax assets, net of valuation allowances, of $22.0 million and $27.5 million as of June 30, 1999 and December 31, 1998, respectively. The Company believes that sufficient future taxable income will be generated and has concluded that these net deferred tax assets will more likely than not be realized. F-6 136 4. INDUSTRY SEGMENT INFORMATION As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which was issued by the FASB in June 1997. This statement establishes standards for reporting information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim periods. Historically, the Company's operations were concentrated primarily in two segments: the exploration and production of oil and natural gas and gas plant, pipeline and gas storage operations. The Company's non-core gas gathering, pipeline and gas storage assets were reclassified to assets held for sale as of December 31, 1997, consistent with the Company's intention to dispose of these assets during 1998 and 1999. The Company completed the sale of its Bright Star gas gathering system in July 1998 and the Richfield gas storage assets in February 1998, at their approximate carrying values, and has signed a letter of intent with a third party to sell the remaining asset, the Illini pipeline. Closing of the Illini pipeline sale is expected by the end of 1999, pending finalization of a purchase and sale agreement and certain regulatory approvals. The Company's policy is to record revenues and expenses associated with these assets, which are no longer being depreciated, until they are sold.
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1999 1998 --------- --------- Sales to unaffiliated customers: Oil and gas-- East ............................. $ 7,682 $ 24,218 Oil and gas-- West ............................. 76,455 90,689 Oil and gas-- International .................... 10,915 8,138 Gas plant, pipelines and other ................. 1,292 3,127 --------- --------- Total sales ............................ 96,344 126,172 Gain on sale of assets, net ............ 80,312 1,677 Other revenues ................................. 2,847 1,324 --------- --------- Total revenues ......................... $ 179,503 $ 129,173 ========= ========= Operating profit before income taxes: Oil and gas-- East(a) .......................... $ 81,141 $ 12,644 Oil and gas-- West ............................. (18,165) (552) Oil and gas-- International .................... (806) (1,288) Gas plant, pipelines and other ................. (1,786) (538) --------- --------- 60,384 10,266 Unallocated corporate expenses ................... 14,373 16,590 Interest expense ................................. 16,400 14,444 Dividends on TECONS .............................. 3,306 3,306 --------- --------- Income (loss) before income taxes .............. $ 26,305 $ (24,074) ========= ========= Depreciation, depletion and amortization: Oil and gas-- East ............................. $ 4,307 6,467 Oil and gas-- West ............................. 37,344 36,817 Oil and gas-- International .................... 3,855 2,529 Gas plant, pipelines and other ................. 412 400 --------- --------- $ 45,918 $ 46,213 ========= =========
- ---------- (a) Includes an $80.3 million net gain on sale of the East Texas gas properties for the six months ended June 30, 1999. F-7 137 5. LONG-TERM DEBT Long-term debt consists of the following (amounts in thousands):
JUNE 30, DECEMBER 31, 1999 1998 --------- ----------- 9 1/2% Senior Subordinated Notes due 2006(a) .......... $ 160,000 $ 160,000 8 7/8% Senior Subordinated Notes due 2008(a) ........... 100,000 100,000 Bank credit facility (b) .............................. 120,000 158,400 OPIC credit facility .................................. 2,051 3,902 --------- --------- Total debt .................................. 382,051 422,302 Less: current maturities .............................. (2,051) (3,152) --------- --------- Long-term debt ........................................ $ 380,000 $ 419,150 ========= =========
- ---------- (a) In July 1999, the Company authorized a new issuance of $260.0 million of 9 1/2% senior subordinated notes due June 1, 2008. The Company has offered to exchange the new notes for its outstanding $160.0 million of 9 1/2% senior subordinated notes due 2006 and $100.0 million of 8 7/8% senior subordinated due 2008. In connection with the exchange offers, the Company has solicited consents to proposed amendments to the indentures under which the old note were issued. These amendments delete most of the covenants in the old indentures. The purpose of the exchange offers is to combine the Company's two existing issues of senior subordinated notes into a single new issue in the aggregate principal amount of $260.0 million. The purpose of the consent solicitations is to streamline the Company's covenant structure and to provide the Company with additional flexibility to pursue its operating strategy. The exchange offers were conditioned on receipt of tenders of at least a majority of the outstanding principal amount of each of the old notes and satisfaction of other customary conditions. As of August 9, 1999, tenders had been received from holders of a majority of each issue of the old notes. Accordingly, the Company and the trustee for the old notes executed supplemental indentures containing the proposed amendments relating to the consent solicitations. In addition to the consideration equal to 3% of the outstanding principal amount of the 9 1/2% notes exchanged that the Company will pay to the holders of the 9 1/2% notes who tendered in the exchange offer, which will be accounted for as deferred financing costs, the Company expects to incur approximately $4.0 million of expenses during the third quarter of 1999, in connection with this exchange offer. (b) Nuevo's Restated Credit Agreement dated June 30, 1999, provides for secured revolving credit availability of up to $400.0 million (subject to a semi-annual borrowing base determination) from a bank group led by Bank of America, N.A. and Morgan Guaranty Trust Company of New York, until its expiration on April 1, 2003. Effective January 6, 1999, the borrowing base on the Company's credit facility was reduced from $380.0 million to $200.0 million, reflecting the sale on that date of the Company's East Texas natural gas reserves, and also reflecting a significant decline in current and projected oil prices since the previous determination. The Company and its banks have begun discussions regarding the reset of the borrowing base to be effective as of October 15, 1999. Given the significant increase in crude oil prices since the prior determination, management anticipates a material increase in the borrowing base. The restatement of the Credit Agreement also provided Nuevo with relief under the covenant requiring minimum levels of EBITDA / Fixed Charge coverage. The Company was in compliance with all covenants as of June 30, 1999, and does not anticipate any issues of non-compliance arising in the foreseeable future. At June 30, 1999, outstanding borrowings under the revolving credit agreement were $109.0 million. Additionally, Nuevo had $11.0 million of outstanding borrowings under an uncommitted line of credit. Accordingly, $91.0 million of committed revolving credit capacity was unused and available at June 30, 1999. 6. EARNINGS (LOSS) PER SHARE COMPUTATION SFAS No. 128 requires a reconciliation of the numerator (income) and denominator (shares) of the basic earnings per share ("EPS") computation to the numerator and denominator of the diluted EPS computation. In the six-month period ended June 30, 1998, weighted average potential dilutive common shares of 451,000 are not included in the calculation of diluted loss per share due to their anti-dilutive effect. The Company's reconciliation is as follows:
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------ 1999 1998 --------------------- ---------------------- INCOME SHARES LOSS SHARES -------- ------ -------- ------ Earnings (loss) per common share-- Basic ......... $ 15,784 19,848 $(14,204) 19,759 Effect of dilutive securities: Stock options .................................. -- 67 -- -- -------- ------ -------- ------ Earnings (loss) per common share-- Diluted ....... $ 15,784 19,915 $(14,204) 19,759 ======== ====== ======== ======
7. CONTINGENCIES The Company has been named as a defendant in the Gloria Garcia Lopez and Husband, Hector S. Lopez, Individually, and as successors to Galo Land & Cattle Company v. Mobil Producing Texas & New Mexico, et al. in the 79th Judicial District Court of Brooks County, Texas. The plaintiffs allege: i) underpayment of royalties and claim damages, on a gross basis, of $27.7 million plus $26.2 million in interest for the period from 1985 to date; F-8 138 ii) that their production was improperly commingled with gas produced from an adjoining lease, resulting in damages, including interest of $40.8 million (gross); and iii) numerous other claims that may result in unspecified damages. Nuevo's working interest in these properties is 20%. The Company, along with the other defendants in this case, denies these allegations and is vigorously contesting these claims. Management does not believe that the final outcome of this matter will have a material adverse impact on the Company's operating results, financial condition or liquidity. The Company has been named as a defendant in certain other lawsuits incidental to its business. Management does not believe that the outcome of such litigation will have a material adverse impact on the Company's operating results or financial condition. However, these actions and claims in the aggregate seek substantial damages against the Company and are subject to the inherent uncertainties in any litigation. The Company is defending itself vigorously in all such matters. In March 1999, the Company discovered that a non-officer employee had fraudulently authorized and diverted for personal use Company funds totaling $5.9 million, $4.3 million in 1998 and the remainder in 1999, that were intended for international exploration. Accordingly, the Company has reclassified the amounts lost in 1998 and 1999 to other expense. Based on its review of the facts, management is confident that only one employee was involved in the matter and that all misappropriated funds have been identified. The Board has engaged a Certified Fraud Examiner to conduct an in-depth review of the fraudulent transactions to determine the scope of the fraud, the possibility of recovery of amounts lost from insurance, from the terminated employee and/or from third parties, and to make recommendations regarding what, if any, new internal control procedures should be implemented. In September 1997, there was a spill of crude oil into the Santa Barbara Channel from a pipeline that connects the Company's Point Pedernales field with shore-based processing facilities. The volume of the spill was estimated to be 163 barrels of oil. The costs of the clean up and the cost to repair the pipeline either have been or are expected to be covered by insurance, less the Company's deductibles, which in total are $120,000. Repairs were completed by the end of 1997, and production recommenced in December 1997. The Company also has exposure to certain costs that may not be recoverable from insurance, including fines, penalties, and damages. Such costs are not quantifiable at this time, but are not expected to be material to the Company's operating results, financial condition or liquidity. The Company's international investments involve risks typically associated with investments in emerging markets such as an uncertain political, economic, legal and tax environment and expropriation and nationalization of assets. In addition, if a dispute arises in its foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the United States. The Company attempts to conduct its business and financial affairs so as to protect against political and economic risks applicable to operations in the various countries where it operates, but there can be no assurance that the Company will be successful in so protecting itself. A portion of the Company's investment in the Republic of Congo in West Africa ("Congo") is insured through political risk insurance provided by the Overseas Private Investment Corporation ("OPIC"). The Company is currently investigating its options for political risk insurance in the Republic of Ghana in West Africa ("Ghana"). The Company and its partners underwent a tax examination related to their ownership interests in the Yombo field offshore the Republic of Congo, for the years 1994 through 1997. On June 25, 1999, the Company and its partners settled this tax assessment for a total of $1.0 million, of which the Company's share was $400,000. In connection with their respective acquisitions of two subsidiaries owning interests in the Yombo field offshore West Africa (each a "Congo subsidiary"), the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co. ("CMS") agreed with the seller not to claim certain tax losses incurred by such subsidiaries prior to the acquisitions. Pursuant to the agreement, the Company and CMS may be liable to the seller for the recapture of these tax losses utilized by the seller in years prior to the acquisitions if certain triggering events occur. A triggering event will not occur, however, if a subsequent purchaser enters into certain agreements specified in the consolidated return regulations intended to ensure that such losses will not be claimed. The Company's potential direct liability could be as much as $50.0 million if a triggering event with respect to the Company occurs, and the Company believes that CMS's liability (for which the Company would be jointly liable with an indemnification right against CMS) could be as much as $67.0 million. The Company does not expect a triggering event to occur with respect to it or CMS and does not believe the agreement will have a material adverse effect upon the Company. 8. ACQUISITIONS In June 1999, the Company acquired oil properties located onshore and offshore California for $61.4 million from Texaco, Inc. To purchase these assets, the Company sued funds from a $100.0 million interest-bearing escrow account that provided "like-kind exchange" tax treatment for the purchase of domestic oil and gas producing properties. The escrow account was created with proceeds from the Company's January 1999 sale of its East Texas natural gas assets (see discussion in Note 9 below). Following the Texaco transaction, the $41.0 million remaining F-9 139 in the escrow account, which included $2.4 million of interest income, was used to repay a portion of the outstanding bank debt in early July 1999. The acquired properties had estimated net proved reserves at June 30, 1999 of 33.7 million barrels of oil equivalent (BOE") and will increase the Company's production from California by approximately 5.0 thousand BOE per day. All of these properties are additional interests in the Company's existing properties or are located near its existing properties. The acquisition includes interests in Cymric, East Colainga, Dos Cuadras and other fields the Company operates. 9. DIVESTITURES On January 6, 1999, the Company completed the sale of its East Texas natural gas assets to an affiliate of Samson Resources Company for an adjusted purchase price of approximately $191.0 million. Of the proceeds, $100.0 million was set aside to fund an escrow account, as discussed above in Note 8. The remainder of the proceeds were used to repay outstanding senior bank debt. The Company realized an $80.3 million adjusted pre-tax gain on the sale of the East Texas natural gas assets resulting in the realization of $14.6 million of the Company's deferred tax asset. A $5.2 million gain on settled hedge transactions was realized in connection with the closing this sale in 1999. The effective date of the sale is July 1, 1998. The Company reclassified these assets to assets held for sale and discontinued depleting these assets during the third quarter of 1998. Estimated net proved reserves associated with these properties totaled approximately 329.0 billion cubic feet of natural gas equivalent at January 1, 1999. F-10 140 INDEPENDENT AUDITORS' REPORT The Board of Directors Nuevo Energy Company: We have audited the accompanying consolidated balance sheets of Nuevo Energy Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nuevo Energy Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company has given retroactive effect to the change in accounting for oil and gas properties from the full cost method to the successful efforts method in 1998. /s/ KPMG LLP Houston, Texas March 25, 1999 F-11 141 NUEVO ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS: DECEMBER 31, ------------------------ 1998 1997* ----------- ---------- CURRENT ASSETS: Cash and cash equivalents ............................................................................ $ 7,403 $ 9,208 Accounts receivable .................................................................................. 25,096 38,196 Product inventory .................................................................................... 5,998 1,627 Assets held for sale ................................................................................. 120,055 6,950 Prepaid expenses and other ........................................................................... 2,700 2,879 ----------- ---------- Total current assets .......................................................................... 161,252 58,860 ----------- ---------- PROPERTY AND EQUIPMENT, at cost: Land ................................................................................................. 51,038 51,411 Oil and gas properties (successful efforts method) ................................................... 959,348 984,273 Gas plant facilities ................................................................................. 17,112 15,500 Other facilities ..................................................................................... 6,696 7,831 ----------- ---------- 1,034,194 1,059,015 Accumulated depreciation, depletion and amortization ................................................. (417,622) (324,904) ----------- ---------- 616,572 734,111 ----------- ---------- DEFERRED TAX ASSETS, net ............................................................................... 27,534 -- OTHER ASSETS ........................................................................................... 12,327 11,315 ----------- ---------- $ 817,685 $ 804,286 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable ..................................................................................... $ 24,393 $ 17,062 Accrued interest ..................................................................................... 4,161 4,285 Accrued drilling costs ............................................................................... 8,380 12,781 Accrued lease operating costs ........................................................................ 4,694 8,891 Other accrued liabilities ............................................................................ 4,843 2,868 Current maturities of long-term debt ................................................................. 3,152 3,716 ----------- ---------- Total current liabilities ..................................................................... 49,623 49,603 ----------- ---------- LONG-TERM DEBT, NET OF CURRENT MATURITIES .............................................................. 419,150 305,940 DEFERRED TAX LIABILITIES ............................................................................... -- 4,986 OTHER LONG-TERM LIABILITIES ............................................................................ 2,034 4,018 COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF NUEVO FINANCING I ............................................................ 115,000 115,000 CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 10,000,000 shares authorized; 7% Cumulative Convertible Preferred Stock, none issued and outstanding at December 31, 1998 and 1997 ........................ -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 20,308,462 and 20,237,537 shares issued at December 31, 1998 and 1997, respectively ............................. 203 202 Additional paid-in capital ........................................................................... 355,600 354,296 Treasury stock, at cost, 473,876 and 497,372 shares, at December 31, 1998 and 1997, respectively ..... (19,335) (19,929) Stock held by benefit trust, 47,759 and 45,119 shares, at December 31, 1998 and 1997, respectively ... (1,732) (1,244) Accumulated deficit (102,858) (8,586) ----------- ---------- Total stockholders' equity .................................................................... 231,878 324,739 ----------- ---------- $ 817,685 $ 804,286 =========== ===========
- ---------------- * Restated See Notes to Consolidated Financial Statements. F-12 142 NUEVO ENERGY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997* 1996* --------- --------- --------- REVENUES: Oil and gas revenues ............................................... $ 240,010 $ 331,973 $ 279,859 Gas plant revenues ................................................. 2,665 14,826 34,802 Pipeline and other revenues ........................................ 2,700 5,772 6,774 Gain on sale of assets, net ........................................ 5,768 1,372 6,008 Interest and other income .......................................... 1,560 3,335 1,614 --------- --------- --------- 252,703 357,278 329,057 --------- --------- --------- COSTS AND EXPENSES: Lease operating expenses ........................................... 134,704 120,042 93,062 Gas plant operating expenses ....................................... 3,202 13,356 29,311 Pipeline and other operating costs ................................. 2,028 5,243 6,105 Exploration costs .................................................. 16,562 11,082 4,571 (Revision of) provision for impairment on assets held for sale ..... (3,740) 23,942 -- Provision for impairment of oil and gas properties ................. 68,904 30,000 -- General and administrative expenses ................................ 18,633 19,822 14,880 Outsourcing fees ................................................... 9,461 11,984 10,249 Depreciation, depletion and amortization ........................... 85,036 102,158 75,664 Interest expense ................................................... 32,471 27,357 36,009 Dividends on Guaranteed Preferred Beneficial Interests in Company's Convertible Debentures (TECONS) ....................... 6,613 6,613 165 Other expense ...................................................... 5,726 3,019 1,069 --------- --------- --------- 379,600 374,618 271,085 --------- --------- --------- (Loss) income before income taxes, minority interest and extraordinary item ................................................. (126,897) (17,340) 57,972 Income tax (benefit) expense ......................................... (32,625) (6,656) 23,965 Minority interest in loss of subsidiary .............................. -- (8) (271) --------- --------- --------- (Loss) income before extraordinary item .............................. (94,272) (10,676) 34,278 Extraordinary loss on early extinguishment of debt, net of income tax benefit of $2,037 ....................................... -- 3,024 -- --------- --------- --------- Net (loss) income .................................................... (94,272) (13,700) 34,278 Dividends on preferred stock ......................................... -- -- 939 --------- --------- --------- Net (loss) income available to common stockholders ................... $ (94,272) $ (13,700) $ 33,339 ========= ========= ========= (Loss) earnings per common share -- Basic: (Loss) income before extraordinary item (net of dividends on preferred stock) ............................................. $ (4.76) $ (0.54) $ 1.99 Extraordinary loss on early extinguishment of debt, net of income tax benefit .............................................. -- (0.15) -- --------- --------- --------- Net (loss) income .................................................. $ (4.76) $ (0.69) $ 1.99 ========= ========= ========= Weighted average Common shares outstanding ........................... 19,795 19,796 16,755 ========= ========= ========= (Loss) earnings per Common share-- Diluted: (loss) income before extraordinary item ............................ $ (4.76) $ (0.54) $ 1.84 Extraordinary loss on early extinguishment of debt, net of income tax benefit .............................................. -- (0.15) -- --------- --------- --------- Net (loss) income .................................................. $ (4.76) $ (0.69) $ 1.84 ========= ========= ========= Weighted average Common and dilutive potential Common shares outstanding ........................................................ 19,795 19,796 18,596 ========= ========= =========
- ------------------ * Restated See Notes to Consolidated Financial Statements. F-13 143 NUEVO ENERGY COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK HELD RETAINED TOTAL -------------- --------------- PAID-IN TREASURY BY BENEFIT EARNINGS STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK TRUST (DEFICIT) EQUITY ------ ------ ------ ------- ----------- --------- ---------- --------- ------------ January 1, 1996* .................. 11,717 $ 117 15 $ 15 $ 151,442 $ -- $ -- $ (28,225) $ 123,349 Issuance of Common Stock .......... 6,384 64 -- -- 172,147 -- -- -- 172,211 Exercise of stock options and related tax benefit ............. 587 6 -- -- 14,718 -- -- -- 14,724 Issuance of non-employee stock options ......................... -- -- -- -- 244 -- -- -- 244 Issuance of warrants .............. -- -- -- -- 1,575 -- -- -- 1,575 Conversion of Preferred Stock ..... 1,164 12 (15) (15) -- -- -- -- (3) Preferred Stock dividends ......... -- -- -- -- -- -- -- (939) (939) Net income* ....................... -- -- -- -- -- -- -- 34,278 34,278 ------ ------ ---- ------ --------- --------- -------- ------- --------- December 31, 1996* ................ 19,852 199 -- -- 340,126 -- -- 5,114 345,439 ====== ====== ==== ====== ========= ========= ======== ======= ========= Exercise of stock options and related tax benefit ............. 386 3 -- -- 11,332 -- -- -- 11,335 Stock put options ................. -- -- -- -- 1,630 -- -- -- 1,630 Employee stock awards ............. -- -- -- -- 1,208 -- -- -- 1,208 Purchase of Treasury Shares ....... -- -- -- -- -- (21,173) -- -- (21,173) Stock held by benefit trust ....... -- -- -- -- -- 1,244 (1,244) -- -- Net loss* ......................... -- -- -- -- -- -- -- (13,700) (13,700) ------ ------ ---- ------ --------- --------- -------- ------- --------- December 31, 1997* ................ 20,238 202 -- -- 354,296 (19,929) (1,244) (8,586) 324,739 ====== ====== ==== ====== ========= ========= ======== ======= ========= Exercise of stock options and related tax benefit ............. 70 1 -- -- 1,304 -- -- -- 1,305 Stock held by benefit trust ....... -- -- -- -- -- 488 (488) -- -- Sale of Treasury Shares ........... -- -- -- -- -- 106 -- -- 106 Net loss .......................... -- -- -- -- -- -- -- (94,272) (94,272) ------ ------ ---- ------ --------- --------- -------- ------- --------- December 31, 1998 ................. 20,308 $ 203 -- -- $ 355,600 $ (19,335) $ (1,732) $(102,858) $ 231,878 ====== ====== ==== ====== ========= ========= ======== ======= =========
- -------------- * Restated See Notes to Consolidated Financial Statements. F-14 144 NUEVO ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997* 1996* --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ............................................................................ $ (94,272) $ (13,700) $ 34,278 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation, depletion and amortization .................................................. 85,036 102,158 75,664 Dry hole costs ............................................................................ 12,962 9,311 3,145 Amortization of debt financing costs ...................................................... 1,643 1,513 1,370 Amortization of deferred revenue .......................................................... (1,625) (3,203) (4,104) (Revision of) provision for impairment on assets held for sale ............................ (3,740) 23,942 -- Provision for impairment of oil and gas properties ........................................ 68,904 30,000 -- Gain on sale of assets, net ............................................................... (5,768) (1,372) (6,008) Loss on early extinguishment of debt ...................................................... -- 5,061 -- Employee stock awards ..................................................................... -- 1,208 -- Deferred taxes ............................................................................ (32,520) (9,249) 22,465 Depreciation of deferred compensation liability ........................................... (1,138) -- -- Minority interest ......................................................................... -- (8) (271) --------- --------- --------- 29,482 145,661 126,539 Changes in assets and liabilities, net of acquisition effects: Accounts receivable .......................................................................... 13,051 578 (21,086) Gas imbalances ............................................................................... 333 20 (198) Accounts payable ............................................................................. 6,634 1,663 14,574 Accrued liabilities .......................................................................... (5,813) 13,719 11,316 Other ........................................................................................ (7,854) 3,821 (4,224) --------- --------- --------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES ...................................... 35,833 165,462 126,921 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to land ............................................................................ -- -- (51,638) Additions to oil and gas properties .......................................................... (157,352) (195,108) (515,985) Proceeds from sale of gas plant .............................................................. -- 24,992 -- Proceeds from sales of properties ............................................................ 11,830 2,385 42,700 Additions to gas plant and other facilities .................................................. (2,813) (1,747) (21,079) --------- --------- --------- NET CASH FLOWS USED IN INVESTING ACTIVITIES .......................................... (148,335) (169,478) (546,002) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings ..................................................................... 240,900 234,000 408,000 Debt issuance costs .......................................................................... (3,360) -- (10,920) Net proceeds from issuance of common stock ................................................... -- -- 138,327 Payments of long-term debt ................................................................... (128,254) (217,503) (232,359) Preferred stock dividends .................................................................... -- -- (939) Proceeds from exercise of stock options ...................................................... 1,305 6,074 10,003 Proceeds from issuance of Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I ..................................... -- -- 115,000 Premium on early extinguishment of debt ...................................................... -- (3,440) -- Proceeds from sale of stock put options ...................................................... -- 1,630 -- Proceeds from sale of treasury stock ......................................................... 106 -- -- Purchase of treasury shares .................................................................. -- (21,173) -- Cash distribution to minority interest owner ................................................. -- -- (160) --------- --------- --------- NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES ............................ 110,697 (412) 426,952 --------- --------- --------- Net (decrease) increase in cash and cash equivalents ........................................... (1,805) (4,428) 7,871 Cash and cash equivalents at beginning of year ................................................. 9,208 13,636 5,765 --------- --------- --------- Cash and cash equivalents at end of year ....................................................... $ 7,403 $ 9,208 $ 13,636 ========= ========= =========
- ------------------ * Restated See Notes to Consolidated Financial Statements. F-15 145 NUEVO ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Nuevo Energy Company ("Nuevo") was formed as a Delaware corporation on March 2, 1990, to acquire the businesses of certain public and private partnerships (collectively "Predecessor Partnerships"). On July 9, 1990, the plan of consolidation ("Plan of Consolidation") was approved by limited partners owning a majority of units of limited partner interests in the partnerships whereby the net assets of the Predecessor Partnerships, which were subject to such Plan of Consolidation, were exchanged for Common Stock of Nuevo ("Common Stock"). All references to the "Company" include Nuevo and its majority and wholly-owned subsidiaries, unless otherwise indicated or the context indicates otherwise. The Company is primarily engaged in the exploration for, and the acquisition, exploitation, development and production of crude oil and natural gas. The Company's principal oil and gas properties are located domestically onshore and offshore California, in East Texas and the onshore Gulf Coast region; and internationally offshore West Africa. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Nuevo and its majority and wholly-owned subsidiaries. The Company's 48.5% general partner interest in Richfield Gas Storage Partnership was pro rata consolidated through February 1998, at which time the Company's interest was sold. The consolidated financial statements also include Bright Star Gathering, Inc., which was 80% owned by the Company until it was sold in July 1998. NuStar Joint Venture and its 66.7% investment in the Benedum Plant System, of which the Company owned a 95% interest, was pro rata consolidated through May 2, 1997, at which time the Company's interest was sold. Minority interests have been deducted from results of operations and stockholders' equity in the appropriate periods. All significant intercompany accounts and transactions have been eliminated in consolidation. Change in Accounting Method Effective January 1, 1998, the Company elected to convert from the full cost method to the successful efforts method of accounting for its investments in oil and gas properties. The Company believes that the successful efforts method of accounting is preferable, as it will provide a fair presentation of the Company's development activities in its core California business and the drilling success of its selective exploration activities, and reflect an impairment in the carrying value of its oil and gas properties only when there has been a permanent decline in their fair value. Accordingly, all prior year financial statements have been restated to conform with successful efforts accounting. The effect, after tax, of the change in accounting method as of December 31, 1997, was a reduction to retained earnings of $64.1 million, primarily attributable to a decrease in net property and equipment and the deferred tax liability of $99.2 million and $38.0 million, respectively. The change in accounting method resulted in a decrease in net income of $32.5 million ($1.64 per share -- basic and diluted) and $0.4 million ($0.02 per share - -- basic and diluted) during 1997 and 1996, respectively. Had the Company not converted to the successful efforts method, the results of operations for the three months ended March 31, 1998, would have included a pre-tax full cost ceiling write-down of approximately $250.0 million. F-16 146 Oil and Gas Properties The Company utilizes the successful efforts method of accounting for its investments in oil and gas properties. Under successful efforts, oil and gas lease acquisition costs and intangible drilling costs associated with exploration efforts that result in the discovery of proved reserves and costs associated with development drilling, whether or not successful, are capitalized when incurred. When a proved property is sold, ceases to produce or is abandoned, a gain or loss is recognized. When an entire interest in an unproved property is sold for cash or cash equivalent, gain or loss is recognized, taking into consideration any recorded impairment. When a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. Unproved leasehold costs are capitalized pending the results of exploration efforts. Significant unproved leasehold costs are reviewed periodically and a loss is recognized to the extent, if any, that the cost of the property has been impaired. An impairment of unproved leasehold costs of $8.1 million was recognized as of December 31, 1998. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charged to expense as incurred. Costs of productive wells, development dry holes and productive leases are capitalized and depleted on a unit-of-production basis over the life of the remaining proved reserves. Capitalized drilling costs are depleted on a unit-of-production basis over the life of the remaining proved developed reserves. Estimated costs (net of salvage value) of dismantlement, abandonment and site remediation are computed by the Company's independent reserve engineers and are included when calculating depreciation and depletion using the unit-of-production method. The Company reviews proved oil and gas properties on a depletable unit basis whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit is recognized. Fair value, on a depletable unit basis, is estimated to be the present value of the undiscounted expected future net revenues computed by application of estimated future oil and gas prices, production and expenses, as determined by management, to estimated future production of oil and gas reserves over the economic life of the reserves. If the carrying value exceeds the undiscounted future net revenues, an impairment is recognized equal to the difference between the carrying value and the discounted estimated future net revenues of that depletable unit. The Company considers probable reserves and escalated commodity pricing in its estimate of future net revenues. Fair value impairments of $60.8 million and $30.0 million were recognized as of December 31, 1998 and 1997, respectively; no such impairment was recognized during 1996. Interest costs associated with non-producing leases and exploration and development projects are capitalized only for the period that activities are in progress to bring these projects to their intended use. The capitalization rates are based on the Company's weighted average cost of funds used to finance expenditures. Any reference to oil and gas reserve information in the Notes to Consolidated Financial Statements is unaudited. F-17 147 Environmental Liabilities Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Company's commitment to a formal plan of action. Gas Plant and Other Facilities Gas plant and other facilities include the costs to acquire certain gas plant and other facilities and to secure rights-of-way. Capitalized costs associated with gas plant and other facilities are amortized primarily over the estimated useful lives of the various components of the facilities utilizing the straight-line method. The estimated useful lives of such assets range from three to thirty years. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement, as amended, establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement requires all derivative instruments to be carried on the balance sheet at fair value and is effective for the Company beginning January 1, 2001, however, early adoption is permitted. The Company has not yet determined the impact of this statement on its financial condition or results of operations or whether it will adopt the statement early. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income", effective January 1, 1998. Comprehensive income includes net income and all changes in an enterprise's other comprehensive income including, among other things, foreign currency translation adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The implementation of this statement had no impact on the Company, as there are no differences between comprehensive (loss) income and net (loss) income for the periods presented. Gas Balancing Positions The Company uses the entitlement method for recording sales of natural gas. Under the entitlement method, revenue is recorded based on the Company's net revenue interest in production. Deliveries of natural gas in excess of the Company's net revenue interests are recorded as liabilities and under-deliveries are recorded as assets. Production imbalances are recorded at the lower of the sales price in effect at the time of production or the current market value. Substantially all such amounts are anticipated to be settled with production in future periods. F-18 148 Derivative Financial Instruments The Company utilizes derivative financial instruments to reduce its exposure to changes in the market prices of natural gas and crude oil. Commodity derivatives utilized as hedges include futures, swap and option contracts, which are used to hedge natural gas and oil prices. Commodity price and basis swaps are sometimes used to hedge the basis differential between the derivative financial instrument index price and the commodity field price. In order to qualify as a hedge, price movements in the underlying commodity derivative must be highly correlated with the hedged commodity. Settlement of gains and losses on price swap contracts are realized monthly, generally based upon the difference between the contract price and the average closing New York Mercantile Exchange ("NYMEX") price and are reported as a component of oil and gas revenues and operating cash flows in the period realized. Gains and losses on option and futures contracts that qualify as a hedge of firmly committed or anticipated purchases and sales of oil and gas commodities are deferred on the balance sheet and recognized in income when the related hedged transaction occurs. Premiums paid on option contracts are deferred in other assets and amortized into oil and gas revenues over the terms of the respective option contracts. Gains or losses attributable to the termination of a derivative financial instrument are deferred on the balance sheet and recognized in revenue when the hedged crude oil and natural gas is sold. There were no such deferred gains or losses at December 31, 1998 or 1997. Gains or losses on derivative financial instruments that do not qualify as a hedge are recognized in income currently. As a result of such hedging transactions, oil and gas revenues were increased by $0.6 million in 1998, and were reduced by $6.0 million and $2.5 million in 1997 and 1996, respectively. Earnings per Share ("EPS") Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. For the years ended December 31, 1998 and 1997, the Company did not have any potentially dilutive securities, as net losses were incurred during these periods. For the year ended December 31, 1996, the Company's potentially dilutive securities included dilutive stock options. Potential dilution may also occur in future periods due to the Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I ("TECONS"). Stock-Based Compensation The Company applies the intrinsic value method for accounting for stock and stock-based compensation described by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company applied the fair value method described by SFAS No. 123, "Accounting for Stock-Based Compensation", it would have incurred compensation expense for stock-based compensation in 1998, 1997 and 1996. (See Note 8 for the SFAS No. 123 pro forma effects on income and earnings per share.) Income Taxes Deferred taxes are accounted for under the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to F-19 149 differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. Statements of Cash Flows For cash flow presentation purposes, the Company considers all highly liquid money market instruments with an original maturity of three months or less to be cash equivalents. Interest paid in cash, net of amounts capitalized, for 1998, 1997 and 1996 was $31.6 million, $28.2 million and $30.6 million, respectively. Net amounts paid (refunded) in cash for income taxes for 1998, 1997 and 1996 were $1,332,000, ($45,000) and $1,500,000, respectively. Product Inventory Inventory relating to quantities of processed fuel oil and natural gas liquids in storage as of the balance sheet date is carried at current market pricing. The Company recognizes revenue for fuel oil sales when the sale is completed and risk of loss transfers to a third party purchaser. Fuel oil in inventory is stated at year end market prices less transportation costs; the Company recognizes changes in the market value of inventory from one period to the next as oil revenues. Use of Estimates In order to prepare these financial statements in conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities, as well as reserve information, which affects the depletion calculation. Actual results could differ from those estimates. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current presentation. 3. ACQUISITIONS In April 1998, the Company acquired a third party's interest in the Yombo field in the Republic of Congo, West Africa ("Congo") for $7.8 million. Such acquisition added 3.4 million barrels of oil equivalent to the Company's reserve base and increased the Company's net working interest in the Congo from 43.75% to 50.0%. In July 1996, the Company completed the acquisition of certain East Texas oil and gas properties for a net purchase price of $9.3 million in cash. The acquisition of these properties was effective as of December 1, 1995, and the purchase price was reduced by the net cash flows from production between such date and closing. In December 1996, the holders of the preferential rights on these properties exercised such rights for a cash payment of $8.0 million, acquiring properties constituting approximately half of the estimated proved reserves related to this acquisition. In April 1996, the Company consummated the acquisition of (i) certain upstream oil and gas properties located onshore and offshore California ("Unocal Properties") of Union Oil Company of California ("Unocal") for an adjusted purchase price of $490.2 million in cash plus a contingent payment based on future realized oil prices, and (ii) certain California oil properties ("Point F-20 150 Pedernales Properties", and together with the Unocal Properties, the "California Properties") from Torch Energy Advisors Incorporated ("Torch") and certain of its wholly-owned subsidiaries for a net adjusted purchase price of $35.7 million in Common Stock of the Company. The acquisition of the California Properties was effective as of October 1, 1995, and the purchase price was reduced by the net cash flows from production between such date and closing. The acquisition was recorded using the purchase method, effective April 1, 1996 for accounting purposes. 4. DIVESTITURES On January 6, 1999, the Company completed the sale of its East Texas natural gas assets to an affiliate of Samson Resources Company for an adjusted purchase price of $192.0 million. Of the proceeds, $100.0 million was set aside to fund an escrow account to provide "like-kind exchange" tax treatment in the event the Company acquires domestic producing oil and gas properties in the first half of 1999. The remainder of the proceeds were used to repay outstanding senior bank debt. A $5.2 million gain on settled hedge transactions was realized in connection with the closing of this sale in 1999. The effective date of the sale is July 1, 1998. The Company reclassified these assets to assets held for sale and discontinued depleting these assets during the third quarter of 1998. Estimated net proved reserves associated with these properties totaled approximately 329.0 billion cubic feet of natural gas equivalent at January 1, 1999. The following condensed balance sheet reflects the pro forma effects of the sale of the East Texas assets: CONDENSED BALANCE SHEET
PRO FORMA DECEMBER 31, ADJUSTMENTS DECEMBER 31, 1998 (SALE OF E. TX) 1998 ----------- --------------- ----------- (UNAUDITED) (UNAUDITED) ASSETS: Current assets ............................ $ 161,252 $ (10,055) $ 151,197 Net property and equipment ................ 616,572 -- 616,572 Deferred tax assets, net .................. 27,534 (15,222) 12,312 Other assets .............................. 12,327 -- 12,327 --------- --------- --------- $ 817,685 $ (25,277) $ 792,408 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities ....................... $ 49,623 $ (9,530) $ 40,093 Long-term debt ............................ 419,150 (82,633) 336,517 Deferred tax liabilities .................. -- -- -- Deferred revenue .......................... -- -- -- Other long-term liabilities ............... 2,034 -- 2,034 TECONS .................................... 115,000 -- 115,000 Stockholders' equity ...................... 231,878 66,886 298,764 --------- --------- --------- $ 817,685 $ (25,277) $ 792,408 ========= ========= =========
During the third quarter of 1998, the Company sold its interest in the Sansinena field in California, and recorded a gain on the sale of $4.1 Million. During the first quarter of 1998, the Company sold its interest in the Coke Field in Chapel Hill, Texas, and recorded a $1.7 Million gain on this sale. In december 1997, the Company announced its intention to dispose of the remainder of its non- core gas gathering, pipeline and storage assets during 1998. Such assets include: the Company's 48.5% interest in the Richfield Gas Storage facility, which was sold in February 1998 at its F-21 151 approximate carrying value; an 80% interest in Bright Star Gathering, Inc., which was sold in July 1998 at its approximate carrying value; and the Illini pipeline. The Company recorded a non-cash, pre-tax charge to fourth quarter 1997 earnings of $23.9 million, reflecting the estimated loss on the disposition of these assets. A positive revision to this charge was made in the fourth quarter of 1998 in the amount of $3.7 Million to reflect the estimated current fair value of the Illini pipeline. The Company entered into a sale agreement during 1998 to sell the Illini pipeline to a third party. Such sale is currently pending and awaiting regulatory approval. The Company's results of operations for the year ended December 31, 1998, included the operating results from these assets through the disposition date, as applicable; however, these assets were not depreciated during 1998. The Company will retain its California gas plants, as these plants are strategic assets for the Company's oil and gas activities in California. In May 1997, Nuevo Liquids, a wholly-owned subsidiary of the Company, sold its 95% interest in the Nustar Joint Venture, which held the Company's investment in the Benedum Plant System, for proceeds of $25.0 million. The effective date of the sale was January 1, 1997. Proceeds from the sale were used to reduce outstanding debt under the Company's revolving credit facility, as well as project debt related to the Benedum Gas Plant in the amount of $5.9 Million. The Company recorded a pre-tax gain of $2.3 million relating to the sale. During the first quarter of 1997, the Company sold its interest in the Second Bayou Field in Cameron Parish, Louisiana and recorded a gain of $1.4 million. During the third quarter of 1997, the Company recognized a loss of $1.6 million on the sale of South Timbalier Block 8. In addition, the Company disposed of several non-core properties at a combined net loss of $679,000. In June 1996, the Company sold 177 producing wells and the majority of its acreage in the Giddings field and East Texas Austin Chalk holdings for $27.3 million recognizing a gain of $9.2 million. The Company retained ownership of seven wells and surrounding acreage in the Turkey Creek prospect area of the Austin Chalk trend. The Company also sold several non-core properties at a combined loss of $3.2 million. 5. PRODUCTION PAYMENTS In April 1994, the Company entered into a four-year commitment for a $30.0 million volumetric production payment for the development of certain infill drilling locations in the Oak Hill field in East Texas. The proceeds from this agreement financed the capital expenditures for well drilling, fracturing and completing and for surface facility installations. Each advance under the production payment obligates the Company to deliver a fixed volume of natural gas, based upon prevailing market conditions at the time of the advance. During 1994, the Company received $18.4 million, committing the Company to deliver 10.7 BCF of natural gas through December 1998. As of December 31, 1998, the Company had fulfilled its obligation under this commitment. The cash advances were reflected as deferred revenues on the Company's December 31, 1997 consolidated balance sheet and were amortized into revenue as the natural gas volumes were delivered. No such advances were received in 1998, 1997 or 1996. 6. OUTSOURCING SERVICES Torch, the Company's outside service provider, is primarily in the business of providing management and advisory services relating to oil and gas assets for institutional and public investors and maintains a large technical, operating, accounting and administrative staff. F-22 152 In early 1999, Nuevo signed new outsourcing agreements with Torch and its subsidiaries, effective January 1, 1999, to provide the following services: (i) oil and gas administration (accounting, information technology and land administration); (ii) human resources; (iii) corporate administration (legal, graphics, support, and corporate insurance); (iv) crude oil marketing; (v) natural gas marketing; (vi) land leasing, and (vii) field operations. Each of the new agreements is stand alone, with different terms ranging from one to five years. In addition, the Company executed a Master Services Agreement with Torch, which contains all the overall terms and conditions governing each individual service agreement. Several functions, such as mergers and acquisitions and internal audit, will be brought in-house. The Company is still in the process of finalizing the field operations agreement with Torch, but anticipates signing this agreement in late March 1999. Prior to January 1, 1999, the Company's outsourcing services were governed by an agreement with Torch (the "Torch Agreement") whereby Torch administered certain business activities of the Company for a monthly fee. The Torch Agreement required Torch to administer the business activities of the Company for a monthly fee equal to the sum of one-twelfth of 2% on the first $250 million of assets and one-twelfth of 1% on assets in excess of $250 million, excluding certain gas plant facilities and cash, plus 2% of monthly operating cash flows (as defined) during the period in which the services were rendered. In addition, the Torch Agreement contained a provision whereby 20% of the overhead fees on Torch operated properties were credited against the monthly fee paid to Torch, as well as a provision whereby the monthly fee was credited for one-twelfth of $900,000. For the years ended December 31, 1998, 1997 and 1996, outsourcing fees paid to Torch amounted to $9.5 million, $12.0 million and $10.2 million, respectively. A subsidiary of Torch markets oil, natural gas and natural gas liquids from certain oil and gas properties and gas plants in which the Company owns an interest. In 1998, 1997 and 1996, such marketing fees were $2.0 million, $2.9 million and $2.8 million, respectively. Torch operates certain oil and gas interests owned by the Company. The Company is charged, on the same basis as other third parties, for all customary expenses and cost reimbursements associated with these activities. Operator's fees charged for these activities for the years ended December 31, 1998, 1997 and 1996, was $25.5 million, $24.8 million and $8.8 million, respectively. In consideration of the services rendered by Torch in connection with the origination of the 1996 acquisition of the Unocal Properties, the Company agreed to pay Torch $10.0 million in twelve equal monthly installments after the closing of the acquisition. 7. RELATED PARTY TRANSACTIONS A broker's fee of 30,000 warrants was granted to a company, of which a director of the Company is a partner, for services associated with the acquisition of the Unocal Properties. These warrants were exercised in the first quarter of 1997. Included in general and administrative expenses for 1997 was a $1.7 million severance payment to the Company's former President and Chief Executive Officer. F-23 153 8. STOCKHOLDERS' EQUITY Common and Preferred Stock The Certificate of Incorporation of the Company authorizes the issuance of up to 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, the terms, preferences, rights and restrictions of which are established by the Board of Directors of the Company. All shares of Common Stock have equal voting rights of one vote per share on all matters to be voted upon by stockholders. Cumulative voting for the election of directors is not permitted. Certain restrictions contained in the Company's loan agreements limit the amount of dividends that may be declared. Under the terms of the most restrictive indenture of the 87/8% Senior Subordinated Notes and the 9 1/2% Senior Subordinated Notes described in Note 10, the Company and its restricted subsidiaries had no funds available for the payment of dividends at December 31, 1998. However, the Company had unrestricted liquidity available through its unrestricted subsidiaries at December 31, 1998. On December 23, 1996, the Company and United Investors Management Company ("United") and The 1818 Fund, L.P. ("The 1818 Fund") closed the offering of 2,138,605 shares of Common Stock (the "Shares"). United sold 1,275,000 shares and The 1818 Fund sold 863,605 shares. The price to the public of the Shares was $47.50 per share. All of the Shares sold by United were outstanding and 112 of the Shares sold by The 1818 Fund were outstanding prior to the offering. The remaining 863,493 of the Shares sold by The 1818 Fund were issued upon conversion of the remaining 11,220 shares of 7% Preferred Stock of the Company. The Company did not receive any proceeds from the issuance of these shares. As a result of this conversion by The 1818 Fund of its shares of 7% Preferred Stock, there are no longer any shares of the 7% Preferred Stock outstanding. During April 1996, the Company partially financed the acquisition of the Unocal Properties with the proceeds from the sale to the public of 5,109,200 shares of Common Stock (the "Common Stock Offering"). The purchase of the Point Pedernales Properties was financed by the issuance to Torch of 1,275,000 shares of the Company's Common Stock valued at the public offering price of $28.00 per share in the Common Stock Offering. F-24 154 EPS Computation SFAS No. 128, "Earnings per Share", requires a reconciliation of the numerator (income) and denominator (shares) of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In 1998 and 1997, weighted average potential dilutive common shares of 331,000 and 670,000 are not included in the calculation of diluted loss per share due to their anti-dilutive effect. The Company's reconciliation is as follows (amounts in thousands):
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1998 1997* 1996* ---------------------- ---------------------- --------------------- LOSS SHARES LOSS SHARES INCOME SHARES -------- ------ -------- ------ -------- ------ (Loss) income before extraordinary item ................... $(94,272) $(10,676) $ 34,278 Less: Dividends on Preferred Stock ................................ -- -- (939) -------- -------- -------- (Loss) earnings before extraordinary item per Common share-- Basic ................. (94,272) 19,795 (10,676) 19,796 33,339 16,755 Effect of dilutive securities: Convertible Preferred Stock ................................ -- -- -- -- 939 -- Stock options .......................... -- -- -- -- -- 1,841 -------- ------ -------- ------ -------- ------ (Loss) earnings before extraordinary item per Common share--Diluted ................ $(94,272) 19,795 $(10,676) 19,796 $ 34,278 18,596 ======== ====== ======== ====== ======== ======
- --------------- * Restated Treasury Stock Repurchases In March 1997, the Board of Directors of the Company authorized the open market repurchase of up to one million shares of outstanding Common Stock during 1997, at times and prices deemed attractive by management. During April 1997, the Company repurchased 500,000 shares of Common Stock in open market transactions, at an average purchase price of $38.94 per share, plus 42,491 shares acquired from the cancellation of warrants issued during 1996. In December 1997, the Board of Directors authorized the open market repurchase of an additional 500,000 shares of Common Stock during 1998, however, no such repurchase occurred during 1998. Put Options In May 1997, the Company sold put options on its Common Stock to a third party. The options gave the purchaser the right to sell to the Company 500,000 shares of its Common Stock at prices ranging from $40.26 to $41.04 per share through December 31, 1997. The contract gave the Company the choice of net cash, net shares, or physical settlement. Any repurchased shares would have been treated as Treasury Stock. The Company generated $1.6 million in option premium from these transactions, which is reflected in additional paid-in capital on the balance sheet. As of December 31, 1997, 400,000 of these options had expired with the Company's share prices above the strike price, and 100,000 of these options were settled on December 31, 1997, for a nominal amount of net cash. F-25 155 Shareholder Rights Plan In March 1997, the Company adopted a Shareholder Rights Plan to protect the Company's shareholders from coercive or unfair takeover tactics. Under the Shareholder Rights Plan, each outstanding share and each share of subsequently issued Common Stock has attached to it one Right. Generally, in the event a person or group ("Acquiring Person") acquires or announces an intention to acquire beneficial ownership of 15% or more of the outstanding shares of Common Stock without the prior consent of the Company, or the Company is acquired in a merger or other business combination, or 50% or more of its assets or earning power is sold, each holder of a Right will have the right to receive, upon exercise of the Right, that number of shares of common stock of the acquiring company, which at the time of such transaction will have a market price of two times the exercise price of the Right. The Company may redeem the Right for $.01 at any time before a person or group becomes an Acquiring Person without prior approval. The Rights will expire on March 21, 2007, subject to earlier redemption by the Board of Directors of the Company. Executive Compensation Plan During July 1997, the Board of Directors of the Company adopted a plan to encourage senior executives to personally invest in the shares of the Company, and to regularly review executives' ownership versus targeted ownership objectives. These incentives include a deferred compensation plan (the "Plan") that gives key executives the ability to defer all or a portion of their salaries and bonuses and invest in Common Stock of the Company at a discount to market prices or make other investments at the employee's discretion. Stock acquired at a discount will be held in a benefit trust and restricted for a two- year period. The stock held in the benefit trust is accounted for as a liability of the Company and is marked-to-market, with any necessary adjustment to general and administrative expense. The Company recorded a benefit related to deferred compensation of $0.6 million in 1998 and an expense of $0.8 million in 1997. The Plan does not permit investment in a diversified equity portfolio until and unless targeted levels of Common Stock ownership in the Company are achieved and maintained. Target levels of ownership are based on multiples of base salary and are administered by the Compensation Committee of the Board of Directors. The Plan applies to all executives at a level of Vice-President and above. Stock Incentive Plan In 1990, the Company established its 1990 Stock Option Plan ("Stock Option Plan"), with respect to its Common Stock, and in 1993, the Board of Directors adopted the Nuevo Energy Company 1993 Stock Incentive Plan ("Stock Incentive Plan"). The purpose of the Stock Option Plan and the Stock Incentive Plan is to provide directors and key employees of the Company and its subsidiaries performance incentives and to provide a means of encouraging stock ownership in the Company by such persons. The maximum number of shares subject to options under the Stock Incentive Plan is 2,500,000 shares. Options are granted under the Stock Incentive Plan on the basis of the optionee's contribution to the Company. No option may exceed a term of more than ten years. Options granted under the Stock Incentive Plan may be either incentive stock options or options that do not qualify as incentive stock options. The Company's compensation committee is authorized to designate the recipients of options, the dates of grants, the number of shares subject to options, the option price, the terms of payment upon exercise of the options, and the time during which the options may be exercised. Options granted are exercisable, in full, six months following the date of the grant. F-26 156 A summary of activity in the stock option plans during the three years ended 1998 is set forth below:
WEIGHTED- AVERAGE OPTIONS EXERCISE PRICE --------- -------------- Outstanding at January 1, 1996 ............................. 1,835,837 $17.97 Granted .................................................. 518,100 $38.10 Exercised ................................................ (587,799) $17.03 --------- Outstanding at December 31, 1996 ........................... 1,766,138 $24.24 Granted .................................................. 652,875 $41.89 Exercised ................................................ (328,550) $18.59 Canceled ................................................. (1,000) $47.88 --------- Outstanding at December 31, 1997 ........................... 2,089,463 $30.61 Granted .................................................. 1,124,800* $16.27 Exercised ................................................ (70,925) $18.35 Canceled ................................................. (466,975)* $36.19 --------- Outstanding at December 31, 1998 ........................... 2,676,363 $23.94 =========
- ------------ * Reflects the cancellation and re-issuance of 401,850 non-executive employee stock options on December 14, 1998. The Company had 1,756,263 options and 1,493,088 options exercisable at December 31, 1998 and 1997, respectively. Detail of stock options outstanding and options exercisable at December 31, 1998 follows:
OUTSTANDING EXERCISABLE ------------------------------------ --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE - ------------------------------ --------- ------------ --------- --------- --------- $11.00 to $12.38 ............. 738,934 9.54 $ 11.18 43,334 $ 11.64 $16.13 to $22.13 ............. 1,046,429 4.84 $ 19.52 821,929 $ 19.21 $29.00 to $39.93 ............. 322,000 6.46 $ 32.73 322,000 $ 32.73 $41.50 to $47.88 ............. 569,000 7.83 $ 43.70 569,000 $ 43.70 --------- --------- Total .............. 2,676,363 1,756,263 ========= =========
F-27 157 The weighted-average fair value of options granted during 1998, 1997 and 1996, was $7.55, $12.89 and $11.52, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected stock price volatility of 50.9% in 1998, 35.2% in 1997 and 33.6% in 1996; risk free interest of 5% in 1998, 5.75% in 1997, and 6% in 1996, and average expected option lives of 3 years. Had compensation expense for stock-based compensation been determined based on the fair value at the date of grant, the Company's net income, earnings available to Common Stockholders and earnings per share would have been reduced to the pro forma amounts indicated below (amounts in thousands, except per share data):
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1997* 1996* ----------- ----------- ----------- Net (loss) income ..................................... As reported $ (94,272) $ (13,700) $ 34,278 Pro forma $ (103,434) $ (16,315) $ 32,028 Net (loss) income available to Common Stockholders ........................................ As reported $ (94,272) $ (13,700) $ 33,339 Pro forma $ (103,434) $ (16,315) $ 31,089 (Loss) earnings per Common share -- Basic ............................................... As reported $ (4.76) $ (0.69) $ 1.99 Pro forma $ (5.23) $ (0.82) $ 1.86 (Loss) earnings per Common share -- Diluted ............................................. As reported $ (4.76) $ (0.69) $ 1.84 Pro forma $ (5.23) $ (0.82) $ 1.72
- ---------------- * Restated 9. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF NUEVO FINANCING I On December 23, 1996, the Company and Nuevo Financing I, a statutory business trust formed under the laws of the state of Delaware, (the "Trust"), closed the offering of 2,300,000 Term Convertible Securities, Series A, ("TECONS") on behalf of the Trust. The price to the public of the TECONS was $50.00 per TECONS. Distributions on the TECONS began to accumulate from December 23, 1996, and are payable quarterly on March 15, June 15, September 15, and December 15, at an annual rate of $2.875 per TECONS. Each TECONS is convertible at any time prior to the close of business on December 15, 2026, at the option of the holder into shares of Common Stock at the rate of .8421 shares of Common Stock for each TECONS, subject to adjustment. The sole asset of the Trust as the obligor on the TECONS is $115.0 million aggregate principal amount of 5.75% Convertible Subordinated Debentures of the Company due December 15, 2026. F-28 158 10. LONG-TERM DEBT Long-term debt is comprised of the following at December 31, 1998 and 1997 (amounts in thousands):
1998 1997 --------- --------- 8 7/8% Senior Subordinated Notes, net of discount (a) .......... $ 100,000 $ -- 9 1/2% Senior Subordinated Notes (b) ............................ 160,000 160,000 OPIC credit facility (at 5.55% and 6.04% at December 31, 1998 and 1997, respectively, plus a guaranty fee of 2.75%) (c) ........................................................... 3,902 7,605 Bank credit facility (at 5.94% and 6.125%) at December 31, 1998 and 1997)(d) ............................................. 158,400 142,000 Other ........................................................... -- 51 --------- --------- Total debt ............................................ 422,302 309,656 Less current maturities ......................................... (3,152) (3,716) --------- --------- Long-term debt .................................................. $ 419,150 $ 305,940 ========= =========
- ---------- (a) In June 1998, the Company issued $100.0 million, 8 7/8% Senior Subordinated Notes due June 1, 2008 (the "8 7/8% Notes"). Interest on the 8 7/8% Notes accrues at the rate of 8 7/8% per annum and is payable semi-annually in arrears on June 1 and December 1. The 8 7/8% Notes are redeemable, in whole or in part, at the option of the Company, on or after June 1, 2003, under certain conditions. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 8 7/8% Notes. The indenture contains covenants that, among other things, limit the Company's ability to incur additional indebtedness, limits restricted payments, limit issuances and sales of capital stock by restricted subsidiaries, limit dispositions of proceeds of asset sales, limit dividends and other payment restrictions affecting restricted subsidiaries, and restricts mergers, consolidations or sales of assets. The 8 7/8% Notes are guaranteed by certain of Nuevo's subsidiaries. The 8 7/8% Notes are unsecured general obligations of the Company, and are subordinated in right of payment to all existing and future senior indebtedness of the Company. In the event of a defined change in control, the Company will be required to make an offer to repurchase all outstanding 8 7/8% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. (b) In April 1996, the Company financed a portion of the purchase price of the Unocal Properties with proceeds from the sale to the public of a principal amount of $160.0 million, 9 1/2% Senior Subordinated Notes due April 15, 2006 (the "9 1/2% Notes"). Interest on the 9 1/2% Notes accrues at the rate of 9 1/2% per annum and is payable semi-annually in arrears on April 15 and October 15. The 9 1/2% Notes are redeemable, in whole or in part, at the option of the Company, on or after April 15, 2001, under certain conditions. The Company is not required to make mandatory redemption or sinking fund payments with respect to the 9 1/2% Notes. The indenture contains covenants that, among other things, limit the Company's ability to incur additional indebtedness, limits restricted payments, limit issuances and sales of capital stock by restricted subsidiaries, limit dispositions of proceeds of asset sales, limit dividends and other payment restrictions affecting restricted subsidiaries, and restricts mergers, consolidations or sales of assets. The 9 1/2% Notes were guaranteed by certain of Nuevo's subsidiaries until February 1998, at which time such subsidiaries were released as guarantors. The 9 1/2% Notes are unsecured general obligations of the Company, and are subordinated in right of payment to all existing and future senior indebtedness of the Company. In the event of a defined change in control, the Company will be required to make an offer to repurchase all outstanding 9 1/2% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. (c) In February 1995, in connection with the purchase of the stock of Amoco Congo Production Company, the Company negotiated with the Overseas Private Investment Corporation ("OPIC") and an agent bank for a non-recourse credit facility in the amount of $25.0 million. The security for such facility is the assets and stock of the Nuevo Congo Company ("NCC"). The initial drawdown on the facility was $8.8 million to finance a portion of the purchase price. The remaining funds under the credit facility will be used to finance 75% of the development drilling program in the Congo. A portion of the remaining outstanding commitment, $6.0 million, was drawn down in January 1996 to fund the first phase of the development drilling program in the Congo. The interest rate associated with such credit facility is the London Interbank Offered Rate ("LIBOR") plus 20 basis points and a guaranty fee of 2.75% of the outstanding loan balance, payable quarterly. At December 31, 1998, the interest rate was 5.55%, plus the guarantee fee of 2.75%. The loan agreement requires a sixteen-quarter repayment period. F-29 159 (d) Nuevo's Amended and Restated Credit Agreement, (the "Agreement"), dated as of February 13, 1998, provides for unsecured revolving credit availability of up to $400 million (subject to a periodic borrowing base determination) from a bank group led by NationsBank of Texas, N.A. and Morgan Guaranty Trust Company of New York, until its expiration on April 1, 2003. The borrowing base determination establishes the maximum borrowings that may be outstanding under the credit facility, and is determined by a two-thirds vote of the banks (three-fourths in the event of an increase in the borrowing base), each of which bases its judgment on (i) the present value of the Company's oil and gas reserves based on its own assumptions regarding future prices, production, costs, risk factors and discount rates, and (ii) on projected cash flow coverage ratios calculated under varying scenarios. If amounts outstanding under the credit facility exceed the borrowing base, as redetermined from time to time, the Company would be required to repay such excess over a defined period of time. Effective January 6, 1999 the borrowing base was reduced from $380 million to $200 million, reflecting the sale on that date of the Company's East Texas natural gas reserves, and also reflecting a significant decline in projected oil prices since the previous determination. Amounts outstanding under the credit facility bear interest at a rate equal to the London Interbank Offered Rate ("LIBOR") plus an amount which increases as borrowing base utilization increases. At December 31, 1998 the Company's interest rate under the credit facility was LIBOR plus .375%, or 5.94%. Outstandings under this facility at year end were $158.4 million, and at January 6, 1999 were reduced by $82.6 million from a portion of the proceeds of the East Texas sale. The Credit Agreement has customary covenants including, but not limited to, covenants with respect to the following matters: (i) limitations on certain restricted payments and investments; (ii) limitations on guarantees and indebtedness; (iii) limitations on prepayments of subordinated and certain other indebtedness; (iv) limitations on mergers and consolidations, on certain types of acquisitions and on the issuance of certain securities by subsidiaries; (v) limitations on liens; (vi) limitations on sales of properties; (vii) limitations on transactions with affiliates; (viii) limitations on derivative contracts; and (ix) limitations on debt in subsidiaries. The Company is also required to maintain certain financial ratios and conditions, including without limitation an EBITDA (earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses) to fixed charge coverage ratio, a net worth requirement, and a funded debt to capitalization ratio. As a result of reduced revenues due to falling oil prices, the Company has obtained amendments for relief from the EBITDA fixed charge coverage test through March 31, 2000. The Company is in compliance with this test and all other covenants of the Agreement at December 31, 1998. The Company is currently in negotiation with its banks regarding other terms of the Agreement, including pricing, security, the frequency of borrowing base determinations and certain other covenants. Management believes the outcome of such negotiations will result, over time, in improved borrowing base availability and greater certainty of the commitment of this facility during difficult periods in the oil and gas industry. In June 1997, the Company redeemed its 12 1/2% Senior Subordinated Notes at a total cost of $78.0 million, representing $75.0 million face value of the debt plus a 4% premium of $3.0 million. In addition to the premium, the Company wrote off approximately $2.0 million of unamortized discount and deferred financing costs. The redemption resulted in an extraordinary loss on early extinguishment of debt in the amount of $3.0 million, net of the related tax benefit of $2.0 million. The Company used proceeds from its bank facility to fund the redemption. The amount of scheduled debt maturities during the next five years and thereafter is as follows (amounts in thousands): 1999................ $ 3,152 2000................ 750 2001................ -- 2002................ -- 2003................ 158,400 Thereafter.......... 260,000 --------- Total Debt $ 422,302 =========
Based upon the quoted market price, the fair value of the 8 7/8% Notes was estimated to be $90.6 million at December 31, 1998, and the fair value of the 9 1/2% Notes was estimated to be $160.2 million and $170.3 million at December 31, 1998 and 1997, respectively. For the OPIC credit facility and other debt, for which no quoted prices are available, management believes the carrying value of the debt materially represents the fair value of the debt at December 31, 1998 and 1997. F-30 160 11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS NCC is a U.S. corporation with foreign branch operations in the Congo. The functional currency of NCC is the U.S. Dollar and its income is taxed in the United States. The Company's Congo investment involves risks typically associated with investments in emerging markets such as an uncertain political, economic, legal and tax environment, and expropriation and nationalization of assets. The Company's investment is insured through political risk insurance provided by OPIC. The OPIC credit facility, discussed in Note 10, requires the Company to provide consolidating financial statements that separately show NCC. Also shown separately is Nuevo Congo LTD. ("NCL") which is the company that holds Nuevo's additional interest in the Yombo field in the Congo (see Note 3) that was acquired in 1998. These condensed consolidating financial statements are presented below: CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
NUEVO NCC NCL CONSOLIDATED -------- -------- -------- ------------ Total current assets ................... $145,906 $ 12,870 $ 2,476 $161,252 Net property and equipment ............. 568,509 39,112 8,951 616,572 Deferred tax assets, net ............... 27,059 475 -- 27,534 Total other assets ..................... 12,308 19 -- 12,327 -------- -------- -------- -------- Total assets ................. $753,782 $ 52,476 $ 11,427 $817,685 ======== ======== ======== ======== Total current liabilities .............. $ 18,006 $ 31,163 $ 454 $ 49,623 Long-term debt ......................... 418,400 750 -- 419,150 Other long-term liabilities ............ 2,034 -- -- 2,034 Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I .......................... 115,000 -- -- 115,000 Total stockholders' equity ............. 200,342 20,563 10,973 231,878 -------- -------- -------- -------- Total liabilities and stockholders' equity ....... $753,782 $ 52,476 $ 11,427 $817,685 ======== ======== ======== ========
F-31 161 CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
NUEVO* NCC* CONSOLIDATED* --------- --------- ------------- Total current assets ............................. $ 51,318 $ 7,542 $ 58,860 Net property and equipment ....................... 701,000 33,111 734,111 Total other assets ............................... 11,220 95 11,315 --------- --------- --------- Total assets ........................... $ 763,538 $ 40,748 $ 804,286 ========= ========= ========= Total current liabilities ........................ $ 44,177 $ 5,426 $ 49,603 Long-term debt ................................... 302,038 3,902 305,940 Deferred tax liabilities ......................... 4,771 215 4,986 Other long-term liabilities ...................... (5,642) 9,660 4,018 Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I ................ 115,000 -- 115,000 Total stockholders' equity ....................... 303,194 21,545 324,739 --------- --------- --------- Total liabilities and stockholders' equity ............................... $ 763,538 $ 40,748 $ 804,286 ========= ========= =========
- ---------------- * Restated CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
NUEVO NCC NCL CONSOLIDATED --------- --------- --------- ------------ Revenues .......................... $ 236,758 $ 14,607 $ 1,338 $ 252,703 Expenses .......................... 362,103 16,279 1,218 379,600 --------- --------- --------- --------- (Loss) income before income taxes ........................... (125,345) (1,672) 120 (126,897) Income tax benefit ................ (31,935) (690) -- (32,625) --------- --------- --------- --------- Net (loss) income ................. $ (93,410) $ (982) $ 120 $ (94,272) ========= ========= ========= =========
F-32 162 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
NUEVO* NCC* CONSOLIDATED* --------- --------- ------------- Revenues .............................................. $ 334,446 $ 22,832 $ 357,278 Expenses .............................................. 358,079 16,531 374,610 --------- --------- --------- (Loss) income before income taxes and extraordinary item ................................................ (23,633) 6,301 (17,332) Income tax (benefit) expense .......................... (6,883) 227 (6,656) --------- --------- --------- (Loss) income before extraordinary item ............... (16,750) 6,074 (10,676) Extraordinary loss on early extinguishment of debt, net of tax benefit .................................. 3,024 -- 3,024 --------- --------- --------- Net (loss) income ..................................... $ (19,774) $ 6,074 $ (13,700) ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
NUEVO* NCC* CONSOLIDATED* -------- -------- ------------- Revenues ......................................... $308,380 $ 20,677 $329,057 Expenses ......................................... 256,568 14,246 270,814 -------- -------- -------- Income before income taxes ....................... 51,812 6,431 58,243 Income tax expense (benefit) ..................... 23,969 (4) 23,965 -------- -------- -------- Net income ....................................... 27,843 6,435 34,278 Dividends on preferred stock ..................... 939 -- 939 -------- -------- -------- Net earnings available to common stockholders .... $ 26,904 $ 6,435 $ 33,339 ======== ======== ========
- ------------ * Restated F-33 163 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (AMOUNTS IN THOUSANDS)
NUEVO NCC NCL CONSOLIDATED --------- --------- --------- ------------ Cash flows from operating activities: Net (loss) income ................................... $ (93,410) $ (982) $ 120 $ (94,272) Non-cash adjustments ................................ 119,473 4,281 -- 123,754 Change in assets and liabilities .................... (8,015) 14,923 (557) 6,351 --------- --------- --------- --------- Net cash provided by (used in) operating activities .................. 18,048 18,222 (437) 35,833 --------- --------- --------- --------- Cash flows from investing activities: additions to oil and gas properties ................. (137,430) (10,971) (8,951) (157,352) Proceeds from sale of properties .................... 11,830 -- -- 11,830 Additions to other properties and other ............. (2,813) -- -- (2,813) --------- --------- --------- --------- Net cash used in investing activities ....... (128,413) (10,971) (8,951) (148,335) --------- --------- --------- --------- Cash flows from financing activities: proceeds from borrowings ............................ 240,900 -- -- 240,900 Payments of long-term debt .......................... (124,551) (3,703) -- (128,254) Contribution to (from) Nuevo ........................ (10,852) -- 10,852 -- Other ............................................... (1,949) -- -- (1,949) --------- --------- --------- --------- Net cash provided by (used in) financing activities .................. 103,548 (3,703) 10,852 110,697 --------- --------- --------- --------- Net increase (decrease) in cash & cash equivalents ......................................... (6,817) 3,548 1,464 (1,805) Cash and cash equivalents at beginning of year ............................................. 7,417 1,791 -- 9,208 --------- --------- --------- --------- Cash and cash equivalents at end of year ................................................ $ 600 $ 5,339 $ 1,464 $ 7,403 ========= ========= ========= =========
F-34 164 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
NUEVO* NCC* CONSOLIDATED* --------- --------- ------------- Cash flows from operating activities: Net (loss) income ................................... $ (19,774) $ 6,074 $ (13,700) Non-cash adjustments ................................ 155,749 3,612 159,361 Change in assets and liabilities .................... 12,846 6,955 19,801 --------- --------- --------- Net cash provided by operating activities ................................ 148,821 16,641 165,462 --------- --------- --------- Cash flows from investing activities: Additions to oil and gas properties ................. (182,261) (12,847) (195,108) Proceeds from sale of properties .................... 27,377 -- 27,377 Additions to other properties and other ............. (1,747) -- (1,747) --------- --------- --------- Net cash used in investing activities ....... (156,631) (12,847) (169,478) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings ............................ 234,000 -- 234,000 Payments of long-term debt .......................... (213,800) (3,703) (217,503) Other ............................................... (16,909) -- (16,909) --------- --------- --------- Net cash provided by (used in) financing activities ................................ 3,291 (3,703) (412) --------- --------- --------- Net (decrease) increase in cash and cash equivalents ......................................... (4,519) 91 (4,428) Cash and cash equivalents at beginning of year ........ 11,936 1,700 13,636 --------- --------- --------- Cash and cash equivalents at end of year .............. $ 7,417 $ 1,791 $ 9,208 ========= ========= =========
- ---------- * Restated F-35 165 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
NUEVO* NCC* CONSOLIDATED* --------- --------- ------------- Cash flows from operating activities: Net income ............................................... $ 27,843 $ 6,435 $ 34,278 Non-cash adjustments ..................................... 89,792 2,469 92,261 Change in assets and liabilities ......................... (6,483) 6,865 382 --------- --------- --------- Net cash provided by operating activities ........ 111,152 15,769 126,921 --------- --------- --------- Cash flows from investing activities: Additions to oil and gas properties ...................... (496,516) (19,469) (515,985) Proceeds from sale of properties ......................... 42,700 -- 42,700 Additions to other properties and other .................. (72,717) -- (72,717) --------- --------- --------- Net cash used in investing activities ............ (526,533) (19,469) (546,002) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings ................................. 402,000 6,000 408,000 Proceeds from issuance of Company-Obligated Mandatorily Redeemable Convertible Preferred Securities of Nuevo Financing I ....................... 115,000 -- 115,000 Payments of long-term debt ............................... (229,406) (2,953) (232,359) Other .................................................... 136,311 -- 136,311 --------- --------- --------- Net cash provided by financing activities ..................................... 423,905 3,047 426,952 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ....... 8,524 (653) 7,871 Cash and cash equivalents at beginning of year ............. 3,412 2,353 5,765 --------- --------- --------- Cash and cash equivalents at end of year ................... $ 11,936 $ 1,700 $ 13,636 ========= ========= =========
12. INCOME TAXES Income tax (benefit) expense is summarized as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997* 1996* -------- -------- -------- Current Federal ............................................. $ (105) $ (135) $ 1,200 State ............................................... -- 421 300 -------- -------- -------- (105) (556) 1,500 -------- -------- -------- Deferred Federal ............................................. (24,172) (7,449) 17,465 State ............................................... (8,348) (1,800) 5,000 -------- -------- -------- (32,520) (9,249) 22,465 -------- -------- -------- Total income tax (benefit) expense .......... $(32,625) $ (8,693) $ 23,965 ======== ======== ========
- -------------- * Restated A deferred tax benefit related to the exercise of employee stock options of approximately $5.3 million and $4.7 million was allocated directly to additional paid-in capital in 1997 and 1996, respectively. A current tax benefit of $2.0 million was allocated to the extraordinary loss in 1997. F-36 166 Total income tax (benefit) expense differs from the amount computed by applying the Federal income tax rate to (loss) income before income taxes, minority interest and extraordinary item. The reasons for these differences are as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997* 1996* ----- ----- ----- Statutory Federal income tax rate ............................... (35.0)% (35.0)% 35.0% (Decrease) increase in tax rate resulting from: State income taxes, net of Federal benefit .................... (4.3) (4.0) 5.9 Non-realization of tax benefits related to provision for impairment on assets held for sale ......................... -- 3.60 -- Increase in valuation allowance ............................... 13.4 -- -- Nondeductible travel and entertainment and other .............. 0.2 (3.4) 0.4 ------ ------ ------ (25.7)% (38.8)% 41.3% ====== ====== ======
The tax effects of temporary differences that result in significant portions of the deferred income tax assets and liabilities and a description of the financial statement items creating these differences are as follows (amounts in thousands):
AS OF DECEMBER 31, ----------------------- 1998 1997* -------- -------- Net operating loss carryforwards ...................... $ 45,610 $ 10,267 Alternative minimum tax credit carryforwards .......... 1,054 1,337 State income taxes .................................... 1,520 -- Capital loss carryforwards ............................ 2,365 700 -------- -------- Total deferred income tax assets ............ 50,549 12,304 Less: valuation allowance ................... (17,646) (700) -------- -------- Net deferred income tax assets .............. 32,903 11,604 -------- -------- Property and equipment ................................ (5,369) (12,694) State income taxes .................................... -- (3,896) -------- -------- Total deferred income tax liabilities ....... (5,369) (16,590) -------- -------- Net deferred income tax asset (liability) ............. $ 27,534 $ (4,986) ======== ========
- --------------- * Restated At December 31, 1998, the Company had a net operating loss carry forward for regular tax of approximately $130.3 million, which will expire in future years beginning in 2006 through 2012. The alternative minimum tax credit carry forward of $1.1 million does not expire and may be applied to reduce regular income tax to an amount not less than the alternative minimum tax payable in any one year. At December 31, 1998, the Company determined that it was more likely than not that a portion of the deferred tax assets will not be realized and the valuation allowance was increased by $16.9 million to a total valuation allowance of $17.6 million. 13. INDUSTRY SEGMENT INFORMATION As of December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which was issued by the FASB in June 1997. This statement establishes standards for reporting information about operating segments in annual financial statements and requires that enterprises report selected information about operating segments in interim reports. F-37 167 The Company's operations are concentrated primarily in two segments: exploration and production of oil and natural gas, and gas plant and other facilities.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1997* 1996* --------- --------- --------- (AMOUNTS IN THOUSANDS) Sales to unaffiliated customers: Oil and gas -- East ............................ $ 46,885 $ 61,456 $ 74,930 Oil and gas -- West ............................ 177,315 247,723 184,261 Oil and gas -- Foreign ......................... 15,810 22,794 20,668 Gas plant, pipeline and other facilities ....... 5,365 20,598 41,576 --------- --------- --------- Total sales ............................ 245,375 352,571 321,435 Other revenues ....................... 7,328 4,707 7,622 --------- --------- --------- Total revenues ......................... $ 252,703 $ 357,278 $ 329,057 ========= ========= ========= Operating (loss) profit before income taxes: Oil and gas -- East ............................ $ 22,608 $ 24,745 $ 37,659 Oil and gas -- West ............................ (67,677) 40,369 72,049 Oil and gas -- Foreign ......................... (12,849) 6,172 7,247 Gas plant, pipeline and other facilities(2) .... 3,063 (22,478) 2,619 --------- --------- --------- (54,855) 48,808 119,574 Unallocated corporate expenses ................. 32,958 32,170 25,157 Interest expense ............................... 32,471 27,357 36,009 Dividends on TECONS ............................ 6,613 6,613 165 --------- --------- --------- Operating (loss) profit before income taxes .... $(126,897) $ (17,332) $ 58,243 ========= ========= ========= Identifiable assets: Oil and gas -- Domestic(1) ..................... $ 748,695 $ 671,603 $ 682,995 Oil and gas -- Foreign ......................... 40,700 40,139 33,147 Gas plant and other facilities ................. 14,893 17,387 66,329 --------- --------- --------- 804,288 729,129 782,471 Corporate assets and investments ............... 13,397 75,157 35,172 --------- --------- --------- Total .................................. $ 817,685 $ 804,286 $ 817,643 ========= ========= ========= Capital expenditures: Oil and gas -- East ............................ $ 36,597 $ 32,857 $ 37,480 Oil and gas -- West(1) ......................... 96,179 148,927 525,259 Oil and gas -- Foreign ......................... 30,498 14,111 19,607 Gas plant and other facilities ................. 2,813 1,747 2,717 --------- --------- --------- $ 166,087 $ 197,642 $ 585,063 ========= ========= ========= Depreciation, depletion and amortization: Oil and gas -- East ............................ $ 10,391 $ 14,252 $ 24,842 Oil and gas -- West ............................ 68,164 81,011 43,964 Oil and gas -- Foreign ......................... 4,971 3,385 2,473 Gas plant and other facilities ................. 812 2,830 3,812 --------- --------- --------- $ 84,338 $ 101,478 $ 75,091 ========= ========= =========
- --------------- * Restated (1) Identifiable assets and capital expenditures for 1996 include $15.0 million in costs associated with gas plant facilities in California, which processes immaterial amounts of third party gas, and whose revenues from the sale of these liquids are included in oil and gas revenues. F-38 168 (2) Gas plant and other facilities operations for 1998 include a positive revision to a prior period charge of $3.7 million and for 1997 include a charge for $23.9 million to record an impairment on assets held for sale and a $2.3 million gain on sale. See Note 4. In 1998, 1997 and 1996, the Company had one customer that accounted for 60%, 62%, and 52% of oil and gas revenues, respectively. Also in 1998, the Company had another customer who accounted 10% of oil and gas revenues. 14. CONTINGENCIES The Company has been named as a defendant in the lawsuit Gloria Garcia Lopez and Husband, Hector S. Lopez, Individually, and as successors to Galo Land & Cattle Company v. Mobil Producing Texas & New Mexico, et al. currently pending in the 79th Judicial District Court of Brooks County, Texas. The plaintiffs allege: (i) underpayment of royalties and claim damages, on a gross basis against all working interest owners, of $27.7 million plus $26.2 million in interest for the period from 1985 to date; (ii) that their production was improperly commingled with gas produced from an adjoining lease, resulting in damages, including interests of $40.8 million, on a gross basis; (iii) $59.7 million (gross) for alleged failure to develop and $20.0 million (gross) for interest in the alleged failure to develop; and (iv) numerous other claims that may result in unspecified damages. Nuevo's working interest in these properties is 20%. The Company, along with the other defendants in this case, denies these allegations and is vigorously contesting these claims. Management does not believe that the outcome of this matter will have a material adverse impact on the Company's operating results, financial condition or liquidity. The Company has been named as a defendant in certain other lawsuits incidental to its business. Management does not believe that the outcome of such litigation will have a material adverse impact on the Company's operating results or financial condition. However, these actions and claims in the aggregate seek substantial damages against the Company and are subject to the inherent uncertainties in any litigation. The Company is defending itself vigorously in all such matters. In March 1999, the Company discovered that an employee had fraudulently authorized and diverted for personal use Company funds totaling $5.9 million, $4.3 million in 1998 and the remainder in 1999, that were intended for international exploration. Accordingly, the Company has reclassified the amounts lost in 1998 from exploration costs to other expense. Based on its review of the facts, management is confident that only one employee was involved in the matter and that all misappropriated funds have been identified. The Board has engaged a Certified Fraud Examiner to conduct an in-depth review of the fraudulent transactions to determine the scope of the fraud, the possibility of recovery of amounts lost from insurance, from the terminated employee and/or from third parties, and to make recommendations regarding what, if any, new internal control procedures should be implemented. In September 1997, there was a spill of crude oil into the Santa Barbara Channel from a pipeline that connects the Company's Point Pedernales field with shore-based processing facilities. The volume of the spill was estimated to be 163 barrels of oil. Torch, which operates the platform and pipeline for the Company, responded immediately by shutting down the pipeline and notified the National Response Center and all appropriate Federal, state, and local authorities, as well as petroleum industry environmental response consortia. The costs of the clean up and the repair either have been or are expected to be covered by insurance held by the Company, less the Company's deductibles of $120,000 net to the Company. Repairs were completed by the end of 1997, and production recommenced in December 1997. Additionally, the Company has exposure to certain costs that may not be recoverable by insurance, including fines, penalties, and damages. Such costs are not quantifiable at this time, but are not expected to be material to the Company's operating results, financial condition or liquidity. The Company's international investments involve risks typically associated with investments in emerging markets such as an uncertain political, economic, legal and tax environment and expropriation and nationalization of assets. In addition, if a dispute arises in its foreign operations, the Company may be subject to the exclusive F-39 169 jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the United States. The Company attempts to conduct its business and financial affairs so as to protect against political and economic risks applicable to operations in the various countries where it operates, but there can be no assurance that the Company will be successful in so protecting itself. A portion of the Company's investment in the Congo is insured through political risk insurance provided by OPIC. The Company and its partners in the Congo are undergoing a tax examination related to their ownership interests in the Yombo field offshore Republic of Congo, for the years 1994 through 1997. The Congolese taxing authorities have issued a preliminary assessment of approximately $24.0 million in taxes and penalties for all years, in aggregate for all parties who have ownership in this field. Nuevo's working interest in this field is 43.75% during the years under examination. The Company, along with the other partners, is in discussions with the Congolese taxing authorities refuting this assessment as without merit to the items being disallowed. Management does not believe that the outcome of this matter will have a material adverse effect upon the Company. In connection with their respective acquisitions of two subsidiaries (each a "Congo subsidiary") owning interests in the Yombo field offshore West Africa, the Company and a wholly-owned subsidiary of CMS NOMECO Oil & Gas Co. ("CMS") agreed with the seller of the subsidiaries not to claim certain tax losses ("dual consolidated losses") incurred by such subsidiaries prior to the acquisitions. Pursuant to the agreement, the Company and CMS may be liable to the seller for the recapture of dual consolidated losses utilized by the seller in years prior to the acquisitions if certain triggering events occur, including (i) a disposition by either the Company or CMS of its respective Congo subsidiary, (ii) either Congo subsidiary's sale of its interest in the Yombo field, (iii) the acquisition of the Company or CMS by another consolidated group or (iv) the failure of the Company or CMS's Congo subsidiary to continue as a member of its respective consolidated group. A triggering event will not occur, however, if a subsequent purchaser enters into certain agreements specified in the consolidated return regulations intended to ensure that such dual consolidated losses will not be claimed. The Company and CMS have agreed among themselves that the party responsible for the triggering event shall indemnify the other for any liability to the seller as a result of such triggering event. The Company's potential direct liability could be as much as $50.0 million if a triggering event with respect to the Company occurs, and the Company believes that CMS's liability (for which the Company would be jointly liable with an indemnification right against CMS) could be as much as $67.0 million. The Company does not expect a triggering event to occur with respect to it or CMS and does not believe the agreement will have a material adverse effect upon the Company. During 1997, a new government was established in the Congo. Although the political situation in the Congo has not to date had a material adverse effect on the Company's operations in the Congo, no assurances can be made that continued political unrest in West Africa will not have a material adverse effect on the Company and its operations in the Congo in the future. 15. FINANCIAL INSTRUMENTS The Company periodically uses derivative financial instruments to manage oil and natural gas price risk. For 1999, the Company entered into swap agreements on 4,500 barrels of oil per day ("BOPD") of its Congo production, hedging the basis differential between No. 6 fuel oil and West Texas Intermediate ("WTI") at an average differential of $2.28. The Company also purchased a call option on 2,000 BOPD of its Congo production at a strike price of $16.00 per barrel of oil ("BBL"), to hedge the Company's potential liability under a price sharing agreement with a third party. These agreements expose the Company to counterparty credit risk to the extent that the counterparty is unable to meet its settlement commitments to the Company. For 1999, the Company has entered into an agreement under which a portion of the its fixed rate debt will be converted to floating rate debt. This agreement is not held for trading purposes. As the swap provider is a major financial institution, the Company does not anticipate non-performance by the provider. F-40 170 Determination of Fair Values of Financial Instruments Fair value for cash, short-term investments, receivables and payables approximates carrying value. The following table details the carrying values and approximate fair values of the Company's other investments, derivative financial instruments and long-term debt at December 31, 1998 and 1997.
DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------------- -------------------------- APPROXIMATE APPROXIMATE CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ----------- -------------- ----------- (AMOUNTS IN THOUSANDS) Other investments ........................... $ 80 $ 80 $ 434 $ 553 Derivative Instruments: Option premium ............................ 292 241 -- -- Commodity price swaps ..................... -- (2,636) -- 506 Long-term debt (See Note 10) ............... 419,150 409,938 305,940 316,228 TECONS ...................................... 115,000 71,875 115,000 112,700
16. SUPPLEMENTAL INFORMATION -- (UNAUDITED) Oil and Gas Producing Activities: Included herein is information with respect to oil and gas acquisition, exploration, development and production activities, which is based on estimates of year-end oil and gas reserve quantities and estimates of future development costs and production schedules. Reserve quantities and future production as of December 31, 1998 are based primarily on reserve reports prepared by the independent petroleum engineering firm of Ryder Scott Company. Reserve quantities and future production for previous years are based primarily upon reserve reports prepared by Ryder Scott Company and the independent petroleum firm of Poco Oil Company. These estimates are inherently imprecise and subject to substantial revision. Estimates of future net cash flows from proved reserves of gas, oil, condensate and natural gas liquids ("NGL") were made in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing Activities". The estimates are based on realized prices at year-end, of $8.03 per BBL and $1.79 per thousand cubic feet of gas ("MCF"). Estimated future cash inflows are reduced by estimated future development and production costs based on year-end cost levels, assuming continuation of existing economic conditions, and by estimated future income tax expense. Tax expense is calculated by applying the existing statutory tax rates, including any known future changes, to the pre-tax net cash flows, less depreciation of the tax basis of the properties and depletion allowances applicable to the gas, oil, condensate and NGL production. Because the disclosure requirements are standardized, significant changes can occur in these estimates based upon oil and gas prices currently in effect. The results of these disclosures should not be construed to represent the fair market value of the Company's oil and gas properties. A market value determination would include many additional factors including: (i) anticipated future increases or decreases in oil and gas prices and production and development costs; (ii) an allowance for return on investment; (iii) the value of additional reserves, not considered proved at the present, which may be recovered as a result of further exploration and development activities; and (iv) other business risks. The following tables include the Company's East Texas natural gas assets, which were sold on January 6, 1999 (see Note 4). Such assets accounted for 54.9 MBOE, or 21%, of the Company's December 31, 1998 net proved reserve estimates. F-41 171 Costs incurred (amounts in thousands) -- The following table sets forth the costs incurred in property acquisition and development activities:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997* 1996* -------- -------- -------- DOMESTIC Property acquisition: Proved properties(2) ....... $ 200 $ 10,206 $452,603 Unproved properties ........ 1,320 -- 40,000 Exploration .................. 26,706 18,474 7,289 Development(1) ............... 104,550 153,104 62,847 -------- -------- -------- $132,776 $181,784 $562,739 ======== ======== ======== FOREIGN Property acquisition: Proved properties .......... $ 7,809 $ -- $ -- Unproved properties ........ 1,404 -- -- Exploration .................. 9,204 10,887 8,844 Development .................. 12,081 3,224 10,763 -------- -------- -------- $ 30,498 $ 14,111 $ 19,607 ======== ======== ======== TOTAL Property acquisition: Proved properties .......... $ 8,009 $ 10,206 $452,603 Unproved properties ........ 2,724 -- 40,000 Exploration .................. 35,910 29,361 16,133 Development .................. 116,631 156,328 73,610 -------- -------- -------- $163,274 $195,895 $582,346 ======== ======== ========
- -------------- * Restated (1) Includes capitalized interest directly related to development activities of $0.6 million in 1998 and $2.4 million in 1997. (2) The acquisition of domestic proved properties for 1996 includes $15.0 million in costs associated with gas plant facilities in California. F-42 172 Capitalized costs (amounts in thousands) -- The following table sets forth the capitalized costs relating to oil and gas activities and the associated accumulated depreciation, depletion and amortization:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997* 1996* --------- --------- --------- Domestic Proved properties ................................ $ 877,230 $ 903,096 $ 739,260 Unproved properties .............................. 20,984 41,661 44,661 --------- --------- --------- Total capitalized costs ........................ 898,214 944,757 783,921 Accumulated depreciation, depletion and amortization ................................ (401,139) (315,038) (198,024) --------- --------- --------- Net capitalized costs .......................... $ 497,075 $ 629,719 $ 585,897 ========= ========= ========= FOREIGN Proved properties ................................ $ 59,774 $ 39,516 $ 26,677 Unproved properties .............................. 1,360 -- -- --------- --------- --------- Total capitalized costs ........................ 61,134 39,516 26,677 Accumulated depreciation, depletion and amortization ................................ (11,724) (6,378) (2,993) --------- --------- --------- Net capitalized costs .......................... $ 49,410 $ 33,138 $ 23,684 ========= ========= ========= TOTAL Proved properties ................................ $ 937,004 $ 942,612 $ 765,937 Unproved properties .............................. 22,344 41,661 44,661 --------- --------- --------- Total capitalized costs ........................ 959,348 984,273 810,598 Accumulated depreciation, depletion and amortization ................................ (412,863) (321,416) (201,017) --------- --------- --------- Net capitalized costs .......................... $ 546,485 $ 662,857 $ 609,581 ========= ========= =========
- ------------ * Restated F-43 173 Results of operations for producing activities (amounts in thousands) --
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997* 1996* --------- --------- --------- DOMESTIC Revenues from oil and gas producing activities ........ $ 224,200 $ 309,179 $ 259,191 Production costs ...................................... (122,816) (108,074) (82,119) Exploration costs ..................................... (5,137) (9,813) (4,566) Depreciation, depletion and amortization .............. (78,555) (95,263) (68,806) Provision for impairment of oil and gas properties .......................................... (68,529) (30,000) -- Income tax benefit (provision) ........................ 13,234 (26,449) (42,828) --------- --------- --------- Results of operations from producing activities (excluding corporate overhead and interest costs) .............................................. $ (37,603) $ 39,580 $ 60,872 ========= ========= ========= FOREIGN Revenues from oil and gas producing activities ........ $ 15,810 $ 22,794 $ 20,668 Production costs ...................................... (11,888) (11,968) (10,943) Exploration costs ..................................... (11,425) (1,269) (5) Depreciation, depletion and amortization .............. (4,971) (3,385) (2,473) Provision for impairment of oil and gas properties .......................................... (375) -- -- Income tax benefit (provision) ........................ 3,174 (2,469) (2,993) --------- --------- --------- Results of operations from producing activities (excluding corporate overhead and interest costs) .............................................. $ (9,675) $ 3,703 $ 4,254 ========= ========= ========= TOTAL Revenues from oil and gas producing activities ........ $ 240,010 $ 331,973 $ 279,859 Production costs ...................................... (134,704) (120,042) (93,062) Exploration costs ..................................... (16,562) (11,082) (4,571) Depreciation, depletion and amortization .............. (83,526) (98,648) (71,279) Provision for impairment of oil and gas properties .......................................... (68,904) (30,000) -- Income tax benefit (provision) ........................ 16,408 (28,918) (45,821) --------- --------- --------- Results of operations from producing activities (excluding corporate overhead and interest costs) .............................................. $ (47,278) $ 43,283 $ 65,126 ========= ========= =========
- ----------- * Restated F-44 174 Per unit sales prices and costs:
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- DOMESTIC Average sales price: Oil (per barrel) ......................................... $ 9.10 $ 14.88 $ 15.99 Gas (per MCF) ............................................ $ 2.00 $ 2.06 $ 2.08 Average production cost per equivalent barrel .............. $ 5.33 $ 4.96 $ 4.63 FOREIGN Average sales price: Oil (per barrel) ......................................... $ 10.82 $ 14.66 $ 14.56 Average production cost per equivalent barrel ............ $ 8.14 $ 7.70 $ 7.71 TOTAL Average sales price: Oil (per barrel) ......................................... $ 9.25 $ 14.86 $ 15.84 Gas (per MCF) ............................................ $ 2.00 $ 2.06 $ 2.08 Average production cost per equivalent barrel .............. $ 5.56 $ 5.14 $ 4.86
F-45 175 The Company's estimated total proved and proved developed reserves of oil and gas are as follows:
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- OIL* GAS OIL* GAS OIL* GAS (MBbl) (MMcf) (MBbl) (MMcf) (MBbl) (MMcf) ------- ------- ------- ------- ------- ------- DOMESTIC Proved reserves at beginning of year ................................. 202,771 390,691 165,839 394,630 9,700 301,311 Revisions of previous estimates ........ (41,399) (8,953) 10,177 (5,105) 5,581 (1,388) Extensions and discoveries ............. 17,694 55,575 39,911 35,682 3,615 18,291 Production ............................. (17,345) (32,521) (15,854) (35,625) (11,924) (34,775) Sales of reserves in-place ............. (1,595) (1,536) (15) (675) (2,506) (30,588) Purchase of reserves in-place .......... 4,174 -- 2,713 1,784 161,373 141,779 ------- ------- ------- ------- ------- ------- Proved reserves at end of year ......... 164,300 403,256 202,771 390,691 165,839 394,630 ======= ======= ======= ======= ======= ======= Proved developed reserves -- Beginning of year .................... 143,486 266,179 122,088 236,013 8,289 142,012 ======= ======= ======= ======= ======= ======= End of year .......................... 123,077 308,667 143,486 266,179 122,088 236,013 ======= ======= ======= ======= ======= ======= FOREIGN Proved reserves at beginning of year ................................. 24,493 -- 20,214 -- 20,826 -- Revisions of previous estimates ........ (420) -- (1,313) -- (107) -- Extensions and discoveries ............. -- -- 7,147 -- 915 -- Production ............................. (1,461) -- (1,555) -- (1,420) -- Sales of reserves in-place ............. -- -- -- -- -- -- Purchase of reserves in-place .......... 3,229 -- -- -- -- -- ------- ------- ------- ------- ------- ------- Proved reserves at end of year ......... 25,841 -- 24,493 -- 20,214 -- ======= ======= ======= ======= ======= ======= Proved developed reserves -- Beginning of year .................... 9,526 -- 16,727 -- 14,787 -- ======= ======= ======= ======= ======= ======= End of year .......................... 10,242 -- 9,526 -- 16,727 -- ======= ======= ======= ======= ======= ======= TOTAL Proved reserves at beginning of year ................................. 227,264 390,691 186,053 394,630 30,526 301,311 Revisions of previous estimates ........ (41,819) (8,953) 8,864 (5,105) 5,474 (1,388) Extensions and discoveries ............. 17,694 55,575 47,058 35,682 4,530 18,291 Production ............................. (18,806) (32,521) (17,409) (35,625) (13,344) (34,775) Sales of reserves in-place ............. (1,595) (1,536) (15) (675) (2,506) (30,588) Purchase of reserves in-place .......... 7,403 -- 2,713 1,784 161,373 141,779 ------- ------- ------- ------- ------- ------- Proved reserves at end of year ......... 190,141 403,256 227,264 390,691 186,053 394,630 ======= ======= ======= ======= ======= ======= Proved developed reserves -- Beginning of year .................... 153,012 266,179 138,815 236,013 23,076 142,012 ======= ======= ======= ======= ======= ======= End of year .......................... 133,319 308,667 153,012 266,179 138,815 236,013 ======= ======= ======= ======= ======= =======
- ----------------- * Includes estimated NGL reserves. F-46 176 Discounted future net cash flows (amounts in thousands) -- The standardized measure of discounted future net cash flows and changes therein are shown below:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- DOMESTIC Future cash inflows ................................... $ 1,989,898 $ 3,566,450 $ 4,476,523 Future production costs ............................... (1,061,638) (1,643,774) (1,739,219) Future development costs .............................. (289,686) (329,997) (309,365) ----------- ----------- ----------- Future net inflows before income tax .................. 638,574 1,592,679 2,427,939 Future income taxes ................................... -- (427,618) (736,788) ----------- ----------- ----------- Future net cash flows ................................. 638,574 1,165,061 1,691,151 10% discount factor ................................... (360,611) (454,023) (702,996) ----------- ----------- ----------- Standardized measure of discounted future net cash flows .......................................... $ 277,963 $ 711,038 $ 988,155 =========== =========== =========== FOREIGN Future cash inflows ................................... $ 260,627 $ 360,959 $ 414,383 Future production costs ............................... (134,549) (171,331) (248,222) Future development costs .............................. (66,715) (59,985) (2,625) ----------- ----------- ----------- Future net inflows before income tax .................. 59,363 129,643 163,536 Future income taxes ................................... -- (39,243) (55,083) ----------- ----------- ----------- Future net cash flows ................................. 59,363 90,400 108,453 10% discount factor ................................... (37,393) (36,653) (33,659) ----------- ----------- ----------- Standardized measure of discounted future net cash flows .......................................... $ 21,970 $ 53,747 $ 74,794 =========== =========== =========== TOTAL Future cash inflows ................................... $ 2,250,525 $ 3,927,409 $ 4,890,906 Future production costs ............................... (1,196,187) (1,815,105) (1,987,441) Future development costs .............................. (356,401) (389,982) (311,990) ----------- ----------- ----------- Future net inflows before income tax .................. 697,937 1,722,322 2,591,475 Future income taxes ................................... -- (466,861) (791,871) ----------- ----------- ----------- Future net cash flows ................................. 697,937 1,255,461 1,799,604 10% discount factor ................................... (398,004) (490,676) (736,655) ----------- ----------- ----------- Standardized measure of discounted future net cash flows .......................................... $ 299,933 $ 764,785 $ 1,062,949 =========== =========== ===========
F-47 177 The following are the principal sources of change in the standardized measure of discounted future net cash flows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- DOMESTIC Standardized measure -- beginning of year ........ $ 711,038 $ 988,155 $ 236,920 Sales, net of production costs ................... (101,383) (201,198) (177,072) Purchases of reserves in-place ................... 2,278 18,293 605,210 Net change in prices and production costs ........ (466,018) (581,640) 505,108 Extensions, discoveries and improved recovery, net of future production and development costs .............................. 46,713 180,146 38,572 Net changes in estimated future development costs .......................................... 79,410 87,606 10,151 Revisions of quantity estimates .................. (86,459) 33,358 79,185 Accretion of discount ............................ 83,281 125,138 26,207 Net change in income taxes ....................... 121,770 141,452 (238,071) Sales of reserves in-place ....................... (356) (1,598) (41,969) Changes in production rates and other ............ (112,311) (78,674) (56,086) ----------- ----------- ----------- Standardized measure -- end of year ............... $ 277,963 $ 711,038 $ 988,155 =========== =========== =========== FOREIGN Standardized measure -- beginning of year ........ $ 53,747 $ 74,794 $ 74,166 Sales, net of production costs ................... (3,923) (10,826) (9,725) Purchases of reserves in-place ................... 2,750 -- -- Net change in prices and production costs ........ (56,690) (22,193) (1,557) Extensions, discoveries and improved recovery, net of future production and development costs .............................. -- 5,486 4,930 Net changes in estimated future development costs .......................................... 8,990 (6,212) 3,892 Revisions of quantity estimates .................. (750) (5,609) (598) Accretion of discount ............................ 6,830 10,720 11,288 Net change in income taxes ....................... 14,552 17,857 6,304 Changes in production rates and other ............ (3,536) (10,270) (13,906) ----------- ----------- ----------- Standardized measure -- end of year .............. $ 21,970 $ 53,747 $ 74,794 =========== =========== =========== TOTAL Standardized measure -- beginning of year ........ $ 764,785 $ 1,062,949 $ 311,086 Sales, net of production costs ................... (105,306) (212,024) (186,797) Purchases of reserves in-place ................... 5,028 18,293 605,210 Net change in prices and production costs ........ (522,708) (603,833) 503,551 Extensions, discoveries and improved recovery, net of future production and development costs .............................. 46,713 185,632 43,502 Net changes in estimated future development costs .......................................... 88,400 81,394 14,043 Revisions of quantity estimates .................. (87,209) 27,749 78,587 Accretion of discount ............................ 90,111 135,858 37,495 Net change in income taxes ....................... 136,322 159,309 (231,767) Sales of reserves in-place ....................... (356) (1,598) (41,969) Changes in production rates and other ............ (115,847) (88,944) (69,992) ----------- ----------- ----------- Standardized measure -- end of year .............. $ 299,933 $ 764,785 $ 1,062,949 =========== =========== ===========
F-48 178 Selected Quarterly Financial Data (amounts in thousands, except per share data) (unaudited):
QUARTER ENDED(4) ----------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 -------- -------- ------------ ----------- Revenues ............................... $ 67,661 $ 61,512 $ 65,966 $ 57,564 Operating earnings (loss)(1) ........... $ 4,011 $ 3,317 $ (5,369) $(66,858) Net loss(1) ............................ $ (6,582) $ (7,622) $(11,245) $(68,823) Loss per Common Share-- Basic .......... $ (0.33) $ (0.39) $ (0.57) $ (3.47) Loss per Common Share-- Diluted ........ $ (0.33) $ (0.39) $ (0.57) $ (3.47)
QUARTER ENDED(4)(5) ----------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1997 1997 1997 1997 -------- -------- ------------ ----------- Revenues ............................... $102,410 $ 85,976 $ 82,120 $ 86,772 Operating earnings (loss)(2) ........... $ 39,872 $ 26,204 $ 17,410 $(34,688) Net income (loss)(2)(3) ................ $ 14,609 $ 2,964 $ 352 $(31,625) Earnings (loss) per Common Share -- Basic ................................ $ 0.73 $ 0.15 $ 0.02 $ (1.60) Earnings (loss) per Common Share -- Diluted .............................. $ 0.70 $ 0.15 $ 0.02 $ (1.60)
- ------------------ (1) Includes a fourth quarter charge of $68.9 million to record an impairment of oil and gas properties and a fourth quarter $3.7 million positive revision to a prior period impairment on assets held for sale. (2) Includes fourth quarter charges of $23.9 million to record an impairment on assets held for sale and $30.0 million to record an impairment of oil and gas properties and a second quarter gain on sale of $3.0 million that was adjusted downward by $752,000 in the third quarter (see Note 4). (3) Includes an extraordinary loss on early extinguishment of debt of $3.0 million, net of income tax benefit, in the second quarter. (4) Certain reclassifications of prior period amounts have been made to conform with the current presentation. (5) Restated. 179 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware, pursuant to which the Company is incorporated, provides generally and in pertinent part that a Delaware corporation may indemnify its directors, officers, employees and agents (or persons serving at the request of the Company as a director, officer, employee or agent of another entity) against expenses, judgments, fines, and settlements actually and reasonably incurred by them in connection with any civil, criminal, administrative, or investigative suit or action except actions by or in the right of the corporation if, in connection with the matters in issue, they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and in connection with any criminal suit or proceeding, if in connection with the matters in issue, they had no reasonable cause to believe their conduct was unlawful. Section 145 further provides that in connection with the defense or settlement of any action by or in the right of the corporation, a Delaware corporation may indemnify its directors, officers, employees and agents (or persons serving at the request of the Company as a director, officer, employee or agent of another entity) against expenses actually and reasonably incurred by them if, in connection with the matters in issue, they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue, or matter as to which such person has been adjudged liable to the corporation unless the Delaware Court of Chancery or other court in which such action or suit is brought approves such indemnification. Section 145 further permits a Delaware corporation to grant its directors and officers additional rights of indemnification through bylaw provisions and otherwise, and or purchase indemnity insurance on behalf of its directors and officers. Article Nine of the Certificate of Incorporation of the Company, as amended, and Article VII of the Bylaws of the Company, as amended, provide, in general, that the Company may indemnify its directors, officers, employees and agents (or persons serving at the request of the Company as a director, officer, employee or agent of another entity) to the full extent of Delaware law. The Company has purchased directors and officers liability insurance policy which insures, among other things, (i) the officers and directors of the Company from any claim arising out of an alleged wrongful act by such persons while acting as directors and officers of the Company and (ii) the Company to the extent that the Company has indemnified the directors and officers for such loss. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBIT NUMBER Description ------ ----------- (1) UNDERWRITING AGREEMENT* (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION* (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Indenture dated April 1, 1996 among Nuevo Energy Company as Issuer, various Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the Trustee - 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference from Registration Statement on Form S-3 (No. 333-1504)). - 2 - 180 EXHIBIT NUMBER Description ------ ----------- 4.2 Form of Amended and Restated Declaration of Trust dated December 23, 1996, among the Company, as Sponsor, Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, and Michael D. Watford, Robert L. Gerry, III and Robert M. King, as Regular Trustees. (Incorporated by reference from Exhibit 4.1 to Current Report on Form 8-K filed on January 6, 1997). 4.3 Form of Subordinated Indenture dated as of November 25, 1996, between the Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by reference from Exhibit 4.2 to Current Report on Form 8-K filed on January 6, 1997). 4.4 Form of First Supplemental Indenture dated December 23, 1996, between the Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by reference from Exhibit 4.3 to Current Report on Form 8-K filed on January 6, 1997). 4.5 Form of Preferred Securities Guarantee Agreement dated as of December 23, 1996, between the Company and Wilmington Trust Company, as Guarantee Trustee. (Incorporated by reference from Exhibit 4.4 to Current Report on Form 8-K filed on January 6, 1997). 4.6 Form of Certificate representing TECONS. (Incorporated by reference from Exhibit 4.5 to Current Report on Form 8-K filed on January 6, 1997). 4.7 Release and Termination of Subsidiary Guarantees with respect to the 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference from Exhibit 4.11 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.8 Indenture dated June 8, 1998 among Nuevo Energy Company as Issuer, various Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the Trustee - 8 7/8% Senior Subordinated Notes due 2008. (Incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-60655) filed on August 5, 1998). 4.9 First Supplemental Indenture to the Indenture dated June 8, 1998, dated August 9, 1999 between Nuevo Energy Company and State Street Bank and Trust Company - 8 7/8% Senior Subordinated Notes due 2008 4.10 Second Supplemental Indenture to the Indenture dated April 1, 1996, dated August 9, 1999 between Nuevo Energy Company and State Street Bank and Trust Company - 9 1/2% Senior Subordinated Notes due 2006 4.11 Indenture, dated as of August 20, 1999, between Nuevo Energy Company and State Street Bank and Trust Company, as Trustee. 4.12 Registration Agreement dated August 20, 1999, between Nuevo Energy Company, Banc of America Securities LLC and Salomon Smith Barney Inc. - 3 - 181 EXHIBIT NUMBER Description ------ ----------- (5) OPINION REGARDING LEGALITY 5.1 Opinion of Haynes and Boone, L.L.P. (8) OPINION REGARDING TAX MATTERS* (12) STATEMENTS REGARDING COMPUTATION OF RATIOS 12.1 Computation of ratio of earnings to fixed charges. (15) LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION* (23) CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Haynes and Boone, L.L.P. (included in Exhibit 5.1). 23.2 Consent of KPMG LLP. 23.3 Consent of Ryder Scott Company. 23.4 Consent of Poco Oil Co. (25) STATEMENT OF ELIGIBILITY OF TRUSTEE 25.1 Statement of Eligibility and Qualification on Form T-1 of Trustee. (27) FINANCIAL DATA SCHEDULE* (99) ADDITIONAL EXHIBITS 99.1 Form of Letter of Transmittal. 99.2 Form of Notice of Guaranteed Delivery. - ---------- * Inapplicable to this filing. - 4 - 182 ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in this Registration Statement when it becomes effective; (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; (2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. - 5 - 183 The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. - 6 - 184 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on the 2nd day of November, 1999. NUEVO ENERGY COMPANY By: /s/ Douglas L. Foshee --------------------------------------- Douglas L. Foshee Chairman of the Board, Chief Executive Officer and President - 7 - 185 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Douglas L. Foshee and Robert M. King, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITIES DATE --------- ---------- ---- /s/ Douglas L. Foshee Chairman of the Board, Chief Executive Officer and November 2, 1999 - --------------------------- President (Principal Executive Officer) Douglas L. Foshee /s/ Robert M. King Senior Vice President and Chief Financial Officer November 2, 1999 - --------------------------- (Principal Accounting and Financial Officer) Robert M. King /s/ Isaac Arnold, Jr. Director November 2, 1999 - --------------------------- Isaac Arnold, Jr. /s/ Thomas D. Barrow Director November 2, 1999 - --------------------------- Thomas D. Barrow /s/ David H. Batchelder Director November 2, 1999 - --------------------------- David H. Batchelder /s/ Charles M. Elson Director November 2, 1999 - --------------------------- Charles M. Elson /s/ Robert L. Gerry III Director November 2, 1999 - --------------------------- Robert L. Gerry III
- 8 - 186 /s/ Gary R. Petersen Director November 2, 1999 - --------------------------- Gary R. Petersen /s/ David Ross III Director November 2, 1999 - --------------------------- David Ross III /s/ Robert W. Shower Director November 2, 1999 - --------------------------- Robert W. Shower
- 9 - 187 INDEX TO EXHIBITS
EXHIBIT NUMBER Description ------ ----------- (1) UNDERWRITING AGREEMENT* (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION* (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Indenture dated April 1, 1996 among Nuevo Energy Company as Issuer, various Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the Trustee - 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference from Registration Statement on Form S-3 (No. 333-1504)). 4.2 Form of Amended and Restated Declaration of Trust dated December 23, 1996, among the Company, as Sponsor, Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, and Michael D. Watford, Robert L. Gerry, III and Robert M. King, as Regular Trustees. (Incorporated by reference from Exhibit 4.1 to Current Report on Form 8-K filed on January 6, 1997). 4.3 Form of Subordinated Indenture dated as of November 25, 1996, between the Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by reference from Exhibit 4.2 to Current Report on Form 8-K filed on January 6, 1997). 4.4 Form of First Supplemental Indenture dated December 23, 1996, between the Company and Wilmington Trust Company, as Indenture Trustee. (Incorporated by reference from Exhibit 4.3 to Current Report on Form 8-K filed on January 6, 1997). 4.5 Form of Preferred Securities Guarantee Agreement dated as of December 23, 1996, between the Company and Wilmington Trust Company, as Guarantee Trustee. (Incorporated by reference from Exhibit 4.4 to Current Report on Form 8-K filed on January 6, 1997). 4.6 Form of Certificate representing TECONS. (Incorporated by reference from Exhibit 4.5 to Current Report on Form 8-K filed on January 6, 1997). 4.7 Release and Termination of Subsidiary Guarantees with respect to the 9 1/2% Senior Subordinated Notes due 2006. (Incorporated by reference from Exhibit 4.11 to Annual Report on Form 10-K for the year ended December 31, 1997). 4.8 Indenture dated June 8, 1998 among Nuevo Energy Company as Issuer, various Subsidiaries as the Guarantors, and State Street Bank and Trust Company as the Trustee - 8 7/8% Senior Subordinated Notes due 2008. (Incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-60655) filed on August 5, 1998).
188
EXHIBIT NUMBER Description ------ ----------- 4.9 First Supplemental Indenture to the Indenture dated June 8, 1998, dated August 9, 1999 between Nuevo Energy Company and State Street Bank and Trust Company - 8 7/8% Senior Subordinated Notes due 2008 4.10 Second Supplemental Indenture to the Indenture dated April 1, 1996, dated August 9, 1999 between Nuevo Energy Company and State Street Bank and Trust Company - 9 1/2% Senior Subordinated Notes due 2006 4.11 Indenture, dated as of August 20, 1999, between Nuevo Energy Company and State Street Bank and Trust Company, as Trustee. 4.12 Registration Agreement dated August 20, 1999, between Nuevo Energy Company, Banc of America Securities LLC and Salomon Smith Barney Inc. (5) OPINION REGARDING LEGALITY 5.1 Opinion of Haynes and Boone, L.L.P. (8) OPINION REGARDING TAX MATTERS* (12) STATEMENTS REGARDING COMPUTATION OF RATIOS 12.1 Computation of ratio of earnings to fixed charges. (15) LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION* (23) CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Haynes and Boone, L.L.P. (included in Exhibit 5.1). 23.2 Consent of KPMG LLP. 23.3 Consent of Ryder Scott Company. 23.4 Consent of Poco Oil Co. (25) STATEMENT OF ELIGIBILITY OF TRUSTEE 25.1 Statement of Eligibility and Qualification on Form T-1 of Trustee. (27) FINANCIAL DATA SCHEDULE*
189
EXHIBIT NUMBER Description ------ ----------- (99) ADDITIONAL EXHIBITS 99.1 Form of Letter of Transmittal. 99.2 Form of Notice of Guaranteed Delivery.
- ---------- * Inapplicable to this filing. EX-4.9 2 FIRST SUPPLEMENT INDENTURE 1 EXHIBIT 4.9 FIRST SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE dated as of August 9, 1999 (this "Supplemental Indenture"), between Nuevo Energy Company, a Delaware corporation (the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company, as trustee (the "Trustee"). WHEREAS, there has heretofore been executed and delivered to the Trustee an Indenture dated as of June 8, 1998 between the Company and the Trustee (as the same has been amended or supplemented from time to time by one or more indentures supplemental thereto entered into pursuant to the applicable provisions thereof, the "Indenture"), providing for the issuance of the Company's 8 7/8% Senior Subordinated Notes due 2008 (the "Securities"); WHEREAS, there are now outstanding under the Indenture Securities in the aggregate principal amount of $100 million; WHEREAS, the Company has offered to exchange new notes for all of the Securities (the "Exchange Offer") and has solicited the consents (the "Solicitations") to certain amendments (the "Amendments") to the Indenture pursuant to the Company's Confidential Memorandum dated July 13, 1999, as supplemented by press releases dated July 26, 1999 and August 5, 1999, respectively, and by Supplement to Confidential Memorandum dated August 9, 1999; WHEREAS, Section 9.2 of the Indenture provides that the Company and the Trustee may amend the Indenture with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding; WHEREAS, the Company desires to amend certain provisions of the Indenture, as set forth in Article II hereof; WHEREAS, the holders of at least a majority in aggregate principal amount of the Securities outstanding have consented to the amendments effected by this Supplemental Indenture; and WHEREAS, all matters necessary to make this Supplemental Indenture a valid agreement, in accordance with its terms, have been done. NOW THEREFORE, this Supplemental Indenture witnesseth that, for and in consideration of the premises, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I EFFECTIVENESS AND OPERATIVE DATE SECTION 1.1. Effectiveness; Operative Date. This Supplemental Indenture shall become effective as of the date hereof. The terms of this Supplemental Indenture will become operative only upon acceptance for exchange by the Company of Securities validly tendered (and not withdrawn) pursuant to the terms of the Exchange Offer. The date that this Supplemental Indenture becomes operative shall be denominated herein as the "Operative Date." ARTICLE II AMENDMENTS TO INDENTURE SECTION 2.1. Amendments to Indenture. (a) The Indenture is hereby amended by deleting therefrom the following provisions in their entirety and any references to those provisions: Sections 5.1(e), 5.1(g), 8.1(b), 8.1(c), 8.1(d), 8.1(f), -1- 2 8.1(g), 10.5, 10.6, 10.7, 10.9, 10.10, 10.11, 10.12, 10,14, 10.15, 10.16, 10.17, 10.18, and 10.19 including without limitation all references, direct or indirect, thereto in Section 5.1, "Events of Default." (b) Section 10.8(a) of the Indenture is hereby amended in its entirety to read as follows: "(a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Restricted Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of such Officer's knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and no Default or Event of Default has occurred and is continuing (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which such Officer may have knowledge and what action the Company is taking or proposes to take with respect thereto). Such Officers' Certificate shall comply with TIA Section 314(a)(4). For purposes of this Section 10.8(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture." (c) Any definitions used exclusively in the deleted provisions of the Indenture set forth in paragraph (a) of this Section 2.1 are hereby deleted in their entirety from the Indenture. ARTICLE III MISCELLANEOUS SECTION 3.1 Instruments To Be Read Together. This Supplemental Indenture is an indenture supplemental to and in implementation of the Indenture, and said Indenture and this Supplemental Indenture shall henceforth be read together: SECTION 3.2 Confirmation. The Indenture as amended and supplemented by this Supplemental Indenture is in all respects confirmed and preserved. SECTION 3.3 Terms Defined. Capitalized terms used in this Supplemental Indenture and otherwise defined herein shall have the respective meanings set forth in the Indenture. SECTION 3.4 Headings. The headings of the Articles and Sections of this Supplemental Indenture have been inserted for convenience of reference only, and are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. SECTION 3.5 Governing Laws. The laws of the State of New York shall govern this Supplemental Indenture. SECTION 3.6 Counterparts. This Supplemental Indenture 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. SECTION 3.7 Compliance with the Trust Indenture Act. This Supplemental Indenture shall be interpreted to comply in every respect with the Trust Indenture Act of 1939, as amended (the "TIA"). If any provision of this Supplemental Indenture limits, qualifies or conflicts with the duties imposed by the TIA, the imposed duties shall control. -2- 3 SECTION 3.8 Acceptance by Trustee. The Trustee accepts the amendments to the Indenture effected by this Supplemental Indenture and agrees to execute the trusts created by the Indenture as hereby amended, but upon the terms and conditions set forth in the Indenture. SECTION 3.9 Responsibility of Trustee. The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture, except that the Trustee is duly authorized to execute and deliver this Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the date first written above. NUEVO ENERGY COMPANY By: /s/ ROBERT M. KING ---------------------------------------------- Name: Robert M. King Title: Senior Vice President and Chief Financial Officer STATE STREET BANK AND TRUST COMPANY By: /s/ JULIE A. BALEMA ----------------------------------------------- Name: Julie A. Balema Title: Assistant Vice President -3- EX-4.10 3 SECOND SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.10 SECOND SUPPLEMENTAL INDENTURE SECOND SUPPLEMENTAL INDENTURE dated as of August 9, 1999 (this "Supplemental Indenture"), between Nuevo Energy Company, a Delaware corporation (the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company, as trustee (the "Trustee"). WHEREAS, there has heretofore been executed and delivered to the Trustee an Indenture dated as of April 1, 1996 between the Company and the Trustee (as the same has been amended or supplemented from time to time by one or more indentures supplemental thereto entered into pursuant to the applicable provisions thereof, the "Indenture"), providing for the issuance of the Company's 9 1/2% Senior Subordinated Notes due 2006 (the "Securities"); WHEREAS, there are now outstanding under the Indenture Securities in the aggregate principal amount of $160 million; WHEREAS, the Company has offered to exchange new notes for all of the Securities (the "Exchange Offer") and has solicited the consents (the "Solicitations") to certain amendments (the "Amendments") to the Indenture pursuant to the Company's Confidential Memorandum dated July 13, 1999, as supplemented by press releases dated July 26, 1999 and August 5, 1999, respectively, and by Supplement to Confidential Memorandum dated August 9, 1999; WHEREAS, Section 9.2 of the Indenture provides that the Company and the Trustee may amend the Indenture with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding; WHEREAS, the Company desires to amend certain provisions of the Indenture, as set forth in Article II hereof; WHEREAS, the holders of at least a majority in aggregate principal amount of the Securities outstanding have consented to the amendments effected by this Supplemental Indenture; and WHEREAS, all matters necessary to make this Supplemental Indenture a valid agreement, in accordance with its terms, have been done. NOW THEREFORE, this Supplemental Indenture witnesseth that, for and in consideration of the premises, the Company and the Trustee agree as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE I EFFECTIVENESS AND OPERATIVE DATE SECTION 1.1. Effectiveness; Operative Date. This Supplemental Indenture shall become effective as of the date hereof. The terms of this Supplemental Indenture will become operative only upon acceptance for exchange by the Company of Securities validly tendered (and not withdrawn) pursuant to the terms of the Exchange Offer. The date that this Supplemental Indenture becomes operative shall be denominated herein as the "Operative Date." ARTICLE II AMENDMENTS TO INDENTURE SECTION 2.1. Amendments to Indenture. (a) The Indenture is hereby amended by deleting therefrom the following provisions in their entirety and any references to those provisions: Sections 5.1(e), 5.1(g), 8.1(b), 8.1(c), 8.1(d), 8.1(f), -1- 2 8.1(g), 10.5, 10.6, 10.7, 10.9, 10.10, 10.11, 10.12, 10,14, 10.15, 10.16, 10.17, 10.18, and 10.19 including without limitation all references, direct or indirect, thereto in Section 5.1, "Events of Default." (b) Section 10.8(a) of the Indenture is hereby amended in its entirety to read as follows: "(a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Restricted Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of such Officer's knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and no Default or Event of Default has occurred and is continuing (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which such Officer may have knowledge and what action the Company is taking or proposes to take with respect thereto). Such Officers' Certificate shall comply with TIA Section 314(a)(4). For purposes of this Section 10.8(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture." (c) Any definitions used exclusively in the deleted provisions of the Indenture set forth in paragraph (a) of this Section 2.1 are hereby deleted in their entirety from the Indenture. ARTICLE III MISCELLANEOUS SECTION 3.1 Instruments To Be Read Together. This Supplemental Indenture is an indenture supplemental to and in implementation of the Indenture, and said Indenture and this Supplemental Indenture shall henceforth be read together: SECTION 3.2 Confirmation. The Indenture as amended and supplemented by this Supplemental Indenture is in all respects confirmed and preserved. SECTION 3.3 Terms Defined. Capitalized terms used in this Supplemental Indenture and otherwise defined herein shall have the respective meanings set forth in the Indenture. SECTION 3.4 Headings. The headings of the Articles and Sections of this Supplemental Indenture have been inserted for convenience of reference only, and are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. SECTION 3.5 Governing Laws. The laws of the State of New York shall govern this Supplemental Indenture. SECTION 3.6 Counterparts. This Supplemental Indenture 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. SECTION 3.7 Compliance with the Trust Indenture Act. This Supplemental Indenture shall be interpreted to comply in every respect with the Trust Indenture Act of 1939, as amended (the "TIA"). If any provision of this Supplemental Indenture limits, qualifies or conflicts with the duties imposed by the TIA, the imposed duties shall control. -2- 3 SECTION 3.8 Acceptance by Trustee. The Trustee accepts the amendments to the Indenture effected by this Supplemental Indenture and agrees to execute the trusts created by the Indenture as hereby amended, but upon the terms and conditions set forth in the Indenture. SECTION 3.9 Responsibility of Trustee. The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture, except that the Trustee is duly authorized to execute and deliver this Supplemental Indenture. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the date first written above. NUEVO ENERGY COMPANY By: /s/ ROBERT M. KING ---------------------------------- Name: Robert M. King Title: Senior Vice President and Chief Financial Officer STATE STREET BANK AND TRUST COMPANY By: /s/ JULIE A. BALEMA ---------------------------------- Name: Julie A. Balema Title: Assistant Vice President -3- EX-4.11 4 INDENTURE - DATED AUGUST 20, 1999 1 EXHIBIT 4.11 - ------------------------------------------------------------------------------- NUEVO ENERGY COMPANY, ANY SUBSIDIARY GUARANTORS Named in Supplements Hereto and STATE STREET BANK AND TRUST COMPANY Trustee --------------- INDENTURE Dated as of August 20, 1999 --------------- Series A and Series B 9 1/2% Senior Subordinated Notes due 2008 - ------------------------------------------------------------------------------- 2 Reconciliation and Tie between Trust Indenture Act of 1939 and Indenture, dated as of August 20, 1999
Trust Indenture Indenture Act Section Section Section 310(a)(1) .................................................. 6.7 (a)(2) .................................................. 6.7 (b) .................................................. 6.7, 6.8, 6.9 Section 311(a) .................................................. 6.12 (b) .................................................. 6.12 Section 312 .................................................. 7.1 Section 313 .................................................. 7.2 Section 314(a) .................................................. 7.3 (a)(4) .................................................. 10.8(a) (c)(1) .................................................. 15.1 (c)(2) .................................................. 15.1 (e) .................................................. 15.1 Section 315(a) .................................................. 6.1 (b) .................................................. 6.13 (c) .................................................. 6.1 (d) .................................................. 6.1 Section 316(a) (last sentence) .................................................. 1.1 ("Outstanding") (a)(1)(A) .................................................. 5.2, 5.12 (a)(1)(B) .................................................. 5.13 (b) .................................................. 5.8 (c) .................................................. 15.3(d) Section 317(a)(1) .................................................. 5.3 (a)(2) .................................................. 5.4 (b) .................................................. 10.3 Section 318(a) .................................................. 15.10(b)
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION.................................................2 Section 1.1 Definitions........................................................................................2 Section 1.2 Other Definitions.................................................................................26 Section 1.3 Incorporation by Reference of Trust Indenture Act.................................................27 Section 1.4 Rules of Construction.............................................................................28 ARTICLE II SECURITY FORMS........................................................................................28 Section 2.1 Forms Generally...................................................................................28 Section 2.2 Form of Face of Security..........................................................................29 Section 2.3 Form of Reverse of Security.......................................................................31 Section 2.4 Form of Notation Relating to Subsidiary Guarantees................................................37 Section 2.5 Form of Trustee's Certificate of Authentication...................................................38 ARTICLE III THE SECURITIES.......................................................................................40 Section 3.1 Title and Terms...................................................................................40 Section 3.2 Denominations.....................................................................................41 Section 3.3 Execution, Authentication, Delivery and Dating....................................................41 Section 3.4 Temporary Securities..............................................................................42 Section 3.5 Registration of Transfer and Exchange.............................................................43 Section 3.6 Book-Entry Provisions for Global Securities.......................................................47 Section 3.7 Mutilated, Destroyed, Lost and Stolen Securities..................................................47 Section 3.8 Payment of Interest; Interest Rights Preserved....................................................48 Section 3.9 Persons Deemed Owners.............................................................................49 Section 3.10 Cancellation.....................................................................................49 Section 3.11 Computation of Interest..........................................................................50 Section 3.12 Private Placement Legend.........................................................................50 ARTICLE IV SATISFACTION AND DISCHARGE............................................................................50 Section 4.1 Satisfaction and Discharge of Indenture...........................................................50 Section 4.2 Application of Trust Money........................................................................51 ARTICLE V REMEDIES...............................................................................................52 Section 5.1 Events of Default.................................................................................52 Section 5.2 Acceleration of Maturity: Rescission and Annulment................................................53 Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee...................................55 Section 5.4 Trustee May File Proofs of Claim..................................................................55 Section 5.5 Trustee May Enforce Claims Without Possession of Securities.......................................56 Section 5.6 Application of Money Collected....................................................................56 Section 5.7 Limitation on Suits...............................................................................57 Section 5.8 Unconditional Right of Holders to Receive Principal Premium and Interest..........................57 Section 5.9 Restoration of Rights and Remedies................................................................58 Section 5.10 Rights and Remedies Cumulative...................................................................58 Section 5.11 Delay or Omission Not Waiver.....................................................................58 Section 5.12 Control by Holders...............................................................................58 Section 5.13 Waiver of Past Defaults..........................................................................59 Section 5.14 Waiver of Stay, Extension or Usury Laws..........................................................59 ARTICLE VI THE TRUSTEE...........................................................................................59 Section 6.1 Duties of Trustee.................................................................................59 Section 6.2 Certain Rights of Trustee.........................................................................60 Section 6.3 Trustee Not Responsible for Recitals or Issuance of Securities....................................61 Section 6.4 May Hold Securities...............................................................................61 Section 6.5 Money Held in Trust...............................................................................62 Section 6.6 Compensation and Reimbursement....................................................................62 Section 6.7 Corporate Trustee Required; Eligibility...........................................................63 Section 6.8 Conflicting Interests.............................................................................63 Section 6.9 Resignation and Removal; Appointment of Successor.................................................63 Section 6.10 Acceptance of Appointment by Successor...........................................................64 Section 6.11 Merger, Conversion, Consolidation or Succession to Business......................................65 Section 6.12 Preferential Collection of Claims Against Company................................................65 Section 6.13 Notice of Defaults...............................................................................65 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY....................................................65 Section 7.1 Holders' Lists; Holder Communications; Disclosures Respecting Holders............................65 Section 7.2 Reports By Trustee................................................................................66
-i- 4 Section 7.3 Reports by Company................................................................................66 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE................................................67 Section 8.1 Company May Consolidate, etc., Only on Certain Terms..............................................67 Section 8.2 Successor Substituted.............................................................................68 ARTICLE IX SUPPLEMENTAL INDENTURES...............................................................................69 Section 9.1 Supplemental Indentures Without Consent of Holders................................................69 Section 9.2 Supplemental Indentures with Consent of Holders...................................................70 Section 9.3 Execution of Supplemental Indentures..............................................................71 Section 9.4 Effect of Supplemental Indentures.................................................................71 Section 9.5 Conformity with Trust Indenture Act...............................................................71 Section 9.6 Reference in Securities to Supplemental Indentures................................................71 Section 9.7 Notice of Supplemental Indentures and Waivers.....................................................71 Section 9.8 Effect on Senior Indebtedness.....................................................................71 ARTICLE X COVENANTS..............................................................................................72 Section 10.1 Payment of Principal, Premium, if any, and Interest..............................................72 Section 10.2 Maintenance of Office or Agency.................................................................72 Section 10.3 Money for Security Payments to Be Held in Trust..................................................73 Section 10.4 Corporate Existence..............................................................................74 Section 10.5 Payment of Taxes and Other Claims................................................................74 Section 10.6 Maintenance of Properties........................................................................75 Section 10.7 Insurance........................................................................................75 Section 10.8 Statement by Officers as to Default..............................................................75 Section 10.9 Provision of Financial Information...............................................................76 Section 10.10 Limitation on Restricted Payments...............................................................76 Section 10.11 Limitation on Other Senior Subordinated Indebtedness............................................80 Section 10.12 Incurrence of Indebtedness......................................................................80 Section 10.13 Subsidiary Guarantors...........................................................................80 Section 10.14 Limitation on Issuance and Sale of Capital Stock by Restricted Subsidiaries.....................81 Section 10.15 Limitation on Liens.............................................................................81 Section 10.16 Purchase of Securities Upon Change of Control...................................................82 Section 10.17 Disposition of Proceeds of Asset Sales..........................................................84 Section 10.18 Limitation on Transactions with Affiliates......................................................86 Section 10.19 Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries........87 Section 10.20 Waiver of Certain Covenants.....................................................................88 Section 10.21 Qualification of Indenture......................................................................88 ARTICLE XI REDEMPTION OF SECURITIES..............................................................................88 Section 11.1 Right of Redemption..............................................................................88 Section 11.2 Applicability of Article.........................................................................89 Section 11.3 Election to Redeem; Notice to Trustee............................................................89 Section 11.4 Selection by Trustee of Securities to Be Redeemed................................................89 Section 11.5 Notice of Redemption.............................................................................90 Section 11.6 Deposit of Redemption Price......................................................................90 Section 11.7 Securities Payable on Redemption Date............................................................90 Section 11.8 Securities Redeemed in Part......................................................................91 Section 11.9 Purchase of Securities...........................................................................91 ARTICLE XII DEFEASANCE AND COVENANT DEFEASANCE...................................................................91 Section 12.1 Company's Option to Effect Defeasance or Covenant Defeasance.....................................91 Section 12.2 Defeasance and Discharge.........................................................................91 Section 12.3 Covenant Defeasance..............................................................................92 Section 12.4 Conditions to Defeasance or Covenant Defeasance..................................................93 Section 12.5 Deposited Money and U.S. Government Obligations to Be Held in Trust: Other Miscellaneous Provisions...................................................................94 Section 12.6 Reinstatement....................................................................................95 ARTICLE XIII SUBSIDIARY GUARANTEES...............................................................................95 Section 13.1 Unconditional Guarantee..........................................................................95 Section 13.2 Subsidiary Guarantors May Consolidate, etc., on Certain Terms...................................96 Section 13.3 Release of Subsidiary Guarantors.................................................................97 Section 13.4 Limitation of Subsidiary Guarantors' Liability...................................................98 Section 13.5 Contribution.....................................................................................98 Section 13.6 Execution and Delivery of Notations of Subsidiary Guarantees.....................................98 Section 13.7 Severability.....................................................................................99
-ii- 5 Section 13.8 Subsidiary Guarantees Subordinated to Guarantor Senior Indebtedness..............................99 Section 13.9 Subsidiary Guarantors Not to Make Payments with Respect to Subsidiary Guarantees in Certain Circumstances...........................................................................100 Section 13.10 Subsidiary Guarantees Subordinated to Prior Payment of All Guarantor Senior Indebtedness upon Dissolution, etc. ........................................................................101 Section 13.11 Holders to be Subrogated to Rights of Holders of Guarantor Senior Indebtedness.................102 Section 13.12 Obligations of Subsidiary Guarantors Unconditional.............................................102 Section 13.13 Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice........................103 Section 13.14 Application by Trustee of Money Deposited with it..............................................103 Section 13.15 Subordination Rights Not Impaired by Acts or Omissions of Subsidiary Guarantors or Holders of Guarantor Senior Indebtedness.......................................................104 Section 13.16 Holders Authorize Trustee to Effectuate Subordination of Subsidiary Guarantees.................104 Section 13.17 Right of Trustee to Hold Guarantor Senior Indebtedness.........................................104 Section 13.18 Article XIII Not to Prevent Events of Default..................................................105 Section 13.19 Payment........................................................................................105 Section 13.20 Payment Permitted If No Default................................................................105 ARTICLE XIV SUBORDINATION OF SECURITIES.........................................................................105 Section 14.1 Securities Subordinate to Senior Indebtedness...................................................105 Section 14.2 Payment over of Proceeds upon Dissolution, etc. ................................................106 Section 14.3 Suspension of Payment When Senior Indebtedness in Default.......................................107 Section 14.4 Payment Permitted If No Default.................................................................108 Section 14.5 Subrogation to Rights of Holders of Senior Indebtedness.........................................108 Section 14.6 Provisions Solely to Define Relative Rights.....................................................108 Section 14.7 Trustee to Effectuate Subordination.............................................................108 Section 14.8 No Waiver of Subordination Provision............................................................109 Section 14.9 Notice to Trustee...............................................................................109 Section 14.10 Reliance on Judicial Order or Certificate of Liquidating Agent Bank............................110 Section 14.11 Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights.........110 Section 14.12 Article Applicable to Paying Agents............................................................110 Section 14.13 No Suspension of Remedies......................................................................111 Section 14.14 Trust Money Not Subordinated...................................................................111 ARTICLE XV MISCELLANEOUS........................................................................................111 Section 15.1 Compliance Certificates and Opinions............................................................111 Section 15.2 Form of Documents Delivered to Trustee..........................................................112 Section 15.3 Acts of Holders.................................................................................112 Section 15.4 Notices, etc. to Trustee, Company and Subsidiary Guarantors.....................................113 Section 15.5 Notice to Holders; Waiver.......................................................................114 Section 15.6 Effect of Headings and Table of Contents........................................................114 Section 15.7 Successors and Assigns..........................................................................114 Section 15.8 Separability Clause.............................................................................114 Section 15.9 Benefits of Indenture...........................................................................114 Section 15.10 Governing Law; Trust Indenture Act Controls....................................................115 Section 15.11 Legal Holidays.................................................................................115 Section 15.12 No Recourse Against Others.....................................................................115 Section 15.13 Duplicate Originals............................................................................116 Section 15.14 No Adverse Interpretation of Other Agreements..................................................116
Exhibit A - Form of Legend for Global Securities Exhibit B - Transfer or Exchange Certificate Exhibit C - Transferee Certificate for Institutional Accredited Investors Exhibit D - Transferee Certificate for Regulation S Transfers Exhibit E - Form of Supplemental Indenture Annex A - Registration Rights Agreement -iii- 6 THIS INDENTURE, dated as of August 20, 1999, is between NUEVO ENERGY COMPANY, a Delaware corporation (hereinafter called the "Company"), any SUBSIDIARY GUARANTORS (as defined hereinafter) that may become parties hereto and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (hereinafter called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of a series of its debt securities denominated as its 9 1/2% Senior Subordinated Notes due 2008, Series A ( the "Series A Securities") and a second series of such debt securities denominated as its 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Series B Securities" and, together with the Series A Securities, the "Securities"), of substantially the tenor and principal amounts hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. The Series A Securities are to be originally issued in an aggregate principal amount of up to $260,000,000 on the date hereof pursuant to the Refinancing; additional Series A Securities may be originally issued from time to time thereafter in an aggregate principal amount of up to $140,000,000; and Series B Securities may also be originally issued from time to time hereafter, but only in exchange for Series A Securities then outstanding, in each case pursuant to a Registration Rights Agreement in an Exchange Offer. The Company shall cause each of its Restricted Subsidiaries (as defined herein), prior to, or contemporaneously with, such Restricted Subsidiary's incurrence of certain obligations as set forth in this Indenture, to execute and deliver a supplement hereto pursuant to which such Restricted Subsidiary shall agree to be bound by the terms of this Indenture, as if it were an original party hereto, and to guarantee the Company's obligations under this Indenture and the Securities, thereby becoming a Subsidiary Guarantor for purposes of this Indenture. All things necessary have been done on the part of the Company to make the Securities, when issued and executed by the Company and authenticated and delivered by the Trustee as herein provided, the valid obligations of the Company, in accordance with their respective terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, without preference of one series of Securities over the other and without preference of any Securities of one series over any other Securities of the same series as a result of any different dates of their original issuance, as follows: -1- 7 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1 Definitions. "Acquired Indebtedness" means Indebtedness of a Person (a) assumed in connection with an acquisition of Properties from such Person or (b) outstanding at the time such Person becomes a Subsidiary of any other Person (other than any Indebtedness incurred in connection with, or in contemplation of, such acquisition or such Person becoming such a Subsidiary). Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of Properties from any Person or the date the acquired Person becomes a Subsidiary. "Act," when used with respect to any Holder, has the meaning specified in Section 15.3. "Adjusted Consolidated Net Tangible Assets" means (without duplication), as of the date of determination, (a) the sum of (i) discounted future net cash flows from proved oil and gas reserves of the Company and its Restricted Subsidiaries calculated in accordance with SEC guidelines but before any state or federal 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, as increased by, as of the date of determination, the estimated discounted future net cash flows 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 extensions, discoveries and other additions and upward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to exploration, development, exploitation, production or other activities, in each case calculated in accordance with SEC guidelines (but before any state or federal income taxes and utilizing the prices utilized in such year-end reserve report), and decreased by, as of the date of determination, the estimated discounted future net cash flows 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 exploration, development, exploitation, production or other activities, in each case calculated in accordance with SEC guidelines (but before any state or federal income taxes and 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, except that in the event there is a Material Change as a result of such acquisitions, dispositions, or revisions, then the discounted future net cash flows 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 appraised value, as estimated by independent appraisers, of other tangible assets (including, without -2- 8 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 (other than a minority interest in a Finance Person), (ii) any net 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 cash flows, calculated in accordance with SEC guidelines (but before any state or federal income taxes and 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 cash flows, calculated in accordance with SEC guidelines but before any state or federal income taxes, 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 cash flows 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. "Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the amount by which the fair value of the Properties of such Subsidiary Guarantor exceeds the total amount of liabilities, including, without limitation, contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such date. "Affiliate" of any specified Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any other Person who is a director or executive officer of (a) such specified Person or (b) any Person described in the preceding clause (i). For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other disposition to any Person other than the Company or any of its Restricted Subsidiaries (including, without limitation, by way of merger or consolidation) (collectively, for purposes of this definition, a "transfer"), directly or indirectly, in one or a series of related transactions, of (a) any Capital Stock of any Restricted Subsidiary held by the Company or any Restricted Subsidiary (other than directors' qualifying shares and shares owned by foreign shareholders to the extent required by applicable local laws in the foreign countries), (b) all or substantially all of the Properties of the Company or any of its Restricted Subsidiaries or (c) any other Properties of the Company or any of its Restricted Subsidiaries other than (i) a disposition of hydrocarbons or other mineral products, inventory, accounts receivable, cash, Cash Equivalents or other Property in the ordinary course of business, (ii) any lease, abandonment, disposition, relinquishment or farm-out of any oil and gas Property in the ordinary course of business, (iii) the liquidation of Property received in settlement of debts owing to the Company or any Restricted -3- 9 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 course of business of the Company or such Restricted Subsidiary or (iv) the issuance and sale of Qualified Capital Stock by a Finance Person. For the purposes of this definition, the term "Asset Sale" shall not include (i) any transfer of Properties which is governed by, and made in accordance with, the provisions of Article VIII hereof; (ii) any transfer of Properties to an Unrestricted Subsidiary, if permitted under Section 10.10 hereof; or (iii) any transfer, in one or a series of related transactions, of Properties having a Fair Market Value of less than $2,500,000. "Average Life" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (a) the sum of the products of (i) the number of years (and any portion thereof) from the date of determination to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund or mandatory redemption payment requirements) of such Indebtedness multiplied by (ii) the amount of each such principal payment by (b) the sum of all such principal payments. "Board of Directors" means, with respect to the Company, either the board of directors of the Company or any duly authorized committee of such board of directors, and, with respect to any Subsidiary, either the board of directors of such Subsidiary or any duly authorized committee of that board. "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 its Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee, and with respect to a Subsidiary, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Subsidiary to have been duly adopted by its 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 Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the Borough of Manhattan, The City of New York, New York or the City of Boston, Massachusetts, are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents in the equity interests (however designated) in such Person, and any rights (other than debt securities convertible into an equity interest that do not constitute Eligible Convertible Securities), warrants or options exercisable for, exchangeable for or convertible into such an equity interest in such Person. (For avoidance of doubt, the Capital Stock of the Company includes any Qualifying TECONS and any Eligible Convertible Securities.) "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any Property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. -4- 10 "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 180 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof); (ii) demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500,000,000; (iii) commercial paper with a maturity of 180 days or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and rated at least A-l by S&P or at least P-l by Moody's; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any commercial bank meeting the specifications of clause (ii) above; (v) overnight bank deposits and bankers' acceptances at any commercial bank meeting the qualifications specified in clause (ii) above; (vi) deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in clause (ii) above but 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 (A) all such deposits are required to be made in such accounts in the ordinary course of business, (B) such deposits do not at any one time exceed $5,000,000 in the aggregate and (C) no funds so deposited remain on deposit in such bank for more than 30 days; (vii) deposits available for withdrawal on demand with any commercial bank not meeting the qualifications specified in clause (ii) above but which is a lending bank under any of the Company's or any Restricted Subsidiary's credit facilities, provided all such deposits do not exceed $5,000,000 in the aggregate at any one time; and (viii) investments in money market funds substantially all of whose assets comprise securities of the types described in clauses (i) through (v). "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total Voting Stock of the Company; (b) the Company is merged with or into or consolidated with another Person and, immediately after giving effect to the merger or consolidation, (A) less than 50% of the total voting power of the outstanding Voting Stock of the surviving or resulting Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the stockholders of the Company immediately prior to such merger or consolidation, and (B) any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act) has become the direct or indirect "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the Voting Stock of the surviving or resulting Person; (c) the Company, either individually or in conjunction with one or more Restricted Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the Properties of the Company and the Restricted Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Restricted Subsidiaries, to any Person (other than the Company or a Wholly Owned Restricted Subsidiary); (d) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office -5- 11 who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (e) the liquidation or dissolution of the Company; or (f) so long as any Existing Notes are outstanding, any other event constituting a Change of Control pursuant to the applicable Existing Indenture. "Code" shall mean the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations thereunder issued by the Internal Revenue Service. "Commission" or "SEC" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture 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. "Common Stock" of any Person means Capital Stock of such Person that does not rank prior, as to the payment of dividends 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. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, 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, its President, any Vice President, its Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Exploration Expenses" means, for any period, exploration expenses of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) the sum of Consolidated Net Income, Consolidated Interest Expense, the portion of Consolidated Exploration Expenses deducted in computing Consolidated Net Income, Consolidated Income Tax Expense and Consolidated Non-cash Charges deducted in computing Consolidated Net Income, in each case, for such period, of the Company and its Restricted Subsidiaries on a consolidated basis, all determined in accordance with GAAP, decreased (to the extent included in determining Consolidated Net Income) by the sum of (x) the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments and (y) amounts recorded in accordance with GAAP as repayments of principal and interest pursuant to Dollar-Denominated Production Payments, to (b) the sum of such Consolidated Interest Expense for such period; provided, however, that (i) the Consolidated Fixed Charge Coverage Ratio shall be calculated on the assumption that (A) the Indebtedness to be incurred (and all other Indebtedness incurred after the first day of the relevant period of fiscal quarters under Section 10.12 hereof through and including the date of determination) and (if applicable) the application of the net proceeds therefrom (and from any other such Indebtedness), including to refinance other Indebtedness, had been incurred on the first day of such period and, in the case of Acquired Indebtedness, on -6- 12 the assumption that the related transaction (whether by means of purchase, merger or otherwise) also had occurred on such date with the appropriate adjustments with respect to such acquisition being included in such pro forma calculation and (B) any acquisition or disposition by the Company or any Restricted Subsidiary of any Properties outside the ordinary course of business, or any repayment of any principal amount of any Indebtedness of the Company or any Restricted Subsidiary prior to the Stated Maturity thereof, in either case since the first day of such period through and including the date of determination, had been consummated on such first day of such period, (ii) in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness required to be computed on a pro forma basis in accordance with Section 10.12 hereof and (A) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation had been the applicable rate for the entire period and (B) which was not outstanding during the period for which the computation is being made but which bears, at the option of the Company, a fixed or floating rate of interest, shall be computed by applying, at the option of the Company, either the fixed or floating rate, (iii) in making such computation, the Consolidated Interest Expense attributable to interest on any Indebtedness under a revolving credit facility required to be computed on a pro forma basis in accordance with Section 10.12 hereof shall be computed based upon the average daily balance of such Indebtedness during the applicable period, provided that such average daily balance shall be reduced by the amount of any repayment of Indebtedness under a revolving credit facility during the applicable period, which repayment permanently reduced the commitments or amounts available to be reborrowed under such facility, (iv) notwithstanding clauses (ii) and (iii) of this proviso, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Rate Protection Obligations, shall be deemed to have accrued at the rate per annum resulting after giving effect to the operation of such agreements, (v) in making such calculation, Consolidated Interest Expense shall exclude interest attributable to Dollar-Denominated Production Payments, and (vi) if after the first day of the period referred to in clause (a) of this definition the Company has retired any Indebtedness out of the net cash proceeds of the issue and sale of Qualified Capital Stock of the Company within 30 days of such issuance and sale, Consolidated Interest Expense shall be calculated on a pro forma basis as if such Indebtedness had been retired on the first day of such period. For the purposes of Section 10.12 hereof, if the Company incurs, or permits any of its Restricted Subsidiaries to incur, any Indebtedness (including Acquired Indebtedness), other than Permitted Indebtedness: (x) on any date which is on or before March 31, 2000, the Company will determine its Consolidated Fixed Charge Coverage Ratio for the full fiscal quarter or quarters, as the case may be, commencing on April 1, 1999 and ending on or before such date; and (y) on any date which is after March 31, 2000, the Company will determine its Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding such date. "Consolidated Income Tax Expense" means, for any period, the provision for federal, state, local and foreign income taxes (including state franchise taxes accounted for as income taxes in accordance with GAAP) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, without duplication, (i) the sum of (a) the interest expense of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (A) any amortization of debt discount, (B) the net cost under Interest -7- 13 Rate Protection Obligations (including any amortization of discounts), (C) the interest portion of any deferred payment obligation constituting Indebtedness, (D) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and (E) all accrued interest, in each case to the extent attributable to such period, (b) to the extent any Indebtedness of any Person (other than the Company or a Restricted Subsidiary) is guaranteed by the Company or any Restricted Subsidiary, the aggregate amount of interest paid (to the extent not accrued in a prior period) or accrued by such other Person during such period attributable to any such Indebtedness, in each case to the extent attributable to that period, (c) the aggregate amount of the interest component of Capitalized Lease Obligations paid (to the extent not accrued in a prior period), accrued or scheduled to be paid or accrued by the Company and its Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP and (d) the aggregate amount of dividends paid (to the extent not accrued in a prior period) or accrued on Redeemable Capital Stock of the Company and its Restricted Subsidiaries, to the extent such Redeemable Capital Stock is owned by Persons other than the Company or its Restricted Subsidiaries and to the extent such dividends are not paid in Common Stock, less (ii) to the extent included in clause (i), (a) fees and expenses associated with the Refinancing, (b) amortization of capitalized debt issuance costs of the Company and its Restricted Subsidiaries during such period, (c) dividends on Qualifying TECONS, and (d) non-cash interest on Eligible Convertible Securities. "Consolidated Net Income" means, for any period, the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period as determined in accordance with GAAP, adjusted by excluding (a) net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (b) net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (c) the net income (or net loss) of any Person (other than the Company or any of its Restricted Subsidiaries), in which the Company or any of its Restricted Subsidiaries has an ownership interest, except to the extent of the amount of dividends or other distributions or interest on indebtedness actually paid to the Company or any of its Restricted Subsidiaries in cash by such other Person during such period (regardless of whether such cash dividends, distributions or interest on indebtedness is attributable to net income (or net loss) of such Person during such period or during any prior period), (d) net income (or net loss) of any Person combined with the Company or any of its Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (e) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary is not at the date of determination permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (f) dividends paid on Qualifying TECONS, (g) non-cash interest on Eligible Convertible Securities, to the extent deducted in determining consolidated net income (or loss), (h) fees and expenses associated with the Refinancing, to the extent deducted in determining consolidated net income (or loss), (i) Consolidated Exploration Expenses and any writedowns or impairments of non-current assets (less an amount equal to the amortization on a quarterly basis of the cumulative Consolidated Exploration Expenses and writedowns or impairments of non-current assets, calculated as two and one-half percent of the cumulative net balance of such costs); and (j) solely for purposes of calculating the Consolidated Fixed Charge Coverage Ratio at any time, net gains or losses on oil and natural gas price hedging arrangements during periods ending on or prior to March 31, 2000. -8- 14 "Consolidated Net Worth" means, at any date, the consolidated stockholders' equity of the Company and its Restricted Subsidiaries less the amount of such stockholders' equity attributable to Redeemable Capital Stock or treasury stock of the Company and its Restricted Subsidiaries, as determined in accordance with GAAP. "Consolidated Non-cash Charges" means, for any period, the aggregate depreciation, depletion, amortization and other non-cash expenses of the Company and its Restricted Subsidiaries reducing Consolidated Net Income for such period, determined on a consolidated basis in accordance with GAAP (excluding any such non-cash charge to the extent required as an accrual of or reserve for cash charges for any future period). "Corporate Trust Office" means the principal corporate trust office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 2 Avenue de Lafayette, Boston, Massachusetts 02111-1724. "Credit Facility" means that certain Second Restated Credit Agreement among the Company, certain Subsidiaries of the Company, Bank of America, N.A., as Administrative Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and certain lenders named therein, as the same may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time. "Default" means any event that is or with the passage of time or giving of notice or both would be an Event of Default. "Defaulted Interest" has the meaning specified in Section 3.8 hereof. "Depository" means The Depository Trust Company, its nominees and their respective successors. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors of the Company is required to deliver a Board Resolution hereunder, a member of the Board of Directors of the Company who does not have any material direct or indirect financial interest (other than an interest arising solely from the beneficial ownership of Capital Stock of the Company) in or with respect to such transaction or series of transactions. "Dollar-Denominated Production Payments" means production payment obligations recorded as liabilities in accordance with GAAP, together with all undertakings and obligations in connection therewith. "Eligible Convertible Securities" means any security issued by the Company that (a) is subordinated in right of payment to the Securities, (b) has a final Stated Maturity at least 91 days after the final Stated Maturity of the Securities, and (c) by its terms or by the terms of any security into which it is convertible or by contract or otherwise requires no scheduled payments, including principal, premium, interest and fees, prior to its final Stated Maturity, other than payments payable only in shares of Common Stock issued by the Company or in options, warrants or other rights to purchase Common Stock issued by the Company. -9- 15 "Equity Offering" means a bona fide underwritten sale to the public of Common Stock of the Company pursuant to a registration statement (other than on Form S-8 or any other form relating to securities issuable under any employee benefit plan of the Company) that is declared effective by the Commission following the Issue Date. "Event of Default" has the meaning specified in Section 5.1 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor act thereto. "Exchange Offer" means the offer that may be made by the Company pursuant to a Registration Rights Agreement to exchange Series B Securities for Series A Securities. "Exchanged Properties" means Properties used or useful in the Oil and Gas Business received by the Company or a Restricted Subsidiary in exchange for other Properties owned by it, whether directly or indirectly through the acquisition of the Capital Stock of a Person holding such Properties so that such Person becomes a Wholly Owned Restricted Subsidiary of the Company, in trade or as a portion of the total consideration for such other Properties. "Existing 8 7/8% Indenture" means that certain indenture dated as of June 8, 1998, among the Company, its Subsidiaries party thereto and State Street Bank and Trust Company, as Trustee, as the same may have been amended or supplemented from time to time prior to the date hereof. "Existing 8 7/8% Notes" means the 8 7/8% Senior Subordinated Notes due 2008, Series B issued pursuant to the Existing 8 7/8% Indenture. "Existing 9 1/2% Indenture" means that certain indenture dated as of April 1, 1996 among the Company, its Subsidiaries party thereto and State Street Bank and Trust Company, as Trustee, as the same may have been amended or supplemented from time to time prior to the date hereof. "Existing 91/2% Notes" means the 9 1/2% Senior Subordinated Notes due 2006 issued pursuant to the Existing 9 1/2% Indenture. "Existing Notes" means the Existing 8 7/8% Notes and the Existing 9 1/2% Notes. "Existing Indentures" means the Existing 8 7/8% Indenture and the Existing 9 1/2% Indenture. "Existing TECONS" means the Company-Obligated Mandatorily Redeemable Convertible Preferred Securities issued by Nuevo Financing I, a statutory business trust wholly owned by the Company, on December 23, 1996, in an aggregate liquidation amount of $115,000,000. "Fair Market Value" means the fair market value of a Property (including shares of Capital Stock) as determined in good faith by the Board of Directors of the Company and evidenced by a Board Resolution, which determination shall be conclusive for purposes of this Indenture; provided, however, that unless otherwise specified herein, the Board of -10- 16 Directors shall be under no obligation to obtain any valuation or assessment from any investment banker, appraiser or other third party. "Federal Bankruptcy Code" means the United States Bankruptcy Code of Title 11 of the United States Code, as amended from time to time. "Finance Person" means a Subsidiary of the Company, the Common Stock of which is owned by the Company, that does not engage in any activity other than (i) the holding of Subordinated Indebtedness with respect to which payments of interest on such Subordinated Indebtedness can, at the election of the issuer thereof, be deferred for one or more payment periods, (ii) the issuance of Qualifying TECONS and Common Stock and/or debt securities and (iii) any activity necessary, incidental or related to the foregoing. "GAAP" means generally accepted accounting principles, consistently applied, that are set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States of America, which are effective on June 8, 1998. The term "guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments or documents for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit; provided, however, that a guarantee by any Person shall not include a contractual commitment by one Person to invest in another Person provided that such Investment is otherwise permitted by this Indenture. When used as a verb, "guarantee" shall have a corresponding meaning. "Guarantor Senior Indebtedness" means the principal of (and premium, if any, on) and interest on (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law) and other amounts due on or in connection with (including any fees, premiums, expenses, including costs of collection, and indemnities) any Indebtedness of a Subsidiary Guarantor, whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness will be pari passu with or subordinated in right of payment to its Subsidiary Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness of a Subsidiary Guarantor shall not include (i) Indebtedness of such Subsidiary Guarantor evidenced by its Subsidiary Guarantee, (ii) Indebtedness of such Subsidiary Guarantor that is expressly pari passu with its Subsidiary Guarantee or is expressly subordinated in right of payment to any Guarantor Senior Indebtedness of such Subsidiary Guarantor or its Subsidiary Guarantee, (iii) Indebtedness of such Subsidiary Guarantor to the extent incurred in violation of Section 10.12 hereof, (iv) Indebtedness of such Subsidiary Guarantor to the Company or any of the Company's other Subsidiaries or to any Affiliate of the Company or any Subsidiary of such Affiliate and (v) Indebtedness which when incurred and without -11- 17 regard to any election under Section 1111(b) of the Federal Bankruptcy Code is without recourse to such Subsidiary Guarantor. "Holder" means a Person in whose name a Security is registered in a Security Register. "Indebtedness" means, with respect to any Person, without duplication, (a) all liabilities of such Person for borrowed money or for the deferred purchase price of Property or services (excluding any trade accounts payable and other accrued current liabilities incurred in the ordinary course of business), and all liabilities of such Person incurred in connection with any letters of credit, bankers' acceptances or other similar credit transactions or any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock outstanding on the date of this Indenture or thereafter, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (b) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, (c) all Indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such Property), but excluding trade accounts payable arising in the ordinary course of business, (d) all Capitalized Lease Obligations of such Person, (e) all Indebtedness referred to in the preceding clauses of other Persons and all dividends of other Persons, the payment of which is secured by (or for which the holder of such Indebtedness has an existing right to be secured by) any Lien upon Property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness (the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured), (f) all guarantees by such Person of Indebtedness referred to in this definition (including, with respect to any Production Payment, any warranties or guaranties of production or payment by such Person with respect to a Production Payment but excluding other contractual obligations of such Person with respect to such Production Payment), (g) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends and (h) all obligations of such Person under or in respect of currency exchange contracts, oil and natural gas price hedging arrangements and Interest Rate Protection Obligations; provided, however, that Indebtedness shall not include (i) Eligible Convertible Securities, (ii) Qualifying TECONS and (iii) Indebtedness (including guarantees thereof) relating to Qualifying TECONS and held by a Finance Person; provided further, that Indebtedness shall include debt securities issued in connection with Existing TECONS and, for purposes of Section 5.1(e) hereof only, Indebtedness shall include debt securities issued in connection with Qualifying TECONS and debt securities issued in connection with Eligible Convertible Securities. For purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture, and if such price is based upon, or measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair Market Value shall be determined in good faith by the board of directors of the issuer of such Redeemable Capital Stock; provided, -12- 18 however, that if such Redeemable Capital Stock is not at the date of determination permitted or required to be repurchased, the "maximum fixed repurchase price" shall be the book value of such Redeemable Capital Stock. Subject to clause (f) of the first sentence of this definition, neither Dollar-Denominated Production Payments nor Volumetric Production Payments shall be deemed to be Indebtedness. "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. "Insolvency or Liquidation Proceeding" means, with respect to any Person, (a) an insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or similar case or proceeding in connection therewith, relative to such Person or its creditors, as such, or its assets or (b) any liquidation, dissolution or other winding-up proceeding of such Person, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (c) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of such Person. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate Protection Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements or arrangements designed to protect against or manage such Person's and any of its Subsidiaries' exposure to fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect advance, loan, guarantee of Indebtedness or other extension of credit or capital contribution to (by means of any transfer of cash or other Property to others or any payment for Property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities (including derivatives) or evidences of Indebtedness issued by, any other Person. In addition, the Fair Market Value of the net assets of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be deemed to be an "Investment" made by the Company in such Unrestricted Subsidiary at such time. In addition, in the event an Unrestricted Subsidiary is designated as a Restricted Subsidiary, then there shall be deemed to be a return of an "Investment" in the amount of the lesser of (i) the book value of the Investments previously made in such Unrestricted Subsidiary that were treated as Restricted Payments, and (ii) the Fair Market Value of the net assets of such Unrestricted Subsidiary at such time. "Investments" shall exclude (a) extensions of trade credit under a joint operating agreement or otherwise in the ordinary course of business, workers' compensation, utility, lease and similar deposits and prepaid expenses in the ordinary course of business, (b) Interest Rate Protection Obligations entered into in the ordinary course of business or as required by any Permitted Indebtedness or any other Indebtedness incurred in compliance with Section 10.12 hereof, but only to the extent that the stated aggregate notional amounts of such Interest Rate Protection Obligations do not exceed -13- 19 105% of the aggregate principal amount of such Indebtedness to which such Interest Rate Protection Obligations relate, (c) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under Section 10.17 hereof and (d) endorsements of negotiable instruments and documents in the ordinary course of business. "Issue Date" means the date on which the Offered Securities were first issued under this Indenture. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing) upon or with respect to any Property of any kind. A Person shall be deemed to own subject to a Lien any Property which such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Liquid Securities" means securities (i) of an issuer that is not an Affiliate of the Company and (ii) that are publicly traded on the New York Stock Exchange, the American Stock Exchange, the Toronto Stock Exchange, the Australian Stock Exchange, the London Stock Exchange or the Nasdaq National Market; provided that securities meeting the requirements of clauses (i) and (ii) 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 (or securities exchangeable for, or convertible into, such securities) are sold or exchanged for cash or Cash Equivalents and (y) 180 days following the date of receipt of such securities. If such securities (or securities exchangeable for, or convertible into, 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 the provisions of Section 10.17(a) hereof, such securities shall be deemed not to have been Liquid Securities until 181 days following the date of receipt of such securities. "Material Change" means an increase or decrease (excluding changes that result solely from changes in prices) of more than 30% during a fiscal quarter in the estimated discounted future net cash flows from proved oil and gas reserves 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 that have been estimated by a nationally recognized firm of independent petroleum engineers and on which a report or reports exist and (ii) any disposition of properties held at the beginning of such quarter that have been disposed of in compliance with Section 10.17 hereof. "Material Subsidiary" means, at any particular time, any Restricted Subsidiary that, together with its Subsidiaries, (a) accounted for more than 5% of the consolidated revenues of the Company and its Restricted Subsidiaries for the most recently completed fiscal year of the Company, or (b) was the owner of more than 5% of the consolidated assets of the Company and its Restricted Subsidiaries at the end of such fiscal year, all as shown in the case of (a) and (b) on the consolidated financial statements of the Company and its Restricted Subsidiaries for such fiscal year. -14- 20 "Maturity" means, with respect to any Security, the date on which any principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity with respect to such principal or by declaration of acceleration, call for redemption or purchase or otherwise. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (i) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment banks) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) amounts required to be paid to any Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the Property subject to the Asset Sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP consistently applied against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of such reserves shall constitute Net Cash Proceeds. "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 consolidated financial statements of the Company prepared in accordance with GAAP. "Non-payment Event of Default" means any event (other than a Payment Event of Default), the occurrence of which (with or without notice or the passage of time) entitles one or more Persons to accelerate the maturity of any Specified Senior Indebtedness. "Non-Recourse Purchase Money Indebtedness" means (i) Indebtedness (other than Capital Lease Obligations) of the Company or any Restricted Subsidiary incurred in connection with the acquisition by the Company or such Restricted Subsidiary in the ordinary course of business of fixed assets used in the Oil and Gas Business (including office buildings and other real property used by the Company or such Restricted Subsidiary in conducting its operations) and (ii) any renewals and refinancings of such Indebtedness; provided that the holders of such Indebtedness described in clauses (i) and (ii) agree that they will look solely to the fixed assets so acquired which secure such Indebtedness (subject to customary exceptions such as indemnifications for environmental, title, fraud and other matters), and neither the Company nor any Restricted Subsidiary (a) is directly or indirectly liable for such Indebtedness or (b) provides credit support, including any undertaking, guarantee, agreement or instrument that would constitute Indebtedness (other than the grant of a Lien on such acquired fixed assets). "Offered Securities" has the meaning set forth in Section 3.1 hereof. -15- 21 "Officer" means, with respect to any Person, the Chairman of the Board, the President, any Vice President, the Chief Financial Officer or the Treasurer of such Person. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Oil and Gas Business" means (i) the acquisition, exploration, development, operation and disposition of interests in oil, gas and other hydrocarbon Properties, (ii) the gathering, marketing, treating, processing, storage, selling and transporting of any production from such interests or Properties, (iii) any business relating to or arising from exploration for or development, production, treatment, processing, storage, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (iv) any power generation and electrical transmission business in a jurisdiction outside of North America where fuel required by such business is supplied, directly or indirectly, from production reserves substantially from blocks in which the Company or its Restricted Subsidiaries participate and (v) any activity necessary, appropriate or incidental to the activities described in the foregoing clauses (i) through (iv) of this definition. "OPIC Facility" means that certain Finance Agreement dated December 28, 1994, among The Nuevo Congo Company, The Congo Holding Company, and the Overseas Private Investment Corporation, as such agreement may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time in one or more credit agreements, loan agreements, instruments or similar agreements, as such may be further amended, modified, extended, restated, replaced, renewed or refinanced. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company (or any Subsidiary Guarantor), including an employee of the Company (or any Subsidiary Guarantor), and who shall be reasonably acceptable to the Trustee. "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities, 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; -16- 22 (iii) Securities, except to the extent provided in Sections 12.2 and 12.3 hereof, with respect to which the Company has effected legal defeasance or covenant defeasance as provided in Article XII hereof; and (iv) Securities which have been paid pursuant to Section 3.7 hereof 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 the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Securities owned by the Company, any Subsidiary Guarantor or any other obligor upon the Securities or any Affiliate of the Company, any Subsidiary Guarantor or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, consent, notice or waiver, only Securities which the Trustee 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 Securities and that the pledgee is not the Company, any Subsidiary Guarantor or any other obligor upon the Securities or any Affiliate of the Company, any Subsidiary Guarantor or such other obligor. "Pari Passu Indebtedness" means any Indebtedness of the Company that is pari passu in right of payment to the Securities, including, without limitation, the Existing Notes. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any, on) or interest on any Securities on behalf of the Company. "Payment Event of Default" means any default in the payment or required prepayment of principal of (or premium, if any, on) or interest on any Specified Senior Indebtedness when due (whether at final maturity, upon scheduled installment, upon acceleration or otherwise). "Permitted Guarantor Junior Securities" means with respect to any Subsidiary Guarantor, equity securities or subordinated debt securities of such Subsidiary Guarantor or any successor obligor with respect to its Guarantor Senior Indebtedness provided for by a plan of reorganization or readjustment that, in the case of any such subordinated debt securities, are subordinated in right of payment to all Guarantor Senior Indebtedness of such Subsidiary Guarantor or successor obligor that may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Subsidiary Guarantee of such Subsidiary Guarantor is so subordinated as provided in this Indenture. "Permitted Indebtedness" means any of the following: -17- 23 (i) Indebtedness under the Credit Facility in an aggregate principal amount at any one time outstanding not to exceed the greater of (A) $400,000,000, less (1) any amounts of principal of such Indebtedness repaid pursuant to clause (b)(i)(A) of Section 10.17 hereof, and (2) any amount of principal of such Indebtedness that was refinanced pursuant to, and that could only be refinanced pursuant to, clause (x) of this definition; or (B) the borrowing base thereunder, less, in the event that the Company incurs additional Indebtedness by refinancing Indebtedness under the Credit Facility on any date, pursuant to, and that could only be refinanced pursuant to, clause (x) of this definition, twenty-five percent of the aggregate amount of principal of such Indebtedness, until, and only until, the Consolidated Fixed Charge Coverage Ratio for any period of four full fiscal quarters ending after such date is at least 2.5 to 1.0, provided that both subclauses (A) and (B) shall include any guarantee of any such Indebtedness and any fees, premiums, expenses (including costs of collection), indemnities and other amounts payable in connection with such Indebtedness; (ii) Indebtedness under the Offered Securities and any Subsidiary Guarantees relating thereto or to any other Securities; (iii) Indebtedness outstanding on June 8, 1998, including, without limitation, the Existing Notes (and not repaid or defeased with the proceeds of the offering of the Securities) and additional Indebtedness permitted to be incurred pursuant to commitments existing under the OPIC Facility on June 8, 1998; (iv) obligations of the Company or a Restricted Subsidiary pursuant to Interest Rate Protection Obligations, but only to the extent that the stated aggregate notional amounts of such obligations do not exceed 105% of the aggregate principal amount of the Indebtedness covered by such Interest Rate Protection Obligations; obligations under currency exchange contracts entered into in the ordinary course of business; and hedging arrangements that the Company or a Restricted Subsidiary enters into in the ordinary course of business for the purpose of protecting its production against fluctuations in oil or natural gas prices; (v) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary or a Finance Person and Indebtedness of a Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary or a Finance Person; provided, however, that upon any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or such Finance Person ceasing to be a Finance Person, as the case may be, or any other subsequent transfer of any such Indebtedness (except to the Company or a Wholly Owned Restricted Subsidiary or a Finance Person), such Indebtedness shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of Section 10.12 at the time the Wholly Owned Restricted Subsidiary or Finance Person in question ceased to be a Wholly Owned Restricted Subsidiary or Finance Person, as the case may be; -18- 24 (vi) in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; (vii) Indebtedness in respect of bid, performance or surety bonds issued for the account of the Company or any Restricted Subsidiary in the ordinary course of business, including guaranties and letters of credit supporting such bid, performance or surety obligations (in each case other than for an obligation for money borrowed); (viii) any guarantee of Senior Indebtedness or Guarantor Senior Indebtedness incurred in compliance with Section 10.12 hereof, by a Restricted Subsidiary or the Company; (ix) Non-Recourse Purchase Money Indebtedness; (x) any renewals, substitutions, exchanges, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company or a Restricted Subsidiary of any Indebtedness incurred pursuant to the provisions of Section 10.12 (excluding Permitted Indebtedness) or pursuant to clause (i), (ii) or (iii) of this definition, including any successive refinancings by the Company or such Restricted Subsidiary, so long as (A) any such new Indebtedness shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of the Company or such Restricted Subsidiary incurred in connection with such refinancing, (B) in the case of any refinancing of Indebtedness of the Company that is not Senior Indebtedness, such new Indebtedness is either pari passu with the Securities or subordinated to the Securities at least to the same extent as the Indebtedness being refinanced, (C) in the case of any refinancing of Indebtedness pursuant to clause (i) of this definition, such new Indebtedness is either Pari Passu Indebtedness or Subordinated Indebtedness and has a final Stated Maturity of at least 91 days after the final Stated Maturity of the Securities and (D) such new Indebtedness has an Average Life equal to or longer than the Average Life of the Indebtedness being refinanced and a final Stated Maturity equal to or later than the final Stated Maturity of the Indebtedness being refinanced; and (xi) any additional Indebtedness in an aggregate principal amount not in excess of $25,000,000 at any one time outstanding. "Permitted Investments" means any of the following: (i) Investments in Cash Equivalents; (ii) Investments in the Company or any of its Restricted Subsidiaries; (iii) Investments in an amount not to exceed $10,000,000 at any one time outstanding; (iv) Investments by the Company or any of its Restricted Subsidiaries in another Person, if as a result of such Investment (A) such other Person becomes a Restricted Subsidiary or -19- 25 (B) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its Properties to, the Company or a Restricted Subsidiary; (v) 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 a means of actively exploiting, exploring for, acquiring, developing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit a Person to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of the Oil and Gas Business jointly with third parties, including, without limitation, (A) ownership interests in oil and gas properties or gathering systems and (B) Investments and expenditures in the form of or pursuant to operating agreements, processing agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling arrangements, joint bidding agreements, service contracts, joint venture agreements, partnership agreements (whether general or limited), subscription agreements, stock purchase agreements and other similar agreements with third parties (including Unrestricted Subsidiaries); (vi) entry into any hedging arrangements in the ordinary course of business for the purpose of protecting the Company's or any Restricted Subsidiary's production against fluctuations in oil or natural gas prices; (vii) entry into any currency exchange contract in the ordinary course of business; (viii) Investments in obligations or securities received as a result of any Asset Sale; (ix) advances and loans to officers, directors and employees of the Company or any Restricted Subsidiary in the ordinary course of business; (x) Investments pursuant to any agreement or obligation in effect on June 8, 1998; (xi) Investments in obligations or securities received in settlement of debts owing to the Company or a Restricted Subsidiary as a result of bankruptcy or insolvency proceedings or upon the foreclosure, perfection or enforcement of any Lien in favor of the Company or a Restricted Subsidiary, in each case as to debt owing to the Company or a Restricted Subsidiary that arose in the ordinary course of business of the Company or any such Restricted Subsidiary; and (xii) contributions to Unrestricted Subsidiaries of the Company's interests in 24 undeveloped federal leases offshore California, known as the COOGER acreage, included in seven units (Bonita, Sword, Point Sal, Gato Canyon, Lion Rock, Purisina Point and Santa Maria). "Permitted Junior Securities" means any equity securities or subordinated debt securities of the Company or any successor obligor with respect to the Senior Indebtedness provided for by a plan of reorganization or readjustment that, in the case of any such subordinated debt securities, are subordinated in right of payment to all Senior Indebtedness that may at the time be outstanding to substantially the same degree as, or to a greater extent than, the Securities are so subordinated as provided in this Indenture. "Permitted Liens" means the following types of Liens: (a) Liens existing as of June 8, 1998 (except to the extent such Liens secure Indebtedness that was repaid or defeased with proceeds of the offering of the Existing 8 7/8% Notes), and any renewal, extension, refunding, exchange or refinancing of any such Lien provided that thereafter such Lien extends only to the Properties that were subject to such Lien prior to the renewal, extension, refunding, exchange or refinancing thereof; (b) Liens securing the Securities or the Subsidiary Guarantees; and (c) Liens in favor of the Company. -20- 26 "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security, including any Security of a different series, 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 3.7 hereof in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock, whether now outstanding or issued after the date of this Indenture, including, without limitation, all classes and series of preferred or preference stock of such Person. "Private Placement Legend" means the legend initially set forth in Section 2.2 hereof. "Production Payments" means, collectively, Dollar-Denominated Production Payments and Volumetric Production Payments. "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. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock and, with respect to the Company, Qualified Capital Stock includes, without limitation, any Qualifying TECONS and any Eligible Convertible Securities. "Qualified Institutional Buyer" has the meaning attributed thereto in Rule 144A under the Securities Act. "Qualifying TECONS" means preferred trust securities or similar securities issued by a Finance Person after June 8, 1998. "Record Date" means a Regular Record Date or a Special Record Date. "Redeemable Capital Stock" means any Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise, is, or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Securities or is redeemable at the option of the holder thereof at any time prior to such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided, that Redeemable Capital Stock shall not include any security by virtue of the fact that it may be exchanged or converted at the option of the holder, or at the option of the Company, into Common Stock of the Company. -21- 27 "Redemption Date," when used with respect to any Security to be redeemed, in whole or in part, 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. "Refinancing" means the exchange offers, consent solicitations and related transactions involved in the exchange of the Offered Securities for Existing 9 1/2% Notes and Existing 8 7/8% Notes pursuant to the Company's Confidential Memorandum dated July 13, 1999, as supplemented. "Registration Default" has the meaning ascribed thereto in a Registration Rights Agreement. "Registration Rights Agreement" means (a) the Registration Agreement, dated as of August 20, 1999, by and among the Company and Bank of America Securities LLC and Salomon Smith Barney Inc., as co-dealer managers, relating to the Offered Securities, a copy of which is attached hereto as Annex A, and (b) any similar agreement that the Company may enter into in relation to any other Series A Securities, in each case as such agreement may be amended, modified or supplemented from time to time. "Regular Record Date" for the interest payable on any Interest Payment Date means the May 15 or November 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Resale Restriction Termination Date" means, in relation to any particular Series A Securities, the date which is two years after the later of the date of original issue of such Series A Securities and the last date that the Company or any Affiliate thereof was the owner of such Series A Securities (or any Predecessor Securities). "Responsible Officer," when used with respect to the Trustee, means any officer in the Corporate Trust Department of the Trustee, and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Subsidiary" means any Subsidiary of the Company, whether existing on or after the date of this Indenture, unless such Subsidiary of the Company is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms of this Indenture. "Rule 144A" means Rule 144A under the Securities Act. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and its successors. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Series A Securities or Series B Securities authenticated and delivered under this Indenture. -22- 28 "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor act thereto. "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.5 hereof. "Senior Indebtedness" means the principal of (and premium, if any, on) and interest on (including interest accruing after the filing of a petition initiating any proceeding pursuant to any bankruptcy law) and other amounts due on or in connection with (including any fees, premiums, expenses, including costs of collection, and indemnities) any Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such Indebtedness will be pari passu with or expressly subordinated in right of payment to the Securities. Notwithstanding the foregoing, "Senior Indebtedness" will not include (A) Indebtedness evidenced by the Securities, (B) Indebtedness of the Company that is Pari Passu Indebtedness or is expressly subordinated in right of payment to any other Indebtedness of the Company, (C) Indebtedness that is represented by Redeemable Capital Stock, (D) Indebtedness of the Company to the extent incurred in violation of Section 10.12 hereof, (E) Indebtedness of the Company to any Subsidiary of the Company or any other Affiliate of the Company or any subsidiary of such Affiliate and (F) Indebtedness which when incurred and without regard to any election under Section 1111(b) of the Federal Bankruptcy Code is without recourse to the Company. "Series A Securities" has the meaning stated in the first recital of this Indenture and includes the Offered Securities. "Series B Securities" has the meaning stated in the first recital of this Indenture. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.8 hereof. "Specified Guarantor Senior Indebtedness" means, with respect to a Subsidiary Guarantor, (a) all Guarantor Senior Indebtedness of such Subsidiary Guarantor in respect of the Credit Facility and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings or replacements (each, for purposes of this definition, a "refinancing") thereof by such Subsidiary Guarantor, including any successive refinancings thereof by such Subsidiary Guarantor, and (b) any other Guarantor Senior Indebtedness and any refinancings thereof having a principal amount of at least $10,000,000 as of the date of determination and provided that the agreements, indentures or other instruments evidencing such Guarantor Senior Indebtedness or pursuant to which such Guarantor Senior Indebtedness was issued specifically designates such Guarantor Senior Indebtedness as "Specified Guarantor Senior Indebtedness" for purposes of this Indenture. For purposes of this definition, a refinancing of any Specified Guarantor Senior Indebtedness shall be treated as Specified Guarantor Senior Indebtedness only if the Indebtedness issued in such refinancing ranks or would rank pari passu with the Specified Guarantor Senior Indebtedness refinanced and only if the Indebtedness issued in such refinancing is permitted under Section 10.12 hereof. -23- 29 "Specified Property Sales" means the sales of any of the Company's and its Restricted Subsidiaries', (i) East Texas oil and gas properties sold in January, 1999 for approximately $192,000,000, and (ii) real properties, other than the Company's and its Restricted Subsidiaries' mineral interests, owned on the date of this Indenture and located in the Counties of Fresno, Kern, Kings, Los Angeles, Orange, Santa Barbara and Ventura in the State of California. "Specified Senior Indebtedness" means (a) all Senior Indebtedness of the Company in respect of the Credit Facility and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings, or replacements (each, for purposes of this definition, a "refinancing") thereof by the Company, including any successive refinancings thereof by the Company and (b) any other Senior Indebtedness and any refinancings thereof by the Company having a principal amount of at least $10,000,000 as of the date of determination and provided that the agreements, indentures or other instruments evidencing such Senior Indebtedness or pursuant to which such Senior Indebtedness was issued specifically designates such Senior Indebtedness as "Specified Senior Indebtedness" for purposes of this Indenture. For purposes of this definition, a refinancing of any Specified Senior Indebtedness shall be treated as a Specified Senior Indebtedness only if the Indebtedness issued in such refinancing ranks or would rank pari passu with the Specified Senior Indebtedness refinanced and only if Indebtedness issued in such refinancing is permitted by Section 10.12 hereof. "Stated Maturity" means, when used with respect to any Security or any installment of interest thereon, the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable, and, when used with respect to any other Indebtedness or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness as the fixed date on which the principal of such Indebtedness or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company which is expressly subordinated in right of payment to the Securities. "Subsidiary" means, with respect to any Person, (i) a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation), including, without limitation, a joint venture, in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, have at least majority ownership interest entitled to vote in the election of directors, managers or trustees thereof (or other Persons performing similar functions). "Subsidiary Guarantee" has the meaning specified in Section 13.1 hereof. "Subsidiary Guarantor" means, unless and until released from its Subsidiary Guarantor pursuant to Section 13.3 hereof, each of (i) the Company's Restricted Subsidiaries, if any, executing a supplemental indenture in compliance with the provisions of Section 10.13(a) hereof and (ii) any Person that becomes a successor guarantor of the Securities in compliance with the provisions of Section 13.2 hereof. -24- 30 "Torch Agreement" means, collectively, (i) Master Services Agreement among the Company and Torch Energy Advisors Incorporated, Torch Operating Company, Torch Energy Marketing, Inc., and Novistar, Inc., effective January 1, 1999; (ii) Field Operating Services Agreement between the Company and Torch Operating Company, effective January 1, 1999; (iii) Oil and Gas Administration Services Agreement between the Company and Novistar, Inc., effective January 1, 1999; (iv) Land Leasing Services Agreement between the Company and Torch Energy Advisors Incorporated, effective January 1, 1999; (v) Natural Gas Marketing Services Agreement between the Company and Torch Energy Marketing, Inc., effective January 1, 1999; (vi) Crude Oil Marketing Services Agreement between the Company and Torch Energy Marketing, Inc., effective January 1, 1999; (vii) Human Resources and Office Administration Services Agreement between the Company and Torch Energy Advisors Incorporated, effective January 1, 1999; and (viii) Corporate Administration Services Agreement between the Company and Torch Energy Advisors Incorporated, effective January 1, 1999, in each case, as the same may have been modified or amended from time to time prior to the date of this Indenture. "Transfer Restricted Security" has the meaning attributed thereto in a Registration Rights Agreement; provided, however, that the Trustee shall be entitled to request and conclusively rely upon an Opinion of Counsel with respect to whether or not any Security is a Transfer Restricted Security. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended and in force at the date as of which this Indenture is qualified under the TIA, except as provided in Section 9.5 hereof. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means (i) The Congo Holding Company, The Nuevo Congo Company, Nuevo Tunisia Ltd. and Nuevo Congo Ltd., (ii) any Subsidiary of the Company that at the time of determination will be designated an Unrestricted Subsidiary by the Board of Directors of the Company as provided below and (iii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary of the Company as an Unrestricted Subsidiary so long as (a) neither the Company nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness of such Subsidiary; (b) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its Stated Maturity; (c) neither the Company nor any Restricted Subsidiary has made an Investment in such Subsidiary unless such Investment was made pursuant to, and in accordance with, Section 10.10 hereof (other than Investments of the type described in clauses (iv) or (xii) of the definition of Permitted Investments); and (d) such designation shall not result in the creation or imposition of any Lien on any of the Properties of the Company or any Restricted Subsidiary (other than any Permitted Lien or any Lien the creation or imposition of which shall have been in compliance with Section 10.15 hereof); provided, however, that with respect to clause (a), the Company or a Restricted Subsidiary may be liable for Indebtedness of an Unrestricted Subsidiary if (x) such liability constituted a Permitted Investment or a Restricted Payment permitted by Section 10.10 hereof, in each case at the time of incurrence, or (y) the -25- 31 liability would be a Permitted Investment at the time of designation of such Subsidiary as an Unrestricted Subsidiary. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by filing a Board Resolution with the Trustee giving effect to such designation. The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation, (i) no Default or Event of Default shall have occurred and be continuing, (ii) the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 10.12 hereof and (iii) if any of the Properties of the Company or any of its Restricted Subsidiaries would upon such designation become subject to any Lien (other than a Permitted Lien), the creation or imposition of such Lien shall have been in compliance with Section 10.15 hereof. "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 GAAP, together with all undertakings and obligations in connection therewith. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, stock of any other class or classes shall have, or might have, voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to the extent (i) all of the Capital Stock or other ownership interests in such Restricted Subsidiary, other than any directors' qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (ii) such Restricted Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of such foreign jurisdiction to be partially owned by the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Restricted Subsidiary to transact business in such foreign jurisdiction, provided that the Company, directly or indirectly, owns the remaining Capital Stock or ownership interest in such Restricted Subsidiary and, by contract or otherwise, controls the management and business of such Restricted Subsidiary and derives the economic benefits of ownership of such Restricted Subsidiary to substantially the same extent as if such Restricted Subsidiary were a wholly owned Subsidiary. Section 1.2 Other Definitions.
Defined Term in Section ---- ---------- "Agent Members".............................................................. 3.6 "Change of Control Notice"................................................... 10.16(b) "Change of Control Offer".................................................... 10.16(a) "Change of Control Purchase Date"............................................ 10.16(a) "Change of Control Purchase Price"........................................... 10.16(a) "Defaulted Interest"......................................................... 3.8
-26- 32
Defined Term in Section ---- ---------- "Excess Proceeds"............................................................ 10.17(b) "Funding Guarantor".......................................................... 13.5 "Global Security"............................................................ 2.1 "Net Proceeds Deficiency".................................................... 10.17(c) "Net Proceeds Offer"......................................................... 10.17(c) "Net Proceeds Payment Date".................................................. 10.17(c) "Offered Price".............................................................. 10.17(c) "Pari Passu Indebtedness Amount"............................................. 10.17(c) "Pari Passu Offer"........................................................... 10.17(c) "Payment Amount"............................................................. 10.17(c) "Payment Blockage Notice".................................................... 14.3(b) "Payment Blockage Period".................................................... 14.3(b) "Permitted Consideration".................................................... 10.17(a) "Physical Securities"........................................................ 2.1 "Purchase Notice"............................................................ 10.17(c) "Restricted Payment"......................................................... 10.10(a) "Special Interest"........................................................... 3.1 "Subsidiary Guarantor Non-Payment Default"................................... 13.9(b) "Subsidiary Guarantor Payment Default"....................................... 13.9(a) "Subsidiary Guarantor Payment Notice"........................................ 13.9(b) "Surviving Entity"........................................................... 8.1(a) "Trigger Date"............................................................... 10.17(c) "U.S. Government Obligations"................................................ 12.4(a)
Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities, "indenture security holder" means a Holder, "indenture to be qualified" means this Indenture, "indenture trustee" or "institutional trustee" means the Trustee, and "obligor" on the indenture securities means the Company or any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein. -27- 33 Section 1.4 Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (c) 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; (d) the masculine gender includes the feminine and the neuter; (e) when used with reference to the Securities, the expression "of like tenor" refers to Securities of the same series; and (f) references to agreements and other instruments include subsequent amendments and waivers but only to the extent not prohibited by this Indenture. ARTICLE II SECURITY FORMS Section 2.1 Forms Generally. The definitive Securities shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities or notations of Subsidiary Guarantees, as the case may be, as evidenced by their execution of such Securities or notations of Subsidiary Guarantees, as the case may be. Securities (including the notations thereon relating to the Subsidiary Guarantees, if any, and the Trustee's certificate of authentication) offered and sold shall be issued initially in the form of one or more permanent global Securities substantially in the form set forth in Sections 2.2 through 2.5 hereof (each being herein called a "Global Security") deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. To the extent required by the rules and procedures of the Depository, Series A Securities initially issued in reliance on Regulation S, Rule 144A or another exemption from the registration requirements of the Securities Act shall be represented by separate Global Securities. Subject to the limitation set forth in Section 3.1, the principal amounts of the Global Securities may be increased or decreased from time to time by adjustments made on the records of the Trustee as custodian for the Depository, as hereinafter provided. Securities (including the notations thereon relating to the Subsidiary Guarantees, if any, and the Trustee's certificate of authentication) exchanged for beneficial interests in a Global Security as described in Section 3.6 shall be issued in the form of permanent -28- 34 certificated securities in registered form in substantially the form set forth in Sections 2.2 through 2.5 hereto ("Physical Securities"). The Series A Securities and the Series B Securities, the notations thereon relating to the Subsidiary Guarantees, if any, and the Trustee's certificate of authentication shall be in substantially the respective forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, CUSIP or other 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 as may, consistently herewith, be determined by the officers executing such Securities or notations of Subsidiary Guarantees, as the case may be, as evidenced by their execution of the Securities or notations of Subsidiary Guarantees, as the case may be. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. In addition to the requirements of Section 2.3, the Securities may also have set forth on the reverse side thereof a form of assignment and forms to elect purchase by the Company pursuant to Section 10.16 or 10.17 hereof. Section 2.2 Form of Face of Security. [THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE RE-OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501 (a)(1), (2), (3) or (7) UNDER THE SECURITIES ACT THAT IS AN INSTITUTIONAL INVESTOR ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF $250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES -29- 35 ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S, THE INITIAL PURCHASERS' AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.](1) NUEVO ENERGY COMPANY 9 1/2% Senior Subordinated Note due 2008, Series ____ No._____ $____________ CUSIP No. 670509 ______ Nuevo Energy Company, 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 _________ Dollars [(or such lesser amount as may be shown on the Schedule of Exchanges attached hereto)](2) on June 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon, commencing on ______________ and continuing semiannually thereafter, on June 1 and December 1 in each year, from _____________, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 9 1/2 % per annum, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Securities from the date on which such overdue interest becomes payable to the date payment of such interest has been made or duly provided for. [The Company also promises to pay any Special Interest required by a Registration Rights Agreement, upon the conditions, at the rates and for the periods specified therein.](3) 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 on the Security Register at the close of business on the Regular Record Date for such interest, which shall be the May 15 or November 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 shall forthwith cease to be payable to the Holder on such Regular Record Date, and such Defaulted Interest, and (to the extent lawful) interest on such Defaulted Interest at the rate borne by the Securities, may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered on the Security Register 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 may be paid at any time in any other - --------------------- (1) This legend should only be included on a Transfer Restricted Security. (2) This clause should be included only in a Global Security. (3) This sentence should be included only in a Series A Security. -30- 36 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. [Accrued but unpaid interest on any Series A Security that is exchanged for a Series B Security pursuant to an Exchange Offer should be paid on the first Interest Payment Date on the Series B Securities.](4) Payment of the principal of (and premium, if any, on) and interest on this Security will be made at the office or agency of the Company maintained for that purpose 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 payment of interest may be made on Physical Securities at the option of the Company on or before the due date by check mailed to the address of the Person entitled thereto as such address shall appear on 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. Unless the certificate of authentication hereon has been duly 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. NUEVO ENERGY COMPANY [SEAL] By: -------------------------------------- Title: Attest: - ------------------------------------ Title: Section 2.3 Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company designated as its 9 1/2% Senior Subordinated Notes due 2008, Series ___ (herein called the "Series ___ Securities" and, together with the Series ___ Securities, the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $400,000,000 at any time Outstanding, which may be issued under an indenture (herein called the "Indenture") dated as of August [ - ], 1999, between the Company and State Street Bank and Trust Company (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, any Subsidiary Guarantors party thereto, the Trustee and the Holders of the - -------------------------- (4) This sentence should be included only in a Series A Security. -31- 37 Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Indebtedness evidenced by the Securities is, to the extent and in the manner provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) and this Security is issued subject to such provisions. Each Holder of this Security, by accepting the same, (i) agrees to and shall be bound by such provisions, (ii) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (iii) appoints the Trustee as his attorney-in-fact for such purpose. The Securities are subject to redemption, at the option of the Company, in whole or in part, at any time on or after June 1, 2003, upon not less than 30 or more than 60 days' notice at the following Redemption Prices (expressed as percentages of principal amount) set forth below if redeemed during the 12-month period beginning June 1, of the years indicated below:
Year Redemption ---- Price ---------- 2003........................................................ 104.750 2004........................................................ 103.167 2005........................................................ 101.583 2006 and thereafter......................................... 100.000%
together in the case of any such redemption with accrued and unpaid interest, if any, to the Redemption Date, all as provided in the Indenture. Notwithstanding the foregoing, prior to June 1, 2001 the Company may, at any time or from time to time, redeem up to 33 1/3% of the aggregate principal amount of the Securities originally issued (excluding, for this purpose, any Series B Securities issued in exchange for Series A Securities) at a Redemption Price of 109.5% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date, with the net proceeds of one or more Equity Offerings of the Company, provided that at least 66 2/3% of the aggregate principal amount of the Securities originally issued (excluding, for this purpose, any Series B Securities issued in exchange for Series A Securities) remains Outstanding after the occurrence of such redemption and provided, further, that such redemption shall occur not later than 90 days after the date of the closing of any such Equity Offering. In the case of any redemption of Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. The Securities do not have the benefit of any mandatory redemption or sinking fund obligations. -32- 38 In the event of a Change of Control of the Company, and subject to certain conditions and limitations provided in the Indenture, the Company will be obligated to make an offer to purchase, on a Business Day not more than 60 or less than 30 days following the mailing of a notice of the occurrence of a Change of Control of the Company, all of the then Outstanding Securities at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the Change of Control Purchase Date, all as provided in the Indenture. In the event of Asset Sales, under certain circumstances, the Company will be obligated to make a Net Proceeds Offer to purchase all or a specified portion of each Holder's Securities at a purchase price equal to 100% of the principal amount of the Securities, together with accrued and unpaid interest to the Net Proceeds Payment Date. Holders of Securities that are the subject of an offer to purchase their securities from the Company may elect to have such Securities purchased by completing the form entitled "Option of Holder to Elect Purchase" below. As set forth in the Indenture, an Event of Default is generally (i) failure to pay principal upon maturity, redemption or otherwise (including pursuant to a Change of Control Offer or a Net Proceeds Offer); (ii) default for 30 days in payment of interest on any of the Securities; (iii) default in the performance of agreements relating to mergers, consolidations and sales of all or substantially all assets or the failure to make or consummate a Change of Control Offer or a Net Proceeds Offer; (iv) failure for 60 days after notice to comply with any other covenants in the Indenture, any Subsidiary Guarantee or the Securities; (v) certain payment defaults under, and the acceleration prior to the maturity of, certain Indebtedness of the Company or any Restricted Subsidiary in an aggregate principal amount in excess of $10,000,000 (or $40,000,000 in the case of Non-Recourse Purchase Money Indebtedness); (vi) the failure of any Subsidiary Guarantee to be in full force and effect or otherwise to be enforceable (except as permitted by the Indenture); (vii) certain final judgments or orders against the Company or any Restricted Subsidiary in an aggregate amount of more than $10,000,000 over the coverage under applicable insurance policies which remain unsatisfied and either become subject to commencement of enforcement proceedings or remain unstayed for a period of 60 days; and (viii) certain events of bankruptcy, insolvency or reorganization of the Company or any Material Subsidiary. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, except that (i) in the case of an Event of Default arising from certain events of bankruptcy, insolvency or reorganization of the Company or any Material Subsidiary, the principal amount of the Securities will become due and payable immediately without further action or notice, and (ii) in the case of an Event of Default which relates to certain payment defaults or acceleration with respect to certain Indebtedness, any such Event of Default and any consequential acceleration of the Securities will be automatically rescinded if any such Indebtedness is repaid or if the default relating to such Indebtedness is cured or waived and if the holders thereof have accelerated such Indebtedness then such holders have rescinded their declaration of acceleration. No Holder may pursue any remedy under the Indenture unless the Trustee shall have failed to act after notice from such Holder of an Event of Default and written request by Holders of at least 25% in aggregate principal amount of the Outstanding Securities, and the offer to the Trustee of indemnity reasonably satisfactory to it; however, such provision does not affect the right to sue for enforcement of any overdue payment on a Security by the Holder thereof. Subject to certain -33- 39 limitations, Holders of a majority in aggregate principal amount of the Outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing default (except default in payment of principal, premium or interest) if it determines in good faith that withholding the notice is in the interest of the Holders. The Company is required to file annual and quarterly reports with the Trustee as to the absence or existence of defaults. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Security and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Security. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and any Subsidiary Guarantors and the rights of the Holders under the Indenture at any time by the Company, such Subsidiary Guarantors 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 aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of 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. Without the consent of any Holder, the Company, any Subsidiary Guarantors and the Trustee may amend or supplement the Indenture or the Securities to cure any ambiguity, defect or inconsistency, to add or release any Subsidiary Guarantor pursuant to the Indenture, to provide for uncertificated Securities in addition to or in place of certificated Securities and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder in any material respect. 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 premium, if any, on) and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registerable on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose 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 and 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 $10 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like -34- 40 aggregate principal amount of Securities of like tenor and of a different authorized denomination, as requested by the Holder surrendering the same. 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 payable in connection therewith. A director, officer, employee, incorporator, stockholder or Affiliate of the Company or any Subsidiary Guarantor, as such, past, present or future shall not have any personal liability under this Security or the Indenture by reason of his or its status as such director, officer, employee, incorporator, stockholder or Affiliate, or any liability for any obligations of the Company or any Subsidiary Guarantor under the Securities or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Security with the notation of Subsidiary Guarantee endorsed hereon, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Security with the notation of Subsidiary Guarantee endorsed hereon. Prior to the time of due presentment of this Security for registration of transfer, the Company, any Subsidiary Guarantors, 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 is overdue, and neither the Company, any Subsidiary Guarantors, the Trustee nor any 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. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 1021 Main Street, Suite 2100, Houston, Texas 77002. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identifying information printed hereon. Interest on this Security shall be computed on the basis of a 360-day year comprised of twelve 30-day months. This Security shall be governed by and construed in accordance with the laws of the State of New York. ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to - ------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - ------------------------------------------------------------------------------- -35- 41 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint___________________________________to transfer this Security on the books of the Company. The agent may substitute another to act for him. - ------------------------------------------------------------------------------- Date: ------------------------ Your Signature: ---------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: ----------------------------- (By an institution that is a member of the Signature Guarantee Medallion program) OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 10.16 or 10.17 of the Indenture, check the box below: Section 10.16 Section 10.17 If you want to elect to have only part of the Security purchased by the Company pursuant to Section 10.16 or Section 10.17 of the Indenture, state the amount you elect to have purchased: $___________ Date: ------------------------ Your Signature: ---------------------------------- (Sign exactly as your name appears on the face of this Security) Soc. Sec. or Tax Identification No.: ------------- Signature Guarantee: ----------------------------- (By an institution that is a member of the Signature Guarantee Medallion program) -36- 42 SCHEDULE OF EXCHANGES OF SECURITIES(5) THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL SECURITY FOR OTHER SECURITIES HAVE BEEN MADE:
Principal Amount Amount of decrease Amount of increase of this Global Signature of in Principal in Principal Security following authorized officer Amount of this Amount of this such decrease (or of Trustee or Date of Exchange Global Security Global Security increase) Security Custodian - ------------------- -------------------- -------------------- -------------------- --------------------
Section 2.4 Form of Notation Relating to Subsidiary Guarantees. The form of notation to be set forth on each Security relating to the Subsidiary Guarantees, if any, shall be in substantially the following form: SUBSIDIARY GUARANTEES Subject to the limitations set forth in the Indenture, all Subsidiary Guarantors (as defined in the Indenture referred to in the Security upon which this notation is endorsed and each being hereinafter referred to as a "Subsidiary Guarantor," which term includes any successor Subsidiary Guarantor under the Indenture) that may become party to the Indenture after the execution and delivery thereof, have, jointly and severally, unconditionally guaranteed (a) the due and punctual payment of the principal (and premium, if any) of and interest on the Securities, whether at maturity, acceleration, redemption or otherwise, (b) the due and punctual payment of interest on the overdue principal of and interest on the Securities, if any, to the extent lawful, (c) the due and punctual performance of all other obligations of the Company to the Holders or the Trustee, all in accordance with the terms set forth in the Indenture, and (d) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. The obligations of each Subsidiary Guarantor are limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, result in the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. - ----------------------- (5) This should be included only if the Security is issued in global form. -37- 43 The obligations of the Subsidiary Guarantors to the Holders or the Trustee pursuant to the Subsidiary Guarantees and the Indenture are expressly subordinate to all Guarantor Senior Indebtedness to the extent set forth in Article XIII of the Indenture and reference is made to such Indenture for the precise terms of such subordination. No stockholder, officer, director, employee, incorporator or Affiliate as such, past, present or future, of any Subsidiary Guarantor shall have any personal liability under its Subsidiary Guarantee by reason of his or its status as such stockholder, officer, director, employee, incorporator or Affiliate, or any liability for any obligations of any Subsidiary Guarantor under the Securities or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Any Subsidiary Guarantor may be released from its Subsidiary Guarantee upon the terms and subject to the conditions provided in the Indenture. All terms used in this notation of Subsidiary Guarantee which are defined in the Indenture referred to in this Security upon which this notation of Subsidiary Guarantees is endorsed shall have the meanings assigned to them in such Indenture. The Subsidiary Guarantees shall be binding upon the Subsidiary Guarantors and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee respecting the Security upon which the foregoing Subsidiary Guarantees are noted, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof and in the Indenture. The Subsidiary Guarantees shall not be valid or obligatory for any purpose until the certificate of authentication on the Security upon which the foregoing Subsidiary Guarantees are noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. [SUBSIDIARY GUARANTORS] By: ------------------------------------ Section 2.5 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication shall be in substantially the following form: -38- 44 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within mentioned Indenture. Dated: State Street Bank and Trust Company, as Trustee -------------------- By: ------------------------------------ Authorized Signatory -39- 45 ARTICLE III THE SECURITIES Section 3.1 Title and Terms. The aggregate principal amount of Series A Securities which may be authenticated and delivered under this Indenture for original issue on the Issue Date is limited to $260,000,000 (such Series A Securities being herein called the "Offered Securities"), and from time to time after the Issue Date up to an additional $140,000,000 aggregate principal amount of Series A Securities may be issued, authenticated and delivered hereunder. The aggregate principal amount of Series B Securities which may be authenticated and delivered under this Indenture for original issue is limited to $400,000,000. The aggregate principal amount of Securities Outstanding at any one time may not exceed $400,000,000 except as provided in Section 3.7 hereof. The Series A Securities shall be known and designated as the "9 1/2% Senior Subordinated Notes due 2008, Series A" of the Company. Their Stated Maturity shall be June 1, 2008, and they shall bear interest at the rate of 9 1/2% per annum from the date of their original issuance, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on June 1 and December 1 in each year, commencing, in the case of the Offered Securities, December 1, 1999, and at said Stated Maturity, until the principal thereof is paid or duly provided for. The Series B Securities shall be known and designated as the "9 1/2% Senior Subordinated Notes due 2008, Series B" of the Company. Their Stated Maturity shall be June 1, 2008, and they shall bear interest at the rate of 9 1/2% per annum from the date of their original issuance, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on June 1 and December 1 in each year, commencing on the first June 1 or December 1 following the original issuance of the Series B Securities, and at said Stated Maturity, until the principal thereof is paid or duly provided for. Upon the occurrence of a Registration Default, the interest rate on Transfer Restricted Securities shall increase ("Special Interest"), with respect to the first 90-day period immediately following the occurrence of such Registration Default, by 0.50% per annum and shall increase by an additional 0.25% per annum with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of 1.0% per annum with respect to all Registration Defaults. Following the cure of a Registration Default, the accrual of Special Interest with respect to such Registration Default shall cease and upon the cure of all Registration Defaults the interest rate shall revert to the original rate. Any Special Interest due on any Security shall be payable on the appropriate Interest Payment Date to the Holder entitled to receive the interest payment to be made on such date. Each obligation to pay Special Interest shall be deemed to accrue from and including the date of the first applicable Registration Default to but excluding the date on which all Registration Defaults have been cured. Accrued but unpaid interest on any Series A Security that is exchanged for a Series B Security pursuant to a Registration Rights Agreement shall be paid on the first Interest Payment Date on the Series B Securities. -40- 46 The Series A Securities and the Series B Securities shall be considered collectively to be a single class for all purposes of this Indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. As provided in the applicable Registration Rights Agreement and subject to the limitations set forth therein, at the option of the Holders, the Series A Securities shall be exchangeable for Series B Securities of like aggregate principal amount pursuant to an Exchange Offer. The principal of (and premium, if any, on) and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose in The City of New York; provided, however, that, at the option of the Company, interest may be paid on Physical Securities by check mailed on or before the due date to addresses of the Persons entitled thereto as such addresses shall appear on the Security Register. The Securities shall be redeemable as provided in Article XI hereof. The Securities shall be subject to defeasance at the option of the Company as provided in Article XII hereof. The Securities shall be guaranteed by the Subsidiary Guarantors, if any, as provided in Article XIII hereof. The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article XIV hereof. Section 3.2 Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $10 and any integral multiple thereof. Section 3.3 Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or a Vice President of the Company, under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary of the Company. The signature of any of these officers on the Securities may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities. 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. At any time after the execution and delivery of this Indenture, the Company may deliver Series A Securities executed by the Company (and if at such time there are any Subsidiary Guarantors, then having the notations of Subsidiary Guarantees executed by such Subsidiary Guarantors) to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Series A Securities, and the Trustee in -41- 47 accordance with such Company Order shall authenticate and deliver such Series A Securities with the notations of Subsidiary Guarantees, if any, thereon as provided in this Indenture. Such Company Order shall specify the principal amount of the Series A Securities to be authenticated and the date on which the original issue of Series A Securities is to be authenticated. In addition, on or prior to the date of consummation of any Exchange Offer, the Company may deliver Series B Securities executed by the Company (and if at such time there are any Subsidiary Guarantors, then having the notations of Subsidiary Guarantees executed by such Subsidiary Guarantors) to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Series B Securities, and the Trustee in accordance with such Company Order shall authenticate and deliver such Series B Securities with the notations of Subsidiary Guarantees, if any, thereon as provided in this Indenture. Such Company Order shall specify the principal amount of the Series B Securities to be authenticated and the date on which the Series B Securities are to be exchanged for an equal principal amount of Series A 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 duly executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to and in compliance with Article VIII hereof, shall be consolidated or merged with or into any other Person or shall sell, convey, transfer, lease or otherwise dispose of all or substantially all of its Properties to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a sale, conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article VIII hereof, any of the Securities authenticated or delivered prior to such sale, consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person be exchanged for other Securities executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Securities as specified in such request for the purpose of such exchange. If Securities shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Securities, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities at the time Outstanding for Securities authenticated and delivered in such new name. Section 3.4 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 -42- 48 which they are issued (and if at such time there are any Subsidiary Guarantors, then having the notations of Subsidiary Guarantees thereon) and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities (and notations of Subsidiary Guarantees, if any) may determine, as conclusively evidenced by their execution of such Securities (and notations of Subsidiary Guarantees, if any). 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 designated for such purpose pursuant to Section 10.2 hereof, without charge to the 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 a like principal amount of definitive Securities of like tenor and of authorized denominations (and if at such time there are any Subsidiary Guarantors, then having the notations of Subsidiary Guarantees thereon). Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 3.5 Registration of Transfer and Exchange. The Company shall cause to be kept a register (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 Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times and during normal business hours, the Security Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Security Registrar") for the purpose of registering Securities and transfers of Securities as herein provided. Subject to the provisions of this Section 3.5 and Section 3.6 hereof, upon surrender for registration of transfer of any Security at the office or agency of the Company designated pursuant to Section 10.2 hereof, 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 like tenor and of any authorized denominations and of a like aggregate principal amount, each such Security having the notation of Subsidiary Guarantees thereon if there are then any Subsidiary Guarantors. Furthermore, any Holder of a Global Security shall, by acceptance of such Global Security, be deemed to have agreed that transfers of beneficial interests in such Global Security may be effected only through a book-entry system maintained by the Depository (or its agent), and that ownership of a beneficial interest in a Global Security shall be required to be reflected in a book entry. At the option of any Holder, Securities may be exchanged for other Securities of like tenor or of any authorized denomination and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at the office or agency of the Company designated pursuant to Section 10.2 hereof. Further, at the option of any Holder, Series A Securities may be exchanged, pursuant to an Exchange Offer and subject to the terms and conditions thereof, for Series B Securities of like aggregate principal amount, upon surrender of the Series A Securities to be exchanged at such office or agency. Whenever -43- 49 any Securities are so surrendered for exchange, the Company shall execute, the Subsidiary Guarantors, if any, shall execute notations of Subsidiary Guarantees on, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities and the Subsidiary Guarantees noted thereon, if any, issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company and the respective Subsidiary Guarantors, if any, 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 Security Registrar) 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. As a special condition to registration of transfer or exchange of any Transfer Restricted Securities involving removal of a Private Placement Legend (other than pursuant to an effective registration statement under the Securities Act), the Holder requesting such registration of transfer or exchange shall furnish the Opinion of Counsel called for by Section 3.12 hereof. The following additional special conditions shall apply to the indicated types of transfers or exchanges: (a) Respecting any requested registration of transfer or exchange of Transfer Restricted Securities in the form of Physical Securities, such Physical Securities shall be accompanied, in the sole discretion of the Company, by the following additional information and documents, as applicable: (1) if such Physical Security is being delivered to the Security Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit B hereto); or (2) if such Physical Security is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A, a certification to that effect (in substantially the form of Exhibit B hereto); or (3) if such Physical Security is being transferred to an Institutional Accredited Investor, delivery of a certification to that effect (in substantially the form of Exhibit B hereto), a Transferee Certificate for Institutional Accredited Investors in the form of Exhibit C hereto and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (4) if such Physical Security is being transferred in reliance on Regulation S, delivery of a certification to that effect (substantially in the form of Exhibit B hereto), a Transferor Certificate for Regulation S Transfers in the form of Exhibit D hereto and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (5) if such Physical Security is being transferred in reliance on Rule 144, delivery of a certification to that effect (substantially in the form of Exhibit B -44- 50 hereto) and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (6) if such Physical Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto) and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act. Any Physical Security issued upon any such registration of transfer or exchange shall be in a minimum principal amount of $250,000. (b) Respecting any requested exchange of a Physical Security for a beneficial interest in a Global Security, such Physical Security shall be accompanied, in the sole discretion of the Company, by the following additional information and documents: (1) a certification, substantially in the form of Exhibit B hereto, that such Physical Security is being transferred to a Person reasonably believed to be a Qualified Institutional Buyer; and (2) written instructions directing the Security Registrar to make, or to direct the Depository to make, an endorsement on the Global Security to reflect an increase in the aggregate amount of the Securities represented by the Global Security; whereupon the Security Registrar shall cancel such Physical Security and cause, or direct the Depository to cause, in accordance with the standing instructions and procedures existing between the Depository and the Security Registrar, the aggregate principal amount of Securities represented by the Global Security to be increased accordingly. If no Global Security is then outstanding, the Company shall issue and the Trustee shall upon Company Order authenticate a new Global Security in the appropriate amount. (c) With the prior approval of the Company, any Person having a beneficial interest in a Global Security may upon request to the Security Registrar exchange such beneficial interest for a Physical Security. Upon receipt by the Security Registrar of written instructions (or such other form of instructions as is customary for the Depository) from the Depository or its nominee on behalf of any Person having a beneficial interest in a Global Security and upon receipt by the Security Registrar of a written order or such other form of instructions as is customary for the Depository or the Person designated by the Depository as having such a beneficial interest containing registration instructions and, in the case of any such transfer or exchange of a beneficial interest in Transfer Restricted Securities, the following additional information and documents: (1) if such beneficial interest is being transferred to the Person designated by the Depository as being the beneficial owner, a certification from such Person to that effect (in substantially the form of Exhibit B hereto); or (2) if such beneficial interest is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto); or -45- 51 (3) if such beneficial interest is being transferred to an Institutional Accredited Investor, delivery of a certification to that effect (substantially in the form of Exhibit B hereto), a Transferee Certificate for Institutional Accredited Investors in the form of Exhibit C hereto and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (4) if such beneficial interest is being transferred in reliance on Regulation S, delivery of a certification to that effect (substantially in the form of Exhibit B hereto), a Transferor Certificate for Regulation S Transfers in the form of Exhibit D hereto and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (5) if such beneficial interest is being transferred in reliance on Rule 144 under the Securities Act, delivery of a certification to that effect (substantially in the form of Exhibit B hereto) and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act; or (6) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto) and an Opinion of Counsel to the effect that such transfer is in compliance with the Securities Act, then the Security Registrar will cause, in accordance with the standing instructions and procedures existing between the Depository and the Security Registrar, the aggregate principal amount of the Global Security to be reduced and, following such reduction, the Company will execute and, upon receipt of a Company Order, the Trustee will authenticate and deliver to the transferee a Physical Security. Securities issued in exchange for a beneficial interest in a Global Security pursuant to this Section 3.5(c) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from Agent Members or otherwise, shall instruct the Security Registrar in writing; provided, however, that any Transfer Restricted Security shall be issued in a minimum denomination of $250,000. The Security Registrar shall deliver such Physical Securities to the Persons in whose names such Physical Securities are so registered. No service charge shall be made for any registration of transfer or exchange or redemption 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 an Exchange Offer or Section 3.4, 9.6 or 11.8 hereof not involving any transfer. Neither the Trustee, the Security Registrar nor the Company shall be required (i) to issue, register the transfer of or exchange any Physical Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of Securities selected for redemption under Section 11.4 hereof and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Physical Security so selected for redemption in whole or in part, except the unredeemed portion of any Physical Security being redeemed in part. -46- 52 Section 3.6 Book-Entry Provisions for Global Securities. Each Global Security shall (i) be registered in the name of the Depository for such Global Security or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear the legend set forth in Exhibit A hereto. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under such Global Security, and the Depository may be treated by the Company, the Subsidiary Guarantors, if any, the Trustee and any agent of the Company, the Subsidiary Guarantors, if any, or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Subsidiary Guarantors, if any, the Trustee or any agent of the Company, the Subsidiary Guarantors, if any, or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or shall impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Security. Transfers of a Global Security shall be limited to transfers of such Global Security in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 3.5 hereof. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Security if, and only if, either (1) the Depository notifies the Company that it is unwilling or unable to continue as depositary for the Global Security and a successor depositary is not appointed by the Company within 90 days of such notice, or (2) an Event of Default has occurred and is continuing and the Security Registrar has received a request from the Depository to issue Physical Securities in lieu of all or a portion of the Global Security (in which case the Company shall deliver Physical Securities within 30 days of such request). In connection with the transfer of an entire Global Security to beneficial owners pursuant to this Section, the Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall upon Company Order authenticate and deliver, to each beneficial owner identified by the Depository, in exchange for its beneficial interest in the Global Security, an equal aggregate principal amount of Physical Securities of authorized denominations. The Holder of the Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. Section 3.7 Mutilated, Destroyed, Lost and Stolen Securities. If (i) any mutilated Security is surrendered to the Trustee or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company, the Subsidiary Guarantors, if any, and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security -47- 53 has been acquired by a bona fide purchaser, the Company shall execute, the Subsidiary Guarantors, if any, shall execute the notation of Subsidiary Guarantees, and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, having the notation of Subsidiary Guarantees thereon if at such time there are any Subsidiary Guarantors, 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 therewith. Every new Security issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company and the respective Subsidiary Guarantors, if any, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities of like tenor 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 3.8 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 such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 10.2 hereof. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) 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 the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount -48- 54 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, and such money when deposited shall 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 in the manner provided for in Section 15.5 hereof, 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 given, 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 (b). (b) The Company may make payment of any Defaulted Interest 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, 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 3.9 Persons Deemed Owners. Prior to the due presentment of a Security for registration of transfer, the Company, the Subsidiary Guarantors, if any, the Security Registrar, the Trustee and any agent of the Company, the Subsidiary Guarantors, if any, 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 premium, if any, on) and (subject to Section 3.8 hereof) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Subsidiary Guarantors, if any, the Security Registrar, the Trustee or any agent of the Company, the Subsidiary Guarantors, if any, or the Trustee shall be affected by notice to the contrary. Section 3.10 Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled 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 all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be -49- 55 disposed of as directed by a Company Order or in accordance with the Trustee's usual practice; provided, however, that the Trustee shall not be required to destroy canceled Securities. Section 3.11 Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Section 3.12 Private Placement Legend. (a) All Transfer Restricted Securities shall bear the Private Placement Legend upon the original issuance thereof. Upon the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Security Registrar shall deliver only Securities that bear the Private Placement Legend unless, and the Trustee is hereby authorized to deliver Securities without the Private Placement Legend if, (i) there is delivered to the Trustee an Opinion of Counsel to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (ii) such Security has been sold pursuant to an effective registration statement under the Securities Act. Upon the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Security Registrar shall deliver Securities that do not bear the Private Placement Legend. (b) Notwithstanding the provisions of the preceding paragraph of this Section 3.12, the Private Placement Legend on any Transfer Restricted Security shall be removed upon the request of the Holder thereof upon delivery of such Security to the Security Registration for exchange at any time after the Resale Restriction Termination Date. (c) By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. ARTICLE IV SATISFACTION AND DISCHARGE Section 4.1 Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities, as expressly provided for in this Indenture) as to all Outstanding Securities, and the Trustee, at the expense of the Company, shall, upon payment of all amounts due the Trustee under Section 6.6 hereof, execute proper instruments acknowledging satisfaction and discharge of this Indenture when (a) either -50- 56 (1) 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 3.7 hereof and (ii) Securities for whose payment money or United States governmental obligations of the type described in clause (i) of the definition of Cash Equivalents have theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.3 hereof) have been delivered to the Trustee for cancellation, or (2) 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 clause (2)(i), (2)(ii) or (2)(iii) above, has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) 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, together with instructions from the Company irrevocably directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (b) the Company has paid or caused to be paid all other sums then due and payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent herein 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 6.6 hereof and, if money shall have been deposited with the Trustee pursuant to this Section, the obligations of the Trustee under Section 4.2 hereof and the last paragraph of Section 10.3 hereof shall survive. Section 4.2 Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.3 hereof, all money deposited with the Trustee pursuant to Section 4.1 hereof 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 (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the -51- 57 principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. ARTICLE V REMEDIES Section 5.1 Events of Default. "Event of Default," wherever used herein, 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 XIV 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): (a) default in the payment of the principal of or premium, if any, on any of the Securities when the same becomes due and payable, whether such payment is due at Stated Maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon acceleration or otherwise; or (b) default in the payment of any installment of interest on any of the Securities, when it becomes due and payable, and the continuance of such default for a period of 30 days; or (c) default in the performance or breach of the provisions of Article VIII hereof, the failure to make or consummate a Change of Control Offer in accordance with the provisions of Section 10.16 or the failure to make or consummate a Net Proceeds Offer in accordance with the provisions of Section 10.17; or (d) failure of the Company or any Subsidiary Guarantor to comply with any other term, covenant or agreement contained in the Securities, any Subsidiary Guarantee or this Indenture (other than a default specified in subparagraph (a), (b) or (c) above) for a period of 60 days after written notice of such failure stating that it is a "notice of default" hereunder and requiring the Company or such Subsidiary Guarantor, as the case may be, to remedy the same shall have been given (x) to the Company by the Trustee or (y) to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Securities then Outstanding; or (e) the occurrence and continuation beyond any applicable grace period of any default in the payment of the principal of (or premium, if any, on) or interest on any Indebtedness of the Company (other than the Securities) or any Restricted Subsidiary for money borrowed when due, or any other default resulting in acceleration of any Indebtedness of the Company or any Restricted Subsidiary for money borrowed, provided that the aggregate principal amount of such Indebtedness shall exceed $10,000,000 (or $40,000,000 in the case of Non-Recourse Purchase Money Indebtedness); or (f) any Subsidiary Guarantee shall for any reason cease to be, or be asserted by the Company or any Subsidiary Guarantor, as applicable, not to be, in full force and effect, enforceable in accordance with its terms (except pursuant to the release or termination of any such Subsidiary Guarantee in accordance with this Indenture); or -52- 58 (g) final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and that require the payment in money, either individually or in an aggregate amount, that is more than $10,000,000 over the coverage under applicable insurance policies and either (A) commencement by any creditor of an enforcement proceeding upon such judgment (other than a judgment that is stayed by reason of pending appeal or otherwise) or (B) the occurrence of a 60-day period during which a stay of such judgment or order, by reason of pending appeal or otherwise, was not in effect; or (h) the entry of a decree or order by a court having jurisdiction in the premises (A) for relief in respect of the Company or any Material Subsidiary in an involuntary case or proceeding under the Federal Bankruptcy Code or any other applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (B) adjudging the Company or any Material Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of the Company or a Material Subsidiary under the Federal Bankruptcy Code or any applicable federal or state law, or appointing under any such law a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Material Subsidiary or of a substantial part of its consolidated assets, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (i) the commencement by the Company or any Material Subsidiary of a voluntary case or proceeding under the Federal Bankruptcy Code or any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Company or any Material Subsidiary to the entry of a decree or order for relief in respect thereof in an involuntary case or proceeding under the Federal Bankruptcy Code or any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by the Company or any Material Subsidiary of a petition or consent seeking reorganization or relief under any applicable federal or state law, or the consent by it under any such law to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or any Material Subsidiary or of any substantial part of its consolidated assets, or the making by it of an assignment for the benefit of creditors under any such law, or the admission by it in writing of its inability to pay its debts generally as they become due or taking of corporate action by the Company or any Material Subsidiary in furtherance of any such action. Section 5.2 Acceleration of Maturity: Rescission and Annulment. If any Event of Default (other than an Event of Default specified in Section 5.1(h) or (i) hereof) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities then Outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall, by a notice in writing to the Company, declare all unpaid principal of, premium, if any, and accrued and unpaid interest on all the Securities to be due and payable immediately, upon which declaration all amounts payable in respect of -53- 59 the Securities shall be immediately due and payable. If an Event of Default specified in Section 5.1(h) or (i) hereof occurs and is continuing, the amounts described above shall become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Securities Outstanding, by written notice to the Company, the Subsidiary Guarantors, if any, and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company or any Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient to pay, (1) all overdue interest on all Outstanding Securities, (2) all unpaid principal of (and premium, if any, on) any Outstanding Securities which have become due otherwise than by such declaration of acceleration, including any Securities required to have been purchased on a Change of Control Purchase Date or a Net Proceeds Payment Date pursuant to a Change of Control Offer or a Net Proceeds Offer, as applicable, and interest on such unpaid principal at the rate borne by the Securities, (3) to the extent that payment of such interest is lawful, interest on overdue interest and overdue principal at the rate borne by the Securities (without duplication of any amount paid or deposited pursuant to clauses (1) and (2) above), and (4) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction as certified to the Trustee by the Company; and (c) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13 hereof. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the foregoing, if an Event of Default specified in Section 5.1(e) hereof shall have occurred and be continuing, such Event of Default and any consequential acceleration shall be automatically rescinded if the Indebtedness that is the subject of such Event of Default has been repaid, or if the default relating to such Indebtedness is waived or cured and if such Indebtedness has been accelerated, then the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness (provided, in each case, that such repayment, waiver, cure or rescission is effected within a period of 10 -54- 60 days from the continuation of such default beyond the applicable grace period or the occurrence of such acceleration), and written notice of such repayment, or cure or waiver and rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Indebtedness or a trustee, fiduciary or agent for such holders or other evidence satisfactory to the Trustee of such events is provided to the Trustee, within 30 days after any such acceleration in respect of the Securities, and so long as such rescission of any such acceleration of the Securities does not conflict with any judgment or decree as certified to the Trustee by the Company. Section 5.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any installment of interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof or with respect to any Security required to have been purchased by the Company on the Change of Control Purchase Date or the Net Proceeds Payment Date pursuant to a Change of Control Offer or Net Proceeds Offer, as applicable, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of 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. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the money adjudged or decreed to be payable in the manner provided by law out of the Property of the Company or any other obligor upon the Securities, wherever situated. 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 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 5.4 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company, any Subsidiary Guarantor or any other obligor upon the Securities, their creditors or the Property of the Company, any Subsidiary Guarantor or of such other -55- 61 obligor, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company, the Subsidiary Guarantors, if any, or such other obligor for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents and take any other actions including participation as a full member of any creditor or other committee as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) subject to Article XIV, to collect and receive any money or other Property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or 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 the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.6 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the Subsidiary Guarantees, if any, or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.5 Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities or the Subsidiary Guarantees, if any, 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 and 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 in respect of which such judgment has been recovered. Section 5.6 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 the case of the distribution of such money on account of principal (or premium, if any) 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 6.6 hereof; -56- 62 SECOND: subject to Article XIV, to the payment of the amounts then due and unpaid for principal of (and premium, if any, on) 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 premium, if any) and interest, respectively; and THIRD: subject to Article XIV, the balance, if any, to the Company. Section 5.7 Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in aggregate 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; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority or more in aggregate principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. Section 5.8 Unconditional Right of Holders to Receive Principal Premium and Interest. Notwithstanding any other provision in this Indenture (but subject to Articles XIII and XIV hereof), the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article XII hereof) and in such Security of the principal of (and premium if any, on) and (subject to Section 3.8 hereof) interest on, such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -57- 63 Section 5.9 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 Subsidiary Guarantors, if any, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereunder and all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10 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 3.7 hereof, 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. Section 5.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security 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 5.12 Control by Holders. The Holders of not less than a majority in aggregate 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, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might involve it in personal liability or be unduly prejudicial to the Holders not joining therein. -58- 64 Section 5.13 Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any existing Default or Event of Default hereunder and its consequences, except a Default or Event of Default, (a) in respect of the payment of the principal of (or premium, if any, on) or interest on any Security, or (b) in respect of a covenant or provision hereof which under Article IX hereof cannot be modified or amended without the consent of the Holder of each Outstanding Security affected thereby. Upon any such waiver, such Default or Event of Default shall cease to exist for every purpose under this Indenture, but no such waiver shall extend to any subsequent or other fault or Event of Default or impair any right consequent thereon. Any such waiver may (but need not) be given in connection with a tender offer or exchange offer for the Securities. Section 5.14 Waiver of Stay, Extension or Usury Laws. Each of the Company and the Subsidiary Guarantors, if any, covenants (to the extent that each may lawfully do so) that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension, or usury law or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company or any Subsidiary Guarantor from paying all or any portion of the principal of (premium, if any, on) or interest on the Securities as contemplated herein, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) each of the Company and the Subsidiary Guarantors, if any, hereby expressly waives all benefit or advantage of any such law, and covenant that they 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 VI THE TRUSTEE Section 6.1 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied -59- 65 covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, and shall be fully protected in so relying, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided, however, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own wilful misconduct, except that: (i) this paragraph shall not limit the effect of Section 6.1(b); (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.12. Section 6.2 Certain Rights of Trustee. Subject to the provisions of Section 6.1 hereof: (a) the Trustee may conclusively 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; (b) 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 may be sufficiently evidenced by a Board Resolution; (c) 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; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) 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 -60- 66 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; (f) 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 Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may reasonably 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; (g) 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; (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; and (i) the Trustee shall not be deemed to have notice or knowledge of any matter unless a Responsible Officer has actual knowledge thereof or unless written notice thereof is received by the Trustee at its Corporate Trust Office and such notice references the Securities generally, the Company or this Indenture. The Trustee shall not be required to advance, 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. Section 6.3 Trustee Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities and the notations of Subsidiary Guarantees thereon, if any, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company or the Subsidiary Guarantors, as the case may be, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Subsidiary Guarantees, if any, or the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder. The Trustee shall not be accountable for the use or application by the Company of any Securities or the proceeds thereof. Section 6.4 May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, the Subsidiary Guarantors, if any, or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311 in the case of the Trustee, may otherwise deal with the Company -61- 67 and the Subsidiary Guarantors, if any, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. Section 6.5 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 with the Company or any Subsidiary Guarantor. Section 6.6 Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee from time to time reasonable compensation 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); (b) 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 the Trustee's willful misconduct, negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without willful misconduct, negligence or bad faith on its part, (i) arising out of or in connection with the acceptance or administration of this trust, 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 or (ii) in connection with enforcing this indemnification provision. The obligations of the Company under this Section 6.6 to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall not be subordinated to the payment of Senior Indebtedness pursuant to Article XIV hereof and shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture or any other termination under any Insolvency or Liquidation Proceeding. As security for the performance of such obligations of the Company, the Trustee shall have a claim and lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for payment of principal of (and premium, if any, on) or interest on particular Securities. Such lien shall survive the satisfaction and discharge of this Indenture or any other termination under any Insolvency or Liquidation Proceeding. When the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in paragraph (h) or (i) of Section 5.1 of this Indenture, such expenses and the compensation for such services are intended to constitute expenses of administration under any Insolvency or Liquidation Proceeding. -62- 68 Section 6.7 Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 6.7, the combined capital and surplus of such corporation 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 6.8 Conflicting Interests. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act; provided, however, that there shall be excluded from the operation of TIA Section 310(b)(1) the Existing Indentures and any other indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in TIA Section 310(b)(1) are met. Section 6.9 Resignation and Removal; Appointment of Successor. (a) 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 6.10 hereof. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.10 hereof shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) 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 6.7 hereof and shall fail to resign 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 (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 -63- 69 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, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), 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. (e) 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 cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. 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 aggregate 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, become the successor Trustee and 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 hereinafter provided, 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 evidence of such successorship may, but need not be, evidenced by a supplemental indenture. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Securities in the manner provided for in Section 15.5 hereof. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 6.10 Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder 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; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of all amounts due it under Section 6.6 hereof, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all money and other Property 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. 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. -64- 70 Section 6.11 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 of 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; and in case at that time any of the Securities shall not have been authenticated, any successor Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities of like tenor or in this Indenture provided; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 6.12 Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor under 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 6.13 Notice of Defaults. Within 60 days after the occurrence of any Default hereunder, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any, on) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.1 Holders' Lists; Holder Communications; Disclosures Respecting Holders. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Holders. Neither the Company, any Subsidiary Guarantor nor the Trustee shall be under any responsibility with regard to the accuracy of such list. If the Trustee is not the Security Registrar, the Company shall furnish to the Trustee semi-annually before each Regular Record Date, and -65- 71 at such other times as the Trustee may reasonably request in writing, a list, in such form as the Trustee may reasonably request, as of such date of the names and addresses of the Holders then known to the Company. The Company and the Trustee shall also satisfy any other requirements imposed upon each of them by TIA Section 312(a). Holders may communicate pursuant to Section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Securities. Every Holder of Securities, by receiving and holding the same, agrees with the Company, the Subsidiary Guarantors, if any, the Security Registrar and the Trustee that none of the Company, the Subsidiary Guarantors, if any, the Security Registrar or the Trustee, or any agent of any of them, shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, that each of such Persons shall have the protection of TIA Section 312(c) and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). Section 7.2 Reports By Trustee. Within 60 days after May 15 of each year commencing with May 15, 2000, the Trustee shall transmit by mail to the Holders, as their names and addresses appear in the Security Register, a brief report dated as of such May 15 in accordance with and to the extent required under TIA Section 313(a). The Trustee shall also comply with TIA Sections 313(b) and 313(c). The Company shall promptly notify the Trustee in writing if the Securities become listed on any stock exchange or automatic quotation system. Commencing at the time this Indenture is qualified under the Trust Indenture Act, a copy of each Trustee's report, at the time of its mailing to Holders of Securities, shall be mailed to the Company and filed with the Commission and each stock exchange, if any, on which the Securities are listed. Section 7.3 Reports by Company. The Company shall: (a) file with the Trustee, within 30 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then the Company shall file with the Trustee such information, documents or reports as required pursuant to Section 10.9 hereof; (b) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the -66- 72 conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (c) transmit by mail to all Holders, in the manner and to the extent provided in TIA Section 313(c), such summaries of any information, documents and reports (without exhibits except to the extent required by TIA Section 313(c)) required to be filed by the Company pursuant to paragraph (a) or (b) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 8.1 Company May Consolidate, etc., Only on Certain Terms. The Company shall not, in any single transaction or a series of related transactions, merge or consolidate with or into any other Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any Person or group of Affiliated Persons, and the Company shall not permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in a sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any other Person or group of Affiliated Persons, unless at the time and after giving affect thereto: (a) either (i) if the transaction is a merger or consolidation, the Company shall be the surviving Person of such merger or consolidation, or (ii) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or to which the Properties of the Company or its Restricted Subsidiaries, as the case may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed of (any such surviving Person or transferee Person being called the "Surviving Entity") shall be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and shall, in either case, expressly assume by a supplemental indenture to this Indenture executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture, and, in each case, this Indenture shall remain in full force and effect; (b) immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any Indebtedness not previously an obligation of the Company or any of its Restricted Subsidiaries which becomes the obligation of the Company or any of its Restricted Subsidiaries in connection with or as a result of such transaction or transactions as having been incurred at the time of such transaction or transactions), no Default or Event of Default shall have occurred and be continuing; (c) except in the case of the consolidation or merger of any Restricted Subsidiary with or into the Company, immediately after giving effect to such transaction or transactions on a pro forma basis, the Consolidated Net Worth of the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) is at -67- 73 least equal to the Consolidated Net Worth of the Company immediately before such transaction or transactions; (d) except in the case of the consolidation or merger of the Company with or into a Wholly Owned Restricted Subsidiary or any Restricted Subsidiary with or into the Company or any Wholly Owned Restricted Subsidiary, immediately after giving effect to such transaction or transactions on a pro forma basis (on the assumption that the transaction or transactions occurred on the first day of the applicable period under Section 10.12 ending immediately prior to the consummation of such transaction or transactions, with the appropriate adjustments with respect to the transaction or transactions being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) could incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) under Section 10.12 hereof; (e) if the Company is not the continuing obligor under this Indenture, then any Subsidiary Guarantor, unless it is the Surviving Entity, shall have by supplemental indenture confirmed that its Subsidiary Guarantee of the Securities shall apply to the Surviving Entity's obligations under this Indenture and the Securities: (f) if any of the Properties of the Company or any of its Restricted Subsidiaries would upon such transaction or series of related transactions become subject to any Lien (other than a Permitted Lien), the creation or imposition of such Lien shall have been in compliance with Section 10.15 hereof; and (g) the Company (or the Surviving Entity if the Company is not the continuing obligor under this Indenture) shall have delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, (i) an Officers' Certificate stating that such consolidation, merger, conveyance, transfer, lease or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Indenture and (ii) an Opinion of Counsel stating that the requirements of Section 8.1(a) have been satisfied. Section 8.2 Successor Substituted. Upon any consolidation of the Company with or merger of the Company into any other corporation or any sale, assignment, lease, conveyance, transfer or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis in accordance with Section 8.1 hereof, the Surviving Entity 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 Surviving Entity had been named as the Company herein, and in the event of any such sale, assignment, lease, conveyance, transfer or other disposition, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 8.1 hereof), except in the case of a lease, shall be discharged from all obligations and covenants under this Indenture and the Securities, and the Company may be dissolved and liquidated and such dissolution and liquidation shall not cause a Change of Control under clause (e) of the definition thereof to occur unless the sale, assignment, lease, conveyance, transfer or other disposition of all or substantially all of the Properties of the Company and its Restricted Subsidiaries on a consolidated basis to any Person otherwise results in a Change of Control. -68- 74 ARTICLE IX SUPPLEMENTAL INDENTURES Section 9.1 Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, each of the Subsidiary Guarantors, if any, when authorized by a Board Resolution, and the Trustee upon Company Request, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; or (b) to add to the covenants of the Company for the benefit of the Holders, to provide any additional rights or benefits to the Holders or to surrender any right or power herein conferred upon the Company; or (c) to add any additional Events of Default; or (d) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Sections 6.9 and 6.10 hereof; or (e) 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 shall not adversely affect the interests of the Holders in any material respect; or (f) to secure the Securities pursuant to the requirements of Section 10.15 hereof or otherwise; or (g) to add any Restricted Subsidiary as a Subsidiary Guarantor as provided in Section 10.13(a) hereof or to evidence the succession of another Person to any Subsidiary Guarantor pursuant to Section 13.2(b) hereof and the assumption by any such successor of the covenants and agreements of such Subsidiary Guarantor contained herein, in the Securities and in the Subsidiary Guarantee of such Subsidiary Guarantor; or (h) to release a Subsidiary Guarantor from its Subsidiary Guarantee pursuant to Section 13.3 hereof; or (i) to provide for uncertificated Securities in addition to or in place of certificated Securities; or (j) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. -69- 75 Section 9.2 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 (which consent may, but need not, be given in connection with any tender offer or exchange offer for the Securities), by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, each of the Subsidiary Guarantors, if any, when authorized by a Board Resolution, and the Trustee upon Company Request may enter into an indenture or indentures supplemental hereto 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 under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: (a) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the Stated Maturity of the principal of, or any installment of interest on, any Security or alter or waive any of the provisions with respect to the redemption of the Securities, except as provided below with respect to Sections 10.16 and 10.17 hereof; (c) reduce the rate of or change the time for payment of interest, including Defaulted Interest, on any Security; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Securities (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount of the then Outstanding Securities and a waiver of the payment default that resulted from such acceleration); (e) make any Security payable in money other than that stated in the Securities; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or the rights of Holders of Securities to receive payments of principal of, premium, if any, on or interest on the Securities; (g) waive a redemption payment with respect to any Security (other than a payment required by Section 10.16 or Section 10.17 hereof); or (h) modify any provisions of this Indenture relating to the relative ranking of the Securities or the Subsidiary Guarantees, if any, in a manner adverse to the Holders thereof; or (i) make any change in Section 5.8, 5.13 or 10.20 hereof or in the foregoing amendment and waiver provisions. It shall not be necessary for any Act of the Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. -70- 76 Section 9.3 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 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 9.4 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. Section 9.5 Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. Section 9.6 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, with the notations of Subsidiary Guarantees thereon executed by the Subsidiary Guarantors, if there are then any Subsidiary Guarantors, and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 9.7 Notice of Supplemental Indentures and Waivers. Promptly after (i) the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 9.2 hereof or (ii) a waiver under Section 5.13 or 10.20 hereof becomes effective, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 15.5 hereof, setting forth in general terms the substance of such supplemental indenture or waiver, as the case may be. Section 9.8 Effect on Senior Indebtedness. No supplemental indenture shall adversely affect the rights of the holders of Senior Indebtedness under Article XIV hereof or the holders of Guarantor Senior Indebtedness under Sections 13.8, 13.9, 13.10, 13.11, 13.13, 13.14, 13.15, 13.16 and 13.19 hereof unless expressly consented to in writing by or on behalf of such holders (or by any specified percentage of holders of a class of Senior Indebtedness or Guarantor Senior -71- 77 Indebtedness, as the case may be, required to consent thereto pursuant to the terms of the agreement or instrument creating, evidencing or governing such Senior Indebtedness or Guarantor Senior Indebtedness, as the case may be), in which event such supplemental indenture shall be binding on all successors and assigns of such holders and on all Persons who become holders of such Senior Indebtedness or Guarantor Senior Indebtedness issued after the date of such amendment or modification. ARTICLE X COVENANTS Section 10.1 Payment of Principal, Premium, if any, and Interest. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any, on) and interest (including Special 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 by 11:00 a.m., Eastern time, on such date the Trustee or a Paying Agent (other than the Company or its Affiliates, except any such Affiliate providing commercial banking services to the Company or its Subsidiaries upon commercially reasonable terms in the ordinary course of such Affiliate's business) 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. The Company shall notify the Trustee and any Paying Agent immediately upon the occurrence of any Registration Default and, with respect to Special Interest payments pursuant to a Registration Rights Agreement, the Company shall notify the Trustee and any Paying Agent prior to any Interest Payment Date of the amount of Special Interest payable to each Holder. Section 10.2 Maintenance of Office or Agency. The Company shall maintain an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities, the Subsidiary Guarantees and this Indenture may be served. The Corporate Trust Office shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation. Further, if at any time there shall be no such office or agency in The City of New York where the Securities may be presented or surrendered for payment, the Company shall forthwith designate -72- 78 and maintain such an office or agency in The City of New York, in order that the Securities shall at all times be payable in The City of New York. (The office of State Street Bank and Trust Company National Association, located at 61 Broadway, 15th floor, New York, New York 10006, is hereby designated as such agency.) The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 10.3 Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it shall, on or before 11:00 a.m., Eastern time, on each due date of the principal of (and premium, if any, on) 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 premium, if any) or interest so becoming due until such sum 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 before 11:00 a.m., Eastern time, on each due date of the principal of (and premium, if any, on), or interest on, any Securities, deposit with a Paying Agent immediately available funds in a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such funds to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company shall promptly notify the Trustee of such action or any failure so to act. The Company shall cause each Paying Agent (other than the Trustee or itself) 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: (a) hold all sums held by it for the payment of the principal of (and premium, if any, on) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest; and (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. Initially, the Company shall act as its own Paying Agent, and it shall be deemed to have agreed with the Trustee that it will adhere to the agreement described in the immediately preceding paragraph. Further, the Company shall give the Trustee notice within 30 days of the making of any payment of principal (and premium, if any) or interest hereunder by any Paying Agent (including the Company if acting as its own Paying Agent, but excluding the Trustee), which notice shall specify the amounts of principal (and premium, if any) and interest so paid and, in the event of any payment of principal, the aggregate unpaid principal amount of all Securities then Outstanding. -73- 79 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 sums. The Trustee and each Paying Agent shall promptly pay to the Company upon Company Request any money held by them (other than pursuant to Article XII) at any time in excess of amounts required to pay principal of, premium, if any, or interest on the Securities. Subject to applicable escheat and abandoned property laws, any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any, on) or interest on any Security and remaining unclaimed for one year after such principal (and premium, if any) or interest has become due and payable shall be paid 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, may 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 Borough of Manhattan, 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 10.4 Corporate Existence. Except as expressly permitted by Article VIII hereof, Section 10.17 hereof or other provisions of this Indenture, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Restricted Subsidiary; provided, however, that the Company shall not be required to preserve any such existence of its Restricted Subsidiaries, rights or franchises, if the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not disadvantageous in any material respect to the Holders. Section 10.5 Payment of Taxes and Other Claims. The Company shall, or, as applicable, shall cause its Restricted Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or Property of the Company or any Restricted Subsidiary and (b) 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 Restricted Subsidiary; provided, however, that the Company and its Restricted Subsidiaries shall not be required to pay or discharge or cause to be paid or discharged -74- 80 any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made in accordance with GAAP. Section 10.6 Maintenance of Properties. The Company shall, or, as applicable, shall cause its Restricted Subsidiaries to, cause all material Properties owned by the Company or any Restricted Subsidiary and used or held for use in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted), all as in the judgment of the Company or such Restricted Subsidiary may be necessary so that its or its Restricted Subsidiary's business may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company or any Restricted Subsidiary from discontinuing the maintenance of any of such Properties if such discontinuance is, in the judgment of the Company or such Restricted Subsidiary, as the case may be, desirable in the conduct of the business of the Company or such Restricted Subsidiary and not disadvantageous in any material respect to the Holders. Notwithstanding the foregoing, nothing contained in this Section 10.6 shall limit or impair in any way the right of the Company and its Restricted Subsidiaries to sell, divest and otherwise to engage in transactions that are otherwise permitted by this Indenture. Section 10.7 Insurance. The Company shall at all times keep all of its, and cause its Restricted Subsidiaries to keep their, Properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character and in a similar location is usually so insured by corporations similarly situated and owning like Properties. The Company or any Restricted Subsidiary may adopt such other plan or method of protection, in lieu of or supplemental to insurance with insurers, whether by the establishment of an insurance fund or reserve to be held and applied to make good losses from casualties, or otherwise, conforming to the systems of self-insurance maintained by corporations similarly situated and in a similar location and owning like Properties, as may be determined by the Board of Directors of the Company or such Restricted Subsidiary. Section 10.8 Statement by Officers as to Default. (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company and within 45 days of the end of each of the first, second and third quarters of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Restricted Subsidiaries during the preceding fiscal quarter or fiscal year, as applicable, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of such Officer's knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and no Default or Event of Default has occurred and is continuing (or, if a Default or Event of Default shall have occurred, describing all such -75- 81 Defaults or Events of Default of which such Officer may have knowledge and what action the Company is taking or proposes to take with respect thereto). Such Officers' Certificate shall comply with TIA Section 314(a)(4). For purposes of this Section 10.8(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee forthwith upon any of its Officers becoming aware of any Default or Event of Default an Officers' Certificate specifying such Default or Event of Default and what action the Company proposes to take with respect thereto. Section 10.9 Provision of Financial Information. The Company shall file on a timely basis with the SEC, to the extent such filings are accepted by the Commission and whether or not the Company has a class of securities registered under the Exchange Act, the annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13 or 15 of the Exchange Act. The Company shall also file with the Trustee (with exhibits), and provide to each Holder of Securities (without exhibits), without cost to such Holder, copies of such reports and documents within 30 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and, if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, the Company shall supply at its cost copies of such reports and documents (including any exhibits thereto) to any Holder of Securities, securities analyst or prospective purchaser of any Securities promptly upon written request given in accordance with Section 15.4 hereof. Section 10.10 Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, take the following actions: (i) declare or pay any dividend or make any distribution on account of the Company's Capital Stock (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Company or in options, warrants or other rights to purchase Qualified Capital Stock of the Company); (ii) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any Affiliate thereof (other than any Wholly Owned Restricted Subsidiary) or any options, warrants or other rights to acquire such Capital Stock; (iii) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, scheduled sinking fund payment or maturity, any Subordinated Indebtedness, except that this clause (iii) shall not include any such payment with respect to any such Subordinated Indebtedness (A) to the extent of Excess Proceeds remaining after compliance with the provisions of Section 10.17(c) hereof and (B) to the extent (and only to the extent) -76- 82 required by the indenture or other agreement or instrument pursuant to which such Subordinated Indebtedness was issued; (iv) declare or pay any dividend on, or make any distribution to the holders of, any shares of Capital Stock of any Restricted Subsidiary (other than to the Company or any of its Wholly Owned Restricted Subsidiaries) or purchase, redeem or otherwise acquire or retire for value any Capital Stock of any Restricted Subsidiary or any options, warrants or other rights to acquire any such Capital Stock (other than with respect to any such Capital Stock held by the Company or any Wholly Owned Restricted Subsidiary of the Company); or (v) make any Investment (other than any Permitted Investment); (such payments or other actions described in (but not excluded from) clauses (i) through (v) are collectively referred to as "Restricted Payments"), unless at the time of and after giving effect to the proposed Restricted Payment (the amount of any such Restricted Payment, if other than cash, shall be the amount determined by the Board of Directors of the Company, whose determination shall be conclusive and evidenced by a Board Resolution), (A) no Default or Event of Default shall have occurred and be continuing, (B) the Company could incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) in accordance with Section 10.12 hereof and (C) the aggregate amount of all Restricted Payments declared or made after June 8, 1998 shall not exceed the sum (without duplication) of the following: (1) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on April 1, 1998 and ending on the last day of the Company's last fiscal quarter ending prior to the date of such proposed Restricted Payment (or, if such aggregate Consolidated Net Income shall be a loss, minus 100% of such loss), plus (2) the aggregate net cash proceeds or the Fair Market Value of any Property other than cash, received after June 8, 1998 by the Company as capital contributions to the Company (other than from any Restricted Subsidiary), plus (3) the aggregate net cash proceeds or the Fair Market Value of any Property other than cash, received after June 8, 1998 by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of Qualified Capital Stock of the Company or any option, warrants or rights to purchase such Qualified Capital Stock of the Company, plus (4) the aggregate net cash proceeds received after June 8, 1998 by the Company (other than from any of its Restricted Subsidiaries) upon the exercise of any options, warrants or rights to purchase Qualified Capital Stock of the Company, plus (5) the aggregate net cash proceeds received after June 8, 1998 by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of debt securities or shares of Redeemable Capital Stock that have been converted into or exchanged for Qualified Capital Stock of the Company, together with the -77- 83 aggregate cash received by the Company at the time of such conversion or exchange, plus (6) the aggregate net cash proceeds or the Fair Market Value of any Property other than cash, received (or deemed to have been received) after June 8, 1998 by the Company or its Restricted Subsidiaries, computed on a consolidated basis, constituting a return of capital on an Investment (other than a Permitted Investment) made by the Company or any Restricted Subsidiary after June 8, 1998, plus (7) $25,000,000. (b) Notwithstanding paragraph (a) above, the Company and its Restricted Subsidiaries may take the following actions so long as, at the time thereof, no Default or Event of Default shall have occurred and be continuing (except in the case of clause (i) below) and (in the case of clause (vi) below) the Company could incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) in accordance with Section 10.12 hereof: (i) the payment of any dividend on any Capital Stock of the Company or any Restricted Subsidiary within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of paragraph (a) above (and such payment shall be deemed to have been paid on such date of declaration for purposes of any calculation required by the provisions of paragraph (a) above); (ii) the repurchase, redemption or other acquisition or retirement of any shares of any class of Capital Stock of the Company or any Restricted Subsidiary, in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of Qualified Capital Stock of the Company; (iii) the repurchase, redemption, repayment, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than Redeemable Capital Stock) in exchange for or out of the aggregate net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of Qualified Capital Stock of the Company; (iv) the purchase, redemption, repayment, defeasance or other acquisition or retirement for value of Subordinated Indebtedness in exchange for, or out of the aggregate net cash proceeds of, a substantially concurrent incurrence (other than to a Restricted Subsidiary) of, Subordinated Indebtedness so long as (A) the principal amount of such new Indebtedness does not exceed the principal amount (or, if such Subordinated Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) of the Indebtedness being so purchased, redeemed, repaid, defeased, acquired or retired, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company as -78- 84 necessary to accomplish such refinancing, plus the amount of expenses of the Company incurred in connection with such refinancing, (B) such new Indebtedness is subordinated to the Securities at least to the same extent as such Indebtedness so purchased, redeemed, repaid, defeased, acquired or retired, (C) such new Indebtedness has an Average Life to Stated Maturity that is longer than the Average Life to Stated Maturity of the Securities and (D) such new Indebtedness has a Stated Maturity for its final scheduled principal payment that is at least 91 days later than the Stated Maturity for the final scheduled principal payment of the Securities; (v) the repurchase, redemption or other acquisition or retirement for value of any Qualified Capital Stock of the Company or any of its Subsidiaries held by any current or former officers, directors or employees of the Company or any of its Subsidiaries pursuant to the terms of agreements (including employment agreements) or plans approved by the Company's Board of Directors, including any such repurchase, redemption, acquisition or retirement of such Qualified Capital Stock that is deemed to occur upon the exercise of stock options or similar rights if such shares represent all or a portion of the exercise price or are surrendered in connection with satisfying Federal income tax obligations; provided, however, that the aggregate amount of such repurchases, redemptions, acquisitions and retirements shall not exceed the sum of (a) $1,000,000 in any twelve-month period and (b) the aggregate net proceeds, if any, received by the Company during such twelve-month period from any issuance of such Qualified Capital Stock pursuant to such agreements or plans; and (vi) the repurchase or other acquisition of any Qualified Capital Stock of the Company in an amount not to exceed 50% of the net after-tax gain from Specified Property Sales. The actions described in clause (i) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph (b) but shall reduce the amount that would otherwise be available for Restricted Payments under clause (C) of paragraph (a) (provided that any dividend paid pursuant to clause (i) of this paragraph (b) shall reduce the amount that would otherwise be available under clause (C) of paragraph (a) when declared, but not also when subsequently paid pursuant to such clause (i)), and the actions described in clauses (ii), (iii), (iv), (v) and (vi) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph (b) and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (C) of paragraph (a). Further, the Company or any Restricted Subsidiary may make a Restricted Payment, if at the time the Company or any Restricted Subsidiary first incurred a commitment for such Restricted Payment such Restricted Payment could have been made; provided that all commitments incurred and outstanding shall be treated as if such commitments were Restricted Payments expended by the Company or a Restricted Subsidiary at the time the commitments were incurred, except that commitments incurred and outstanding which are treated as a Restricted Payment expended by the Company or a Restricted Subsidiary and which are terminated shall no longer be treated as a Restricted Payment expended by the Company or a Restricted Subsidiary upon the termination of such commitment for such purposes; and provided, further, that at the time such Restricted Payment is made no Default or Event of Default -79- 85 shall have occurred and be continuing and the Company could incur $1.00 of additional Indebtedness (excluding Permitted Indebtedness) in accordance with Section 10.12 hereof. (c) In computing Consolidated Net Income of the Company under paragraph (a) above, (1) the Company shall use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (2) the Company shall be permitted to rely in good faith on the financial statements and other financial data derived from the books and records of the Company that are available on the date of determination. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment would in the good faith determination of the Company be permitted under the requirements of this Indenture, such Restricted Payment shall be deemed to have been made in compliance with this Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Net Income of the Company for any period. Section 10.11 Limitation on Other Senior Subordinated Indebtedness. The Company shall not incur (as such term is defined in Section 10.12 hereof), or permit to remain outstanding, any Indebtedness (including Acquired Indebtedness and Permitted Indebtedness) other than the Securities, that is subordinated in right of payment to any Senior Indebtedness, unless such Indebtedness is also pari passu with, or subordinated in right of payment to, the Securities pursuant to subordination provisions substantially similar to those contained in this Indenture. Section 10.12 Incurrence of Indebtedness. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, create, incur, assume, guarantee or otherwise become directly or indirectly liable for (collectively, "incur") any Indebtedness (including any Acquired Indebtedness), other than Permitted Indebtedness, unless at the time of such event and after giving effect thereto on a pro forma basis: (i) if such incurrence occurs on or before March 31, 2000, the Consolidated Fixed Charge Coverage Ratio for the applicable period would have been at least 2.0 to 1.0; and (ii) if such incurrence occurs after March 31, 2000, the Consolidated Fixed Charge Coverage Ratio for the applicable period, would have been at least equal to 2.5 to 1.0. (b) The amount of any guarantees by the Company or any Restricted Subsidiary of any Indebtedness of the Company or one or more Restricted Subsidiaries shall not be deemed to be outstanding or incurred for purposes of this Section 10.12 hereof in addition to the amount of Indebtedness which it guarantees. Section 10.13 Subsidiary Guarantors. (a) The Company shall cause each Restricted Subsidiary, prior to, or contemporaneously with, its incurrence of any obligations that guarantee or secure any -80- 86 Pari Passu Indebtedness or Subordinated Indebtedness of the Company, to execute and deliver a supplemental indenture to this Indenture, substantially in the form of Exhibit E hereto, agreeing to be bound by its terms applicable to a Subsidiary Guarantor and providing for a Subsidiary Guarantee of the Securities by such Restricted Subsidiary. (b) Notwithstanding the foregoing and the other provisions of this Indenture, any Subsidiary Guarantee incurred by a Restricted Subsidiary pursuant to this Section 10.13 shall provide by its terms that it shall be automatically and unconditionally released and discharged upon the terms and conditions set forth in Section 13.3 hereof. Section 10.14 Limitation on Issuance and Sale of Capital Stock by Restricted Subsidiaries. The Company (a) shall not permit any Restricted Subsidiary to issue any Capital Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (b) shall not permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary, except, in each case, for (i) directors' qualifying shares, (ii) Capital Stock of a Restricted Subsidiary organized in a foreign jurisdiction required to be issued to, or owned by, the government of such foreign jurisdiction or individual or corporate citizens of such foreign jurisdiction in order for such Restricted Subsidiary to transact business in such foreign jurisdiction, (iii) a sale of all or substantially all the Capital Stock of a Restricted Subsidiary effected in accordance with Section 10.17, (iv) Qualifying TECONS and (v) 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; provided, however, that any Capital Stock retained by the Company or a Restricted Subsidiary shall be treated as an Investment for purposes of Section 10.10, if the amount of such Capital Stock represents less than a majority of the Voting Stock of such Restricted Subsidiary. Section 10.15 Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, except for Permitted Liens, upon any of their respective Properties, whether now owned or acquired after the date of this Indenture, or any income or profits therefrom to secure any Pari Passu Indebtedness or Subordinated Indebtedness, unless prior to or contemporaneously therewith the Securities are directly secured equally and ratably, provided that (1) if such secured Indebtedness is Pari Passu Indebtedness, the Lien securing such Pari Passu Indebtedness shall be subordinate and junior to, or pari passu with, the Lien securing the Securities and (2) if such secured Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness shall be subordinate and junior to the Lien securing the Securities at least to the same extent as such Subordinated Indebtedness is subordinated to the Securities. The foregoing covenant shall not apply to any Lien securing Acquired Indebtedness, provided that any such Lien extends only to the Properties that were subject to such Lien prior to the related acquisition by the Company or such Restricted Subsidiary and was not created, incurred or assumed in contemplation of such transaction. -81- 87 Section 10.16 Purchase of Securities Upon Change of Control. (a) Upon the occurrence of a Change of Control, each Holder of Securities shall have the right to require the Company to purchase such Holder's Securities, in whole or in part, in a principal amount that is an integral multiple of $10, pursuant to the offer described in Section 10.16(b) hereof (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Change of Control Purchase Date"). The Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer at the same purchase price, at the same times and otherwise in substantial compliance with the requirements applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer. (b) Within 30 calendar days after the date of any Change of Control, the Company, or the Trustee at the request and expense of the Company, shall send to each Holder, in the manner provided in Section 15.5, a notice (the "Change of Control Notice") prepared by the Company describing the transaction or transactions that constitute the Change of Control and stating: (i) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to this Section 10.16, and that all Securities that are timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price, and the Change of Control Purchase Date, which date shall be a Business Day no earlier than 30 calendar days nor later than 60 calendar days subsequent to the date such notice is mailed; (iii) that any Securities or portions thereof not tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the Change of Control Purchase Price with respect thereto, all Securities or portions thereof accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest from and after the Change of Control Purchase Date; (v) that any Holder electing to have any Securities or portions thereof purchased pursuant to a Change of Control Offer will be required to surrender such Securities, with the form to elect purchase by the Company pursuant to this Section 10.16 completed, to the Paying Agent at the address specified in the notice, prior to the close of business on the third Business Day preceding the Change of Control Purchase Date; (vi) that any Holder shall be entitled to withdraw such election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Change of Control Purchase Date, a facsimile transmission or letter, setting forth the name of the Holder, the principal amount of Securities delivered for purchase, and a statement that -82- 88 such Holder is withdrawing such Holder's election to have such Securities or portions thereof purchased pursuant to the Change of Control Offer; (vii) that any Holder electing to have Securities purchased pursuant to the Change of Control offer must specify the principal amount that is being tendered for purchase, which principal amount must be $10 or an integral multiple thereof; (viii) if Physical Securities have been issued pursuant to Section 2.1, that any Holder of Physical Securities whose Physical Securities are being purchased only in part will be issued new Physical Securities equal in principal amount to the unpurchased portion of the Physical Securities surrendered, which unpurchased portion will be equal in principal amount to $10 or an integral multiple thereof; and (ix) any other information necessary to enable any Holder to tender Securities and to have such Securities purchased pursuant to this Section 10.16. If any of the Securities subject to a Change of Control Offer is in the form of a Global Security, then the Company shall modify the Change of Control Notice to the extent necessary to accord with the procedures of the Depository applicable to repurchases. (c) On the Change of Control Purchase Date, the Company shall (1) accept for payment all Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (2) irrevocably deposit with the Paying Agent, by 11:00 a.m., Eastern time, on such date, in immediately available funds, an amount equal to the Change of Control Purchase Price in respect of all Securities or portions thereof so accepted and (3) deliver or cause to be delivered to the Trustee the Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly send, in the manner provided in Section 15.5, to each Holder of Securities or portions thereof so accepted for payment the Change of Control Purchase Price for such Securities or portions thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. For purposes of this Section 10.16, the Trustee shall act as the Paying Agent. (d) Upon surrender and cancellation of a Physical Security that is purchased in part pursuant to the Change of Control Offer, the Company shall promptly issue and the Trustee shall authenticate and deliver to the surrendering Holder of such Physical Security a new Physical Security equal in principal amount to the unpurchased portion of such surrendered Physical Security; provided that each such new Physical Security shall be in a principal amount of $10 or an integral multiple thereof. (e) The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that a Change of Control occurs and the Company is required to purchase Securities as described in this Section 10.16. 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 -83- 89 and regulations and will not be deemed to have breached its obligations under this Section 10.16 by virtue thereof. (f) Prior to complying with the provisions of this Section 10.16, but in any event within 30 days following a Change of Control, the Company shall either repay all outstanding Senior Indebtedness or obtain the requisite consents, if any, under all agreements governing outstanding Senior Indebtedness to permit the repurchase of Securities required by this Section 10.16. Section 10.17 Disposition of Proceeds of Asset Sales. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any Asset Sale 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 Properties sold or otherwise disposed of pursuant to the Asset Sale, (ii) all of the consideration received by the Company or the Restricted Subsidiary, as the case may be, in respect of such Asset Sale consists of cash, Cash Equivalents, Liquid Securities or Exchanged Properties ("Permitted Consideration"); provided, however, that the Company and its Restricted Subsidiaries shall be permitted to receive any Property other than Permitted Consideration, so long as the aggregate Fair Market Value (determined on the date of each Asset Sale) of such Property other than Permitted Consideration received from Asset Sales and held by the Company or any Restricted Subsidiary at any one time shall not exceed 10.0% of Adjusted Consolidated Net Tangible Assets and (iii) the Company delivers to the Trustee an Officers' Certificate (which Officers' Certificate shall be conclusive) certifying that such Asset Sale complies with clauses (i) and (ii) of this Section 10.17(a). The amount (without duplication) of any Indebtedness (other than Subordinated Indebtedness or Pari Passu Indebtedness) of the Company or such Restricted Subsidiary that is expressly assumed by the transferee in such Asset Sale and with respect to which the Company or such Restricted Subsidiary, as the case may be, is unconditionally released by the holder of such Indebtedness, shall be deemed to be cash or Cash Equivalents for purposes of clause (ii) and shall also be deemed to constitute a repayment of, and a permanent reduction in, the amount of such Indebtedness for purposes of the next following paragraph. (b) If the Company or any Restricted Subsidiary engages in an Asset Sale after the date of this Indenture, the Company or such Restricted Subsidiary may either, no later than 365 days after such Asset Sale, (i) apply all or any of the Net Cash Proceeds therefrom to (A) repay Indebtedness under the Credit Facility or (B) repay or purchase other Indebtedness (other than Subordinated Indebtedness or Pari Passu Indebtedness) of the Company or any Restricted Subsidiary, provided, in the case of clause (B), that the related loan commitment (if any) is thereby permanently reduced by the amount of such Indebtedness so repaid or purchased, or (ii) invest all or any part of the Net Cash Proceeds thereof in Properties that will be used in the Oil and Gas Business of the Company or its Restricted Subsidiaries, as the case may be. The amount of such Net Cash Proceeds not applied or invested as provided in this paragraph (after the periods specified in this paragraph) shall constitute "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds equals or exceeds $10,000,000 (the "Trigger Date"), the Company shall make an offer to purchase, from all Holders of the Securities and holders of any then outstanding Pari Passu Indebtedness required to be repurchased or repaid on a permanent basis in connection with an Asset -84- 90 Sale, an aggregate principal amount of Securities and any such Pari Passu Indebtedness equal to such Excess Proceeds as follows: (1) Not later than the 30th day following the Trigger Date, the Company shall (i) give to the Trustee in the manner provided in Section 15.4 hereof and each Holder of the Securities in the manner provided in Section 15.5 hereof, a notice (a "Purchase Notice") offering to purchase (a "Net Proceeds Offer") from all Holders of the Securities the maximum principal amount (expressed as a multiple of $10) of Securities that may be purchased out of an amount (the "Payment Amount") equal to the product of such Excess Proceeds multiplied by a fraction, the numerator of which is the outstanding principal amount of the Securities and the denominator of which is the sum of the outstanding principal amount of the Securities and any such Pari Passu Indebtedness (subject to proration in the event such amount is less than the aggregate Offered Price (as hereinafter defined) of all Securities tendered), and (ii) to the extent required by any Pari Passu Indebtedness and provided there is a permanent reduction in the principal amount of such Pari Passu Indebtedness, the Company shall make an offer to purchase such Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Indebtedness Amount") equal to the excess of the Excess Proceeds over the Payment Amount. (2) The offer price for the Securities shall be payable in cash in an amount equal to 100% of the aggregate principal amount of the Securities tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid interest, if any, to the date such Net Proceeds Offer is consummated (the "Offered Price"), in accordance with paragraph (d) of this Section. To the extent that the aggregate Offered Price of the Securities tendered pursuant to a Net Proceeds Offer is less than the Payment Amount relating thereto or the aggregate amount of the Pari Passu Indebtedness that is purchased or repaid pursuant to the Pari Passu Offer is less than the Pari Passu Indebtedness Amount (such shortfall constituting a "Net Proceeds Deficiency"), the Company may use such Net Proceeds Deficiency, or a portion thereof, for general corporate purposes, subject to the limitations of Section 10.10 hereof. (3) If the aggregate Offered Price of Securities validly tendered and not withdrawn by Holders thereof exceeds the Payment Amount, Securities to be purchased will be selected on a pro rata basis by the Trustee based on the aggregate principal amount of Securities so tendered. Upon completion of a Net Proceeds Offer and a Pari Passu Offer, the amount of Excess Proceeds shall be reset to zero. (4) The Purchase Notice shall set forth a purchase date (the "Net Proceeds Payment Date"), which shall be on a Business Day no earlier than 30 days nor later than 60 days from the Trigger Date. The Purchase Notice shall also state (i) that a Trigger Date with respect to one or more Asset Sales has occurred and that such Holder has the right to require the Company to repurchase such Holder's Securities at the Offered Price, subject to the limitations described in the forgoing paragraph (3), (ii) any information regarding such Net Proceeds Offer required to be furnished pursuant to Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, (iii) that any Security, or portion thereof, not tendered or accepted for payment will continue to accrue interest, (iv) that, unless the Company defaults in depositing money with the Paying Agent in accordance with the last paragraph of clause (d) of this Section 10.17, or -85- 91 payment is otherwise prevented, any Security, or portion thereof, accepted for payment pursuant to the Net Proceeds Offer shall cease to accrue interest after the Net Proceeds Payment Date, and (v) the instructions a Holder must follow in order to have his Securities repurchased in accordance with paragraph (d) of this Section. (d) Holders electing to have Securities purchased will be required to surrender such Securities to the Paying Agent at the address specified in the Purchase Notice prior to the close of business on the third Business Days prior to the Net Proceeds Payment Date. Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the second Business Days prior to the Net Proceeds Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities delivered for purchase by the Holder as to which his election is to be withdrawn and a statement that such Holder is withdrawing his election to have such Securities purchased. Holders of Physical Securities whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered, which unpurchased portion will be equal to $10 or an integral multiple thereof. On the Net Proceeds Payment Date, the Company shall (i) accept for payment Securities or portions thereof validly tendered pursuant to a Net Proceeds Offer in an aggregate principal amount equal to the Payment Amount or such lesser amount of Securities as has been tendered, (ii) irrevocably deposit with the Paying Agent, by 11:00 a.m., Eastern time, immediately available funds sufficient to pay the purchase price of all Securities or portions thereof so tendered in an aggregate principal amount equal to the Payment Amount or such lesser amount and (iii) deliver or cause to be delivered to the Trustee the Securities so accepted. The Paying Agent shall promptly send, in the manner provided in Section 15.5, to Holders of the Securities so accepted payment in an amount equal to the purchase price, and the Company shall execute and the Trustee shall authenticate and mail or make available for delivery to such Holders a new Security equal in principal amount to any unpurchased portion of the Security which any such Holder did not surrender for purchase. Any Securities not so accepted will be promptly mailed or delivered to the Holder thereof. The Company shall announce the results of a Net Proceeds Offer on or as soon as practicable after the Net Proceeds Payment Date. For purposes of this Section 10.17, the Trustee will act as the Paying Agent. (e) The Company shall not permit any Restricted Subsidiary to enter into or suffer to exist any agreement that would place any restriction of any kind (other than pursuant to law or regulation) on the ability of the Company to make a Net Proceeds Offer following any Asset Sale. The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, if applicable, in the event that an Asset Sale occurs and the Company is required to purchase Securities as described in this Section 10.17. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Net Proceeds Offer, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 10.17 by virtue thereof. Section 10.18 Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of -86- 92 Property or services) with any Affiliate of the Company (other than the Company or a Restricted Subsidiary) unless (i) such transaction or series of related transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available in a comparable transaction in arm's-length dealings with an unrelated third party, (ii) with respect to a transaction or series of related transactions involving payments in excess of $1,000,000 in the aggregate, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction complies with clause (i) above, (iii) with respect to a transaction or series of related transactions involving payments in excess of $5,000,000 but less than $25,000,000 in the aggregate, the Company delivers an Officers' Certificate to the Trustee certifying that (A) such transaction or series of related transactions complies with clause (i) above and (B) such transaction or series of related transactions shall have been approved by a majority of the Disinterested Directors of the Company and (iv) with respect to a transaction or series of related transactions involving payments of $25,000,000 or more in the aggregate, the Company delivers an Officers' Certificate to the Trustee certifying that (A) such transaction or series of related transactions complies with clause (i) above, (B) such transaction or series of related transactions shall have been approved by a majority of the Disinterested Directors of the Company and (C) the Company shall have received the written opinion of a nationally recognized investment banking firm or appraisal firm in the United States that such transaction or series of related transactions is fair, from a financial point of view, to the Company or such Restricted Subsidiary; provided, however, that the foregoing restriction shall not apply to (s) the provision of services and payments under the Torch Agreement, so long as the Torch Agreement (including any modifications, renewals, replacements or substitutions thereof or amendments thereto entered into on or after the date of this Indenture) has been approved by a majority of the Disinterested Directors of the Company, (t) loans or advances to officers, directors and employees of the Company or any Restricted Subsidiary made in the ordinary course of business and consistent with past practices of the Company and its Restricted Subsidiaries in an aggregate amount not to exceed $3,000,000 outstanding at any one time, (u) 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 Affiliate, (v) the Company's employee compensation and other benefit arrangements, (w) indemnities of officers and directors of the Company or any Subsidiary consistent with such Person's bylaws and applicable statutory provisions or (x) Restricted Payments permitted by Section 10.10 hereof. Section 10.19 Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock to the Company or any other Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make an Investment in the Company or any other Restricted Subsidiary or (d) transfer any of its Properties to the Company or any other Restricted Subsidiary, except in each instance for such encumbrances or restrictions pursuant to (i) this Indenture, the Credit Facility or any other agreement in effect on the date of this Indenture, (ii) any agreement or other instrument of a Person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created in contemplation thereof), which -87- 93 encumbrance or restriction is not applicable to any other Person, or the Properties of any other Person, other than the Person, or the Property of the Person, so acquired, (iii) customary restrictions in leases and licenses relating to the Property covered thereby and entered into in the ordinary course of business or (iv) any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (i), (ii) and (iii), provided that the terms and conditions of any such restrictions are not materially less favorable to the Holders of the Securities than those under or pursuant to the agreement so extended, renewed, refinanced or replaced, and except with respect to clause (d) only, (i) restrictions in the form of Liens which are not prohibited under Section 10.15 and which contain customary limitations on the transfer of collateral and (ii) with respect to clause (d) only, customary restrictions contained in asset sale agreements limiting the transfer of such assets pending the closing of such sale. Section 10.20 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 10.5 through 10.19 (excluding Section 10.13) hereof if, before or after the time for such compliance, the Holders of at least a majority in aggregate principal amount of the Outstanding Securities, by Act of such Holders, waive such compliance in such instance 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 10.21 Qualification of Indenture. The Company shall qualify this Indenture under the TIA in accordance with the terms and conditions of the initial Registration Rights Agreement and shall pay all costs and expenses (including attorneys' fees for the Company and the Trustee) incurred in connection therewith. In connection with any such qualification of this Indenture under the TIA, the Trustee shall be entitled to receive from the Company any such Officers' Certificates, Opinions of Counsel or other documentation as it may reasonably request. ARTICLE XI REDEMPTION OF SECURITIES Section 11.1 Right of Redemption. The Securities may be redeemed, at the election of the Company, as a whole or from time to time in part, at any time on or after June 1, 2003, upon not less than 30 or more than 60 days' notice to each Holder of Securities to be redeemed, subject to the conditions and at the Redemption Prices (expressed as percentages of principal amount) specified in the form of Security, together with accrued and unpaid interest, if any, to the Redemption Date. Notwithstanding the foregoing, prior to June 1, 2001 the Company may, at any time or from time to time, redeem up to 33 1/3% of the aggregate principal amount of the Securities originally issued (excluding, for this purpose, any Series B Securities issued in exchange for Series A Securities) at a Redemption Price of 109.5% of the principal -88- 94 amount thereof, plus accrued and unpaid interest, if any, to the Redemption Date, with the net proceeds of one or more Equity Offerings of the Company, provided that at least 66 2/3% of the aggregate principal amount of the Securities originally issued at any time prior to such redemption (excluding, for this purpose, any Series B Securities issued in exchange for Series A Securities) remains Outstanding after the occurrence of such redemption and provided, further, that such redemption shall occur not later than 90 days after the date of the closing of any such Equity Offering. Section 11.2 Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. Section 11.3 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.1 hereof shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 60 days (or, in the case of a full redemption of all Outstanding Securities, at least 45 days) prior to the Redemption Date fixed by the Company (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 and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Securities to be redeemed pursuant to Section 11.4 hereof. Any election to redeem Securities shall be revocable until the Company gives a notice of redemption pursuant to Section 11.5 hereof to the Holders of Securities to be redeemed. Section 11.4 Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not less than 30 days nor more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, pro rata or by any other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Securities; provided, however, that any such partial redemption shall be in integral multiples of $10. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, 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 Global Security, whether such Global 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 Global Security shall be in an authorized denomination. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. -89- 95 Section 11.5 Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 15.5 hereof not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) in the case of a partial redemption of Physical Securities, the identification of the particular Securities to be redeemed, and, if any Global Security or Physical Security is to be redeemed in part, the portion of the principal amount thereof to be redeemed; (d) that on the Redemption Date the Redemption Price (together with accrued interest, if any, to the Redemption Date payable as provided in Section 11.7 hereof) will become due and payable upon each such Security, or the portion thereof, to be redeemed, and that, unless the Company shall default in the payment of the Redemption Price and any applicable accrued and unpaid interest, interest thereon will cease to accrue on and after said date; and (e) the place or places where such Securities are to be surrendered for payment of the Redemption Price. If any Security to be redeemed is in global form, then the Company shall modify such notice to the extent necessary to accord with the procedures of the Depository applicable to repurchases. 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. Failure to give such notice by mailing to any Holder of Securities or any defect therein shall not affect the validity of any proceedings for the redemption of other Securities. Section 11.6 Deposit of Redemption Price. On or before 11:00 a.m., Eastern time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.3 hereof) immediately available funds in an amount sufficient to pay the Redemption Price of, and any accrued and unpaid interest on, all the Securities which are to be redeemed on such Redemption Date. Section 11.7 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 -90- 96 Price therein specified (together with accrued and unpaid interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued and unpaid interest) 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 and unpaid interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall 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 3.8 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Securities. Section 11.8 Securities Redeemed in Part. Any Physical Security which is to be redeemed only in part shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 10.2 hereof (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 such Holder's 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 Physical Security or Securities, of like tenor and 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 amount of the Security so surrendered. Section 11.9 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 XII DEFEASANCE AND COVENANT DEFEASANCE Section 12.1 Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 12.2 or Section 12.3 hereof be applied to all Outstanding Securities upon compliance with the conditions set forth below in this Article XII. Section 12.2 Defeasance and Discharge. Upon the Company's exercise under Section 12.1 hereof of the option applicable to this Section 12.2, the Company and the Subsidiary Guarantors, if any, shall be deemed to have been discharged from their respective obligations with respect to all Outstanding Securities on the date the conditions set forth in Section 12.4 hereof are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the -91- 97 Company and the Subsidiary Guarantors, if any, shall be deemed (i) to have paid and discharged their respective obligations under the Outstanding Securities; provided, however, that the Securities shall continue to be deemed to be "Outstanding" for purposes of Section 12.5 hereof and the other Sections of this Indenture referred to in clauses (A) and (B) below, and (ii) to have satisfied all their other obligations with respect to such Securities and this Indenture (and the Trustee, at the expense and direction of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 12.4 hereof and as more fully set forth in such Section, payments in respect of the principal of (and premium if any, on) and interest on such Securities when such payments are due (or at such time as the Securities would be subject to redemption at the option of the Company in accordance with this Indenture), (B) the respective obligations of the Company and the Subsidiary Guarantors, if any, under Sections 3.3, 3.4, 3.5, 3.6, 3.7, 5.8, 6.6, 6.9, 6.10, 10.2, 10.3, 10.21, 13.1 (to the extent it relates to the foregoing Sections and this Article XII), 13.4 and 13.5 hereof, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and (D) the obligations of the Company and the Subsidiary Guarantors, if any, under this Article XII. Subject to compliance with this Article XII, the Company may exercise its option under this Section 12.2 notwithstanding the prior exercise of its option under Section 12.3 hereof with respect to the Securities. Section 12.3 Covenant Defeasance. Upon the Company's exercise under Section 12.1 hereof of the option applicable to this Section 12.3, (i) the Company and each Subsidiary Guarantor, if any, shall be released from their respective obligations under any covenant contained in Article VIII, in Sections 10.5 through 10.19 and in Section 13.2 hereof, and any covenant added to this Indenture pursuant to Section 9.1(b), and (ii) the occurrence of any event specified in Section 5.1(c) or 5.1(d) hereof (with respect to any of Article VIII, Sections 10.5 through 10.19, Section 13.2 and any covenant added to this Indenture pursuant to Section 9.1(b)) shall be deemed not to be or result in an Event of Default, in each case with respect to the Outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities, the Company and each Subsidiary Guarantor, if any, may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Article or Section (to the extent so specified in the case of Sections 5.1(c) and 5.1(d) hereof), whether directly or indirectly, by reason of any reference elsewhere herein to any such Article or Section or by reason of any reference in any such Article or Section to any other provision herein or in any other document, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. In addition, upon the Company's exercise under Section 12.1 hereof of the option applicable to this Section 12.3, subject to the satisfaction of the conditions set forth in Section 12.4 hereof, Sections 5.1(e) and 5.1(g) hereof shall thereafter not constitute Events of Default. -92- 98 Section 12.4 Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 12.2 or Section 12.3 hereof to the Outstanding Securities: (a) The Company or any Subsidiary Guarantor shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.7 hereof who shall agree to comply with the provisions of this Article XII applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) cash in U.S. Dollars in an amount, or (B) U.S. Government Obligations which through the scheduled 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, or (C) a combination thereof, sufficient, in the opinion of a 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 (or other qualifying trustee) to pay and discharge, the principal of (and premium, if any, on) and interest on the Outstanding Securities on the Stated Maturity thereof (or Redemption Date, if applicable), provided that the Trustee shall have been irrevocably instructed in writing by the Company to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities. Before such a deposit, the Company may give to the Trustee, in accordance with Section 11.3 hereof, a notice of its election to redeem all of the Outstanding Securities at a future date in accordance with Article XI hereof, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, 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 depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (b) No Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as Sections 5.1(h) and 5.1(i) are concerned, at any time during the period ending on the 91st day after the date of such deposit. (c) Such legal defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest under this Indenture or the Trust Indenture Act with respect to any securities of the Company or any Subsidiary Guarantor. -93- 99 (d) Such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under any other material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound, as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit. (e) In the case of an election under Section 12.2 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel stating 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 laws, in either case providing that the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred (it being understood that (x) such Opinion of Counsel shall also state that such ruling or applicable law is consistent with the conclusions reached in such Opinion of Counsel and (y) the Trustee shall be under no obligation to investigate the basis or correctness of such ruling). (f) In the case of an election under Section 12.3 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (g) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent provided for relating to either the legal defeasance under Section 12.2 hereof or the covenant defeasance under Section 12.3 (as the case may be) have been complied with. Section 12.5 Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.3 hereof, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively for purposes of this Section 12.5, the "Trustee") pursuant to Section 12.4 hereof in respect of the Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 12.4 hereof 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 the Outstanding Securities. -94- 100 Anything in this Article XII 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 12.4 hereof which, in the opinion of a 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 an equivalent legal defeasance or covenant defeasance, as applicable, in accordance with this Article. Section 12.6 Reinstatement. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 12.5 hereof by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's and any Subsidiary Guarantors' obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.2 or 12.3 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 12.5 hereof; provided, however, that if the Company or any Subsidiary Guarantor makes any payment of principal of (or premium, if any, on) or interest on any Security following the reinstatement of its obligations, the Company or such Subsidiary Guarantor shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE XIII SUBSIDIARY GUARANTEES Section 13.1 Unconditional Guarantee. Each Subsidiary Guarantor, if any, hereby unconditionally, jointly and severally, guarantees (each such guarantee being referred to herein as this "Subsidiary Guarantee," with all such guarantees being referred to herein as the "Subsidiary Guarantees") to each Holder of Securities authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, the full and prompt performance of the Company's obligations under this Indenture and the Securities and that: (a) the principal of (and premium, if any, on) and interest on the Securities will be promptly paid in full when due (subject to any applicable grace periods), whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Securities, if any, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Securities or of any such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity by acceleration or otherwise; subject, however, in the case of clauses (a) and (b) above, to the limitations set forth in Section 13.4 hereof. -95- 101 Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantors will be jointly and severally obligated to pay the same immediately. Each Subsidiary Guarantor hereby agrees that its obligations hereunder shall, to the extent permitted by law, be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Each Subsidiary Guarantor hereby waives, to the extent permitted by law, diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and in this Subsidiary Guarantee. If any Holder or the Trustee is required by any court or otherwise to return to the Company, any Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or any Subsidiary Guarantor, any amount paid by the Company or any Subsidiary Guarantor to the Trustee or such Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Subsidiary Guarantor agrees it shall not be entitled to enforce any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that, as between each Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article V hereof for the purposes of this Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (y) in the event of any acceleration of such obligations as provided in Article V hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of this Subsidiary Guarantee. Section 13.2 Subsidiary Guarantors May Consolidate, etc., on Certain Terms. (a) Except as set forth in Article VIII hereof, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Subsidiary Guarantor with or into the Company or another Subsidiary Guarantor or shall prevent any sale, conveyance or other disposition of all or substantially all the Properties of a Subsidiary Guarantor to the Company or another Subsidiary Guarantor. (b) Except as set forth in Article VIII hereof, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Subsidiary Guarantor with or into a Person other than the Company or another Subsidiary Guarantor (whether or not Affiliated with the Subsidiary Guarantor), or successive consolidations or mergers in which a Subsidiary Guarantor or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or other disposition of all or substantially all the Properties of a Subsidiary Guarantor to a Person other than the Company or another Subsidiary Guarantor (whether or not Affiliated with the Subsidiary Guarantor) authorized to acquire and operate the same; provided, however, that (i) immediately after such transaction, and giving effect thereto, no Default or Event of -96- 102 Default shall have occurred as a result of such transaction and be continuing, (ii) such transaction shall not violate any of the covenants of Sections 10.1 through 10.19 hereof, and (iii) each Subsidiary Guarantor hereby covenants and agrees that, upon any such consolidation, merger, sale, conveyance or other disposition, such Subsidiary Guarantor's Subsidiary Guarantee set forth in this Article XIII and in a notation to the Securities, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor, shall be expressly assumed (in the event that the Subsidiary Guarantor is not the surviving corporation in a merger), by supplemental indenture substantially in the form of Exhibit E hereto, executed and delivered to the Trustee, by such Person formed by such consolidation, or into which the Subsidiary Guarantor shall have merged, or by the Person that shall have acquired such Property (except to the extent the following Section 13.3 would result in the release of such Subsidiary Guarantee, in which case such surviving Person or transferee of such Property shall not have to execute any such supplemental indenture and shall not have to assume such Subsidiary Guarantor's Subsidiary Guarantee). In the case of any such consolidation, merger, sale, conveyance or other disposition and upon the assumption by the successor Person, by supplemental indenture executed and delivered to the Trustee substantially in the form of Exhibit E hereto of the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Subsidiary Guarantor, such successor Person shall succeed to and be substituted for the Subsidiary Guarantor with the same effect as if it had been named herein as the initial Subsidiary Guarantor. Section 13.3 Release of Subsidiary Guarantors. Upon the sale or disposition (by merger or otherwise) of a Subsidiary Guarantor (or all or substantially all of its Properties) to a Person other than the Company or another Subsidiary Guarantor and pursuant to a transaction that is otherwise in compliance with the terms of this Indenture, including but not limited to the provisions of Section 13.2 hereof or pursuant to Article VIII hereof, such Subsidiary Guarantor shall be deemed released from its Subsidiary Guarantee and all related obligations under this Indenture; provided, however, that any such termination shall occur only to the extent that all obligations of such Subsidiary Guarantor under all of its guarantees of, and under all of its pledges of assets or other security interests which secure, other Indebtedness of the Company or any other Restricted Subsidiary shall also terminate upon such sale or other disposition. The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officers' Certificate and an Opinion of Counsel certifying that such sale or other disposition was made by the Company in accordance with the provisions of this Indenture. Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the provisions of this Indenture shall be released from its Subsidiary Guarantee and all related obligations under this Indenture for so long as it remains an Unrestricted Subsidiary. The Trustee shall deliver an appropriate instrument evidencing such release upon its receipt of the Board Resolution designating such Unrestricted Subsidiary. Notwithstanding any other provision of this Indenture, all of the Subsidiary Guarantors shall be deemed released from their respective Subsidiary Guarantees and all related obligations under this Indenture in the event that all obligations of the Subsidiary Guarantors under all of their guarantees of, and under all of their pledges of assets or other -97- 103 security interests which secure, other Indebtedness of the Company (excluding any Senior Indebtedness) shall also terminate. The Trustee shall deliver an appropriate instrument evidencing such release upon receipt of a Company Request accompanied by an Officer's Certificate and Opinion of Counsel certifying that all such obligations of the Subsidiary Guarantors have terminated. Any Subsidiary Guarantor not released in accordance with this Section 13.3 shall remain liable for the full amount of principal of (and premium, if any, on) and interest on the Securities as provided in this Article XIII. Section 13.4 Limitation of Subsidiary Guarantors' Liability. Each Subsidiary Guarantor, and by its acceptance hereof each Holder, hereby confirm that it is the intention of all such parties that the guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and each Subsidiary Guarantor hereby irrevocably agree that the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities (including, but not limited to, Guarantor Senior Indebtedness) of such Subsidiary Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to Section 13.5 hereof, result in the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee not constituting such a fraudulent conveyance or fraudulent transfer. This Section 13.4 is for the benefit of the creditors of each Subsidiary Guarantor, and, for purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act any each other similar federal or state law, any Indebtedness of a Subsidiary Guarantor incurred from time to time pursuant to the Credit Facility shall be deemed to have been incurred prior to the incurrence by such Subsidiary Guarantor of liability under its Subsidiary Guarantee. Section 13.5 Contribution. In order to provide for just and equitable contribution among the Subsidiary Guarantors, the Subsidiary Guarantors agree, inter se, that in the event any payment or distribution is made by any Subsidiary Guarantor (a "Funding Guarantor") under its Subsidiary Guarantee, such Funding Guarantor shall be entitled to a contribution from each other Subsidiary Guarantor (if any) in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Securities or any other Subsidiary Guarantor's obligations with respect to its Subsidiary Guarantee. Section 13.6 Execution and Delivery of Notations of Subsidiary Guarantees. To evidence its Subsidiary Guarantee set forth in Section 13.1 hereof, each Subsidiary Guarantor hereby agrees to execute the notations of Subsidiary Guarantees in substantially the form set forth in Section 2.4 hereof to be endorsed on all Securities ordered to be authenticated and delivered by the Trustee, unless at such time there are no -98- 104 Subsidiary Guarantors, and each Subsidiary Guarantor agrees that any supplement to this Indenture shall be executed on behalf of such Subsidiary Guarantor by its President or one of its Vice Presidents. Each Subsidiary Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 13.1 hereof shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Subsidiary Guarantee. Each such notation of Subsidiary Guarantee shall be signed on behalf of each Subsidiary Guarantor by its President or one of its Vice Presidents (each of whom shall, in each case, have been duly authorized by all requisite corporate action) prior to the authentication of the Security on which it is endorsed, and the delivery of such Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of such Subsidiary Guarantor. Such signatures upon the notation of Subsidiary Guarantee may be by manual or facsimile signature of such officers and may be imprinted or otherwise reproduced on the Subsidiary Guarantee, and in case any such officer who shall have signed the notation of Subsidiary Guarantee shall cease to be such officer before the Security on which such notation of Subsidiary Guarantee is endorsed shall have been authenticated and delivered by the Trustee or disposed of by the Company, such Security nevertheless may be authenticated and delivered or disposed of as though the person who signed the notation of Subsidiary Guarantee had not ceased to be such officer of the Subsidiary Guarantor. Section 13.7 Severability. In case any provision of this Subsidiary Guarantee shall be invalid, illegal or unenforceable, that portion of such provision that is not invalid, illegal or unenforceable shall remain in effect, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 13.8 Subsidiary Guarantees Subordinated to Guarantor Senior Indebtedness. Each Subsidiary Guarantor covenants and agrees, and each Holder of a Security, by his acceptance of the Subsidiary Guarantees, likewise covenants and agrees, for the benefit of the holders, from time to time, of Guarantor Senior Indebtedness, that the indebtedness, obligations and liabilities of such Subsidiary Guarantor in respect of its Subsidiary Guarantee are subordinated and subject in right of payment, to the extent and in the manner provided in this Article XIII, to the prior payment in full of all Guarantor Senior Indebtedness of such Subsidiary Guarantor, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed or guaranteed; provided, however, that the Subsidiary Guarantee of such Subsidiary Guarantor, the Indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and the interest on the Securities pursuant to such Subsidiary Guarantee in all respects shall rank pari passu with, or prior to, all existing and future unsecured indebtedness (including, without limitation, Indebtedness) of such Subsidiary Guarantor that is subordinated to its Guarantor Senior Indebtedness. This Article XIII shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold, Guarantor Senior Indebtedness, and such provisions are made for the benefit of the holders of Guarantor Senior Indebtedness, and such holders are made obligees hereunder and any of them may enforce such provisions. -99- 105 Section 13.9 Subsidiary Guarantors Not to Make Payments with Respect to Subsidiary Guarantees in Certain Circumstances. (a) No payment or distribution of any Property of any Subsidiary Guarantor of any kind or character (other than Permitted Guarantor Junior Securities) may be made by such Subsidiary Guarantor in respect of its Subsidiary Guarantee upon (i) the happening of any default in respect of the payment or required prepayment of any of its Guarantor Senior Indebtedness when the same becomes due and payable (a "Subsidiary Guarantor Payment Default") and (ii) receipt by the Trustee of written notice thereof, unless and until such Subsidiary Guarantor Payment Default shall have been cured or waived in writing or shall have ceased to exist or such Guarantor Senior Indebtedness shall have been paid in full or otherwise discharged, after which (unless otherwise prohibited pursuant to Section 13.10 hereof) such Subsidiary Guarantor shall resume making any and all required payments in respect of its Subsidiary Guarantee, including any missed payments. (b) Upon the happening of any event (other than a Subsidiary Guarantor Payment Default) the occurrence of which entitles one or more Persons to accelerate the maturity of any Specified Guarantor Senior Indebtedness (a "Subsidiary Guarantor Non-payment Default"), and receipt by the applicable Subsidiary Guarantor and the Trustee of written notice thereof from one or more of the holders of such Specified Guarantor Senior Indebtedness or their representative (a "Subsidiary Guarantor Payment Notice"), then, unless and until such Subsidiary Guarantor Non-payment Default shall have been cured or waived in writing or shall have ceased to exist or such Specified Guarantor Senior Indebtedness is paid in full or otherwise discharged or the holders (or a representative of the holders) of such Specified Guarantor Senior Indebtedness give their written approval, no payment or distribution shall be made by such Subsidiary Guarantor in respect of its Subsidiary Guarantee (other than Permitted Guarantor Junior Securities); provided, however, that these provisions will not prevent the making of any payment for more than 179 days after a Subsidiary Guarantor Payment Notice shall have been given after which such Subsidiary Guarantor will resume (unless otherwise prohibited pursuant to the immediately preceding paragraph or Section 13.10 hereof) making any and all required payments in respect of its Subsidiary Guarantee, including any missed payments. Notwithstanding the foregoing, not more than one Subsidiary Guarantor Payment Notice shall be given with respect to any Subsidiary Guarantee within a period of 360 consecutive days. No Subsidiary Guarantor Non-payment Default that existed or was continuing on the date of delivery of any Subsidiary Guarantor Payment Notice with respect to the Specified Guarantor Senior Indebtedness initiating such Subsidiary Guarantor Payment Notice will be, or can be, made the basis for the commencement of a subsequent Subsidiary Guarantor Payment Notice with respect to such Subsidiary Guarantee. (c) In the event that, notwithstanding the foregoing, a Subsidiary Guarantor shall make any payment in respect of its Subsidiary Guarantee to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 13.9, then and in such event such payment shall be paid over and delivered forthwith to the Company. In the event that a Subsidiary Guarantor shall make any payment in respect of its Subsidiary Guarantee to the Trustee and the Trustee shall receive written notice of a Subsidiary Guarantor Payment Default or a Subsidiary Guarantor Nonpayment Default from one or more of the holders of Specified Guarantor Senior Indebtedness (or their representative) prior to making any payment to Holders in respect of the Subsidiary -100- 106 Guarantee and prior to 11:00 a.m. Eastern Time on the date which is two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose, such payments shall be paid over by the Trustee and delivered forthwith to the Company. Each Subsidiary Guarantor shall give prompt written notice to the Trustee of any default under any of its Guarantor Senior Indebtedness or under any agreement pursuant to which its Guarantor Senior Indebtedness may have been issued. Section 13.10 Subsidiary Guarantees Subordinated to Prior Payment of All Guarantor Senior Indebtedness upon Dissolution, etc. Upon any distribution of Properties of any Subsidiary Guarantor or payment on behalf of a Subsidiary Guarantor in the event of any Insolvency or Liquidation Proceeding with respect to such Subsidiary Guarantor: (a) the holders of such Subsidiary Guarantor's Guarantor Senior Indebtedness shall be entitled to receive payment in full of such Guarantor Senior Indebtedness, or provision must be made for such payment, before the Holders are entitled to receive any direct or indirect payment or distribution of any kind or character, whether in cash, property or securities (other than Permitted Guarantor Junior Securities), on account of any payment in respect of such Subsidiary Guarantor's Subsidiary Guarantee; (b) any direct or indirect payment or distribution of Properties of such Subsidiary Guarantor of any kind or character, whether in cash, property or securities (other than a payment or distribution in the form of Permitted Guarantor Junior Securities), by set-off or otherwise, to which the Holders or the Trustee, on behalf of the Holders, would be entitled except for the provisions of this Article XIII, shall be paid by the Subsidiary Guarantor or by any liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of such Guarantor Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Guarantor Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of such Senior Guarantor Indebtedness held or represented by each, to the extent necessary to make payment in full of all such Guarantor Senior Indebtedness, after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing provisions of this Section 13.10, any direct or indirect payment or distribution of Properties of such Subsidiary Guarantor of any kind or character, whether in cash, property or securities (other than a payment or distribution in the form of Permitted Guarantor Junior Securities), shall be received by the Trustee or the Holders before all such Guarantor Senior Indebtedness is paid in full or otherwise discharged, such Properties shall be received and held in trust for and shall be paid over to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of such Subsidiary Guarantor, for application to the payment of such Guarantor Senior Indebtedness until all such Guarantor Senior Indebtedness shall have been paid or provided for in full, after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness. -101- 107 The Company or a Subsidiary Guarantor shall give prompt written notice to the Trustee of the occurrence of any Insolvency or Liquidation Proceeding with respect to such Subsidiary Guarantor. Section 13.11 Holders to be Subrogated to Rights of Holders of Guarantor Senior Indebtedness. After the payment in full of all Guarantor Senior Indebtedness of a Subsidiary Guarantor, the Holders shall be subrogated (equally and ratably with the holders of all other Indebtedness of such Subsidiary Guarantor which by its express terms is subordinated to such Guarantor Senior Indebtedness to substantially the same extent as such Subsidiary Guarantee is so subordinated and which is entitled to like rights of subrogation as a result of payments made to the holders of such Guarantor Senior Indebtedness) to the rights of the holders of such Guarantor Senior Indebtedness to receive payments or distributions of cash, property and securities of such Subsidiary Guarantor applicable to such Guarantor Senior Indebtedness until all amounts owing on the Securities shall be paid in full, and for the purpose of such subrogation no payments or distributions to the holders of such Guarantor Senior Indebtedness by or on behalf of such Subsidiary Guarantor or by or on behalf of the Holders by virtue of this Article XIII which otherwise would have been made to the Holders shall, as between such Subsidiary Guarantor, its creditors other than the holders of Guarantor Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment or distribution by such Subsidiary Guarantor to or on account of such Guarantor Senior Indebtedness, it being understood that the subordination provisions of this Article XIII are, and are intended solely for, the purpose of defining the relative rights of the Holders, on the one hand, and the holders of Guarantor Senior Indebtedness, on the other hand. Section 13.12 Obligations of Subsidiary Guarantors Unconditional. Nothing contained in this Article XIII or elsewhere in this Indenture or in any Security is intended to or shall impair, as between the Subsidiary Guarantors and the Holders, the obligation of the Subsidiary Guarantors under the Subsidiary Guarantees, or is intended to or shall affect the relative rights of the Holders and creditors of the Subsidiary Guarantors, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon Default under this Indenture, subject to the rights, if any, under this Article XIII of the holders of Guarantor Senior Indebtedness in respect of cash, property or securities of any Subsidiary Guarantor received upon the exercise of any such remedy. Upon any distribution of Properties of a Subsidiary Guarantor referred to in this Article XIII, the Trustee, subject to the provisions of Section 6.2 hereof, and the Holders of the Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of a trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, or agent or other Person making any distribution to the Trustee or to the Holders of the Securities, for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the related Guarantor Senior Indebtedness and other indebtedness of such Subsidiary Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XIII. -102- 108 Section 13.13 Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Trustee shall not at any time be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee, unless it shall have received at its Corporate Trust Office written notice thereof from a Subsidiary Guarantor or from one or more holders of Guarantor Senior Indebtedness or Specified Guarantor Senior Indebtedness, in the case of a Subsidiary Guarantor Non-payment Default, or from any representative thereof; and, prior to the receipt of any such written notice, the Trustee, subject to TIA Sections 315(a) through 315(d), shall be entitled to assume conclusively that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Guarantor Senior Indebtedness or Specified Guarantor Senior Indebtedness, in the case of a Subsidiary Guarantor Non-payment Default (or a representative on behalf of such holder), to establish that such notice has been given by a holder of Guarantor Senior Indebtedness or Specified Guarantor Senior Indebtedness, in the case of a Subsidiary Guarantor Non-payment Default, or a representative on behalf of any such holder or holders. Section 13.14 Application by Trustee of Money Deposited with it. Except as provided in Article XIV, any deposit of money by a Subsidiary Guarantor with the Trustee or any Paying Agent (whether or not in trust) for any payment in respect of the related Subsidiary Guarantee shall be subject to the provisions of Sections 13.8, 13.9, 13.10 and 13.11 hereof except that, if prior to 11:00 a.m. Eastern time on the date which is two Business Days prior to the date on which by the terms of this Indenture any such money may become payable for any purpose, the Trustee or, in the case of any such deposit of money with a Paying Agent, the Paying Agent shall not have received with respect to such money the notice provided for in Section 13.13 hereof, then the Trustee or such Paying Agent, as the case may be, shall have full power and authority to receive such money and to apply the same to the purpose for which it was received, and shall not be affected by any notice to the contrary which may be received by it on or after 11:00 a.m., Eastern time, two Business Days prior to such payment date. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Guarantor Senior Indebtedness to participate in any payment or distribution pursuant to this Article XIII, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Guarantor Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XIII, 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 Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Guarantor Senior Indebtedness but shall have only such obligations to such holders as are expressly set forth in this Article XIII. -103- 109 Section 13.15 Subordination Rights Not Impaired by Acts or Omissions of Subsidiary Guarantors or Holders of Guarantor Senior Indebtedness. No right of any present or future holders of any Guarantor Senior Indebtedness of a Subsidiary Guarantor to enforce subordination as provided herein shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of such Subsidiary Guarantor or by any act or failure to act by any such holder, or by any noncompliance by such Subsidiary Guarantor with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. Without in any way limiting the generality of the preceding paragraph of this Section, the holders of Guarantor Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination or other benefits provided in this Article, or the obligations hereunder of the Holders of the Securities to the holders of Guarantor Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew, exchange, amend, increase or alter, Guarantor Senior Indebtedness or the term of any instrument evidencing the same or any agreement under which Guarantor Senior Indebtedness is outstanding or any liability of any obligor thereon (unless such change, extension or alteration results in such Indebtedness no longer being Guarantor Senior Indebtedness as defined in this Indenture); (2) sell, exchange, release or otherwise deal with any Property pledged, mortgaged or otherwise securing Guarantor Senior Indebtedness; (3) settle or compromise any Guarantor Senior Indebtedness or any liability of any obligor thereon or release any Person liable in any manner for the collection of Guarantor Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other Person. Section 13.16 Holders Authorize Trustee to Effectuate Subordination of Subsidiary Guarantees. Each Holder, by his acceptance thereof, authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XIII and appoints the Trustee as his attorney-in-fact for such purpose, including, in the event of any Insolvency or Liquidation Proceeding with respect to any Subsidiary Guarantor, the immediate filing of a claim for the unpaid balance of his Securities pursuant to the related Subsidiary Guarantee in the form required in said proceedings and the causing of said claim to be approved. Section 13.17 Right of Trustee to Hold Guarantor Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article XIII in respect of any Guarantor Senior Indebtedness at any time held by it to the same extent as any other holder of Guarantor Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. -104- 110 Section 13.18 Article XIII Not to Prevent Events of Default. The failure to make a payment on account of the Subsidiary Guarantees by reason of any provision in this Article XIII shall not be construed as preventing the occurrence of an Event of Default under this Indenture. Section 13.19 Payment. For purposes of this Article XIII, a payment with respect to any Subsidiary Guarantee or with respect to principal of or interest on the Security or any Subsidiary Guarantee shall include, without limitation, payment of principal of and interest on any Security, any depositing of funds under Article IV hereof, any payment on account of any repurchase or redemption of any Security and any payment or recovery on any claim (whether for rescission or damages and whether based on contract, tort, duty imposed by law, or any other theory of liability) relating to or arising out of the offer, sale or purchase of any Security. Section 13.20 Payment Permitted If No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent any Subsidiary Guarantor, at any time except during the pendency of any Insolvency or Liquidation Proceeding referred to in Section 13.10 hereof or under the conditions described in Section 13.9 hereof, from making payments at any time on its Subsidiary Guarantee. ARTICLE XIV SUBORDINATION OF SECURITIES Section 14.1 Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Senior Indebtedness, that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Securities and the payment of the principal of (and premium, if any, on) and interest on each and all of the Securities are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Senior Indebtedness, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed or guaranteed; provided, however, that the Securities, the Indebtedness represented thereby and the payment of the principal of (and premium, if any, on) and interest on the Securities in all respects shall rank equally with, or prior to, all existing and future unsecured indebtedness (including, without limitation, Indebtedness) of the Company that is subordinated to Senior Indebtedness. This Article XIV shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and any one or more of them may enforce such provisions. -105- 111 Section 14.2 Payment over of Proceeds upon Dissolution, etc. Upon any distribution of Properties of the Company or payment on behalf of the Company with respect to the Securities in the event of any Insolvency or Liquidation Proceeding with respect to the Company: (a) the holders of Senior Indebtedness shall be entitled to receive payment in full of such Senior Indebtedness, or provision must be made for such payment, before the Holders of the Securities are entitled to receive any direct or indirect payment or distribution of any kind or character, whether in cash, property or securities (other than Permitted Junior Securities) on account of principal of (or premium, if any, on) or interest on the Securities or on account of the purchase or redemption or other acquisition of Securities (including pursuant to a Change of Control Offer or a Net Proceeds Offer); and (b) any direct or indirect payment or distribution of Properties of the Company of any kind or character, whether in cash, property or securities (other than a payment or distribution in the form of Permitted Junior Securities), by set-off or otherwise, to which the Holders or the Trustee, on behalf of the Holders, would be entitled but for the provisions of this Article shall be paid by the Company or by any liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of Properties of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, in respect of principal of (and premium, if any, on) or interest on the Securities before all Senior Indebtedness is paid or provided for in full, then and in such event such payment or distribution (other than a payment or distribution in the form of Permitted Junior Securities) shall be received and held in trust for and shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. 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, assignment, conveyance, transfer, lease or other disposition of all or substantially all its Properties on a consolidated basis to another Person or group of Affiliated Persons pursuant to, and in compliance with, the terms and conditions set forth in Article VIII hereof shall not be deemed an Insolvency or Liquidation Proceeding (requiring the repayment of all Senior Indebtedness in full as a prerequisite to any payments being made to the Holders) for the purposes of this Section. -106- 112 Section 14.3 Suspension of Payment When Senior Indebtedness in Default. (a) Upon (1) the occurrence of a Payment Event of Default and (2) receipt by the Trustee of written notice of such occurrence, then no payment or distribution of any Properties of the Company of any kind or character (other than Permitted Junior Securities) shall be made by the Company on account of principal of (or premium, if any, on) or interest on the Securities or on account of the purchase or redemption or other acquisition of Securities unless and until such Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Specified Senior Indebtedness shall have been paid in full or otherwise discharged, after which (unless otherwise prohibited by Section 14.2 hereof) the Company shall resume making any and all required payments in respect of the Securities, including any missed payments. (b) Upon (1) the occurrence of a Non-payment Event of Default and (2) receipt by the Trustee and the Company of written notice of such occurrence from one or more of the holders of Specified Senior Indebtedness (or their representative), then no payment or distribution of any Properties of the Company of any kind or character (other than Permitted Junior Securities) shall be made by the Company on account of any principal of (or premium, if any, on) or interest on the Securities or on account of the purchase or redemption or other acquisition of Securities for the period specified below (the "Payment Blockage Period"). The Payment Blockage Period will commence upon the earlier of the dates of receipt by the Trustee or the Company of such notice (the "Payment Blockage Notice") from one or more of the holders of Specified Senior Indebtedness (or their representative) and shall end on the earliest of (i) 179 days thereafter, (ii) the date, as set forth in a written notice from the holders of the Specified Senior Indebtedness (or their representative) to the Company or the Trustee, on which such Non-payment Event of Default is cured, waived in writing or ceases to exist or such Specified Senior Indebtedness is discharged or (iii) the date on which such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from one or more of the holders (or their representative) initiating such Payment Blockage Period, after which the Company will resume (unless otherwise prohibited pursuant to the immediately preceding paragraph or Section 14.2 hereof) making any and all required payments in respect of the Securities, including any missed payments. In any event, not more than one Payment Blockage Period may be commenced during any period of 360 consecutive days. No Non-payment Event of Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee will be, or can be, made the basis for the commencement of a subsequent Payment Blockage Period. (c) In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 14.3, then and in such event such payment shall be paid over and delivered forthwith to the Company. In the event that the Company shall make any payment in respect of the Securities to the Trustee and the Trustee shall receive written notice of a Payment Event of Default or a Non-payment Event of Default from one or more of the holders of Specified Senior Indebtedness (or their representative) prior to making any payment to Holders in respect of the Securities and prior to 11:00 a.m. Eastern time on the date which is two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose, such payments shall be paid over by the Trustee and delivered forthwith to the Company. -107- 113 Section 14.4 Payment Permitted If No Default. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent the Company, at any time except during the pendency of any Insolvency or Liquidation Proceeding referred to in Section 14.2 hereof or under the conditions described in Section 14.3 hereof, from making payments at any time of principal of (and premium, if any, on) or interest on the Securities. Section 14.5 Subrogation to Rights of Holders of Senior Indebtedness. After the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to Senior Indebtedness to substantially the same extent as the Securities are so subordinated and which is entitled to like rights of subrogation as a result of the payments made to the holders of Senior Indebtedness) to the rights of the holders of Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to Senior Indebtedness until all amounts owing on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness by or on behalf of the Company or by or on behalf of the Holders by virtue of this Article which otherwise would have been made to the Holders shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. Section 14.6 Provisions Solely to Define Relative Rights. The provisions of this Article are, and are intended solely, for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as between the Company and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of (and premium, if any, on) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness. Section 14.7 Trustee to Effectuate Subordination. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee as his attorney-in-fact for any and all such purposes, including, in the event of any Insolvency or Liquidation Proceeding with respect to the Company, the immediate filing of a claim for the unpaid balance of his Securities pursuant to this Indenture in the form required in said proceedings and the causing of said claim to be approved. -108- 114 Section 14.8 No Waiver of Subordination Provision. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act by any such holder, or by any non-compliance by the Company with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of any Senior Indebtedness, in accordance with the terms of the instrument or agreement evidencing their Senior Indebtedness, may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination or other benefits provided in this Article, or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew, exchange, amend, increase or alter, Senior Indebtedness or the terms of any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding or any liability of any obligor thereon (unless such change, extension, amendment, increase or other alteration results in such Indebtedness no longer being Senior Indebtedness as defined in this Indenture); (2) sell, exchange, release or otherwise deal with any Property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) settle or compromise any Senior Indebtedness or any liability of any obligor thereon or release any Person liable in any manner for the collection of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other Person. Section 14.9 Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or one or more of the holders of Senior Indebtedness (or their representative), with respect to a Payment Default, or one or more of the holders of Specified Senior Indebtedness (or their representative), with respect to a Non-payment Event of Default, or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to TIA Sections 315(a) through 315(d), shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Trustee shall not have received the notice provided for in this Section prior to 11:00 a.m. Eastern time on the date which is two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any, on) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it on or after 11:00 a.m. Eastern time two Business Days prior to such payment date. -109- 115 (b) Subject to TIA Sections 315(a) through 315(d), the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Trustee determines in good faith that further 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, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of 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. Section 14.10 Reliance on Judicial Order or Certificate of Liquidating Agent Bank. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to TIA Sections 315(a) through 315(d), and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Insolvency or Liquidation Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of 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. Section 14.11 Rights of Trustee as a 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. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 hereof. Section 14.12 Article Applicable to Paying Agents. In case at any time a 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 Section 14.11 hereof shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. -110- 116 Section 14.13 No Suspension of Remedies. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Securities to take any action to accelerate the maturity of the Securities pursuant to Article V hereof or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article V hereof. Section 14.14 Trust Money Not Subordinated. Notwithstanding anything contained herein to the contrary, payments from cash or the proceeds of U.S. Government Obligations held in trust under Article XII hereof by the Trustee (or other qualifying trustee) and which were deposited in accordance with the terms of Article XII hereof and not in violation of Section 14.2 or 14.3 hereof for the payment of principal of (and premium, if any, on) 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 XIV, and none of the Holders shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness or any other creditor of the Company. ARTICLE XV MISCELLANEOUS Section 15.1 Compliance Certificates and Opinions. Upon any application or request by the Company or any Subsidiary Guarantor to the Trustee to take any action under any provision of this Indenture, the Company or such Subsidiary Guarantor, as the case may be, shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act or this Indenture. Each such certificate and each such opinion shall be in the form of an Officers' Certificate or an Opinion of Counsel, as applicable, and shall comply with the requirements of this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture 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. -111- 117 The certificates and opinions provided pursuant to this Section 15.1 and the statements required by this Section 15.1 shall comply in all respects with TIA Sections 314(c) and (e). Section 15.2 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 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 Opinion of Counsel may be based, insofar as it relates to factual matters, upon an officers' certificate, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate with respect to such matters is erroneous. 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 15.3 Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given 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 agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. 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 conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) 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 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. -112- 118 (c) The ownership, principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. (d) If the Company shall solicit from the Holders of Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date, provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) 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, including, without limitation, any Series B Security exchanged for a Series A Security, 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. Section 15.4 Notices, etc. to Trustee, Company and Subsidiary Guarantors. 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, the Company, any Subsidiary Guarantor or any holder of Senior Indebtedness or Guarantor Senior Indebtedness shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing (in the English language) and delivered in person or mailed by certified or registered mail (return receipt requested) to the Trustee at its Corporate Trust Office; or (2) the Company or any Subsidiary Guarantor by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing (in the English language) and delivered in person or mailed by certified or registered mail (return receipt requested) to the Company or such Subsidiary Guarantor, as applicable, addressed to it at the Company's -113- 119 principal office located at 1021 Main Street, Suite 2100, Houston, Texas 77002, or at any other address otherwise furnished in writing to the Trustee by the Company. Section 15.5 Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company, the Trustee or any Paying Agent, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing (in the English language) 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, and not earlier than the earliest date, 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. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. 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 or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. Section 15.6 Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 15.7 Successors and Assigns. All covenants and agreements in this Indenture by the Company and the Subsidiary Guarantors, if any, shall bind their respective successors and assigns, whether so expressed or not. All agreements of the Trustee in this Indenture shall bind its successor. Section 15.8 Separability Clause. In case any provision in this Indenture or in the Securities or the Subsidiary Guarantees, if any, shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto. Section 15.9 Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person (other than the parties hereto, any Paying Agent, any Securities Registrar and their successors hereunder, the Holders and, to the extent set forth in Section 13.4 hereof, creditors of any Subsidiary Guarantor, the holders of Senior Indebtedness and the holders -114- 120 of Guarantor Senior Indebtedness) any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 15.10 Governing Law; Trust Indenture Act Controls. (a) THIS INDENTURE, THE SUBSIDIARY GUARANTEES, IF ANY, AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. THE COMPANY AND EACH SUBSIDIARY GUARANTOR, IF ANY, IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN, THE CITY OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE SECURITIES OR THE SUBSIDIARY GUARANTEES, IF ANY, AND THE COMPANY AND EACH SUBSIDIARY GUARANTOR, IF ANY, IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED BY ANY SUCH COURT. (b) Effective upon and subject to the qualification of this Indenture pursuant to the provisions of the Trust Indenture Act, if and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of Section 318(c) of the Trust Indenture Act, or conflicts with any provision (an "incorporated provision") required by or deemed to be included in this Indenture by operation of such Trust Indenture Act section, such imposed duties or incorporated provision shall control. Section 15.11 Legal Holidays. In any case where any Interest Payment Date, Redemption Date, or Stated Maturity or Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities or any Subsidiary Guarantee) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date or at the Stated Maturity or Maturity; provided, however, that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be. Section 15.12 No Recourse Against Others. A director, officer, employee, stockholder, incorporator or Affiliate, as such, past, present or future, of the Company or any Subsidiary Guarantor shall not have any personal liability under the Securities or this Indenture by reason of his or its status as a director, officer, employee, stockholder, incorporator or Affiliate or any liability for any obligations of the Company or any Subsidiary Guarantor under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder, by accepting any of the Securities, waives and releases all such liability to the extent permitted by applicable law. -115- 121 Section 15.13 Duplicate Originals. The parties may sign any number of copies or counterparts of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 15.14 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. -116- 122 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. ISSUER: NUEVO ENERGY COMPANY By: /s/ ROBERT M. KING -------------------------------------- Name: Robert M. King Title: Senior Vice President and Chief Financial Officer TRUSTEE: STATE STREET BANK AND TRUST COMPANY By: /s/ CHI C. MA -------------------------------------- Name: Chi C. Ma Title: Vice President -117- 123 EXHIBIT A FORM OF LEGEND FOR GLOBAL SECURITIES Any Global Security authenticated and delivered hereunder shall bear a legend in addition to the Private Placement Legend, if required by Section 3.12 hereof, in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OF ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. A-1 124 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF SECURITIES Re: 9 1/2% Senior Subordinated Notes due 2008, Series A, and 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Securities"), of Nuevo Energy Company This Certificate relates to $_________ principal amount of Securities held in the form of *[ ] a beneficial interest in a Global Security or *[ ] Physical Securities by _________________ (the "Transferor"). The Transferor:* [ ] has requested by written order that the Security Registrar deliver in exchange for its beneficial interest in the Global Security held by the Depository a Physical Security or Physical Securities in definitive, registered form of authorized denominations and in an aggregate principal amount equal to its beneficial interest in such Global Security (or the portion thereof indicated above); or [ ] has requested that the Security Registrar by written order exchange or register the transfer of a Physical Security or Physical Securities. In connection with such request and in respect of each such Security, the Transferor does hereby certify that the Transferor is familiar with the Indenture relating to the above captioned Securities and the restrictions on transfers thereof as provided in Section 3.5 of such Indenture, and that the transfer of these Securities does not require registration under the Securities Act of 1933, as amended (the "Act") because *: [ ] Such Security is being acquired for the Transferor's own account, without transfer (in satisfaction of subparagraph (a)(1) or (c)(1) of Section 3.5 of the Indenture). [ ] Such Security is being transferred to a person whom the Transferor reasonably believes is a "qualified institutional buyer" (as defined in Rule 144A under the Act), in reliance on Rule 144A. [ ] Such Security is being transferred to an institutional "accredited investor" (within the meaning of subparagraphs (a)(1), (2), (3) or (7) of Rule 501 under the Act). [ ] Such Security is being transferred in reliance on Regulation S under the Act. [ ] Such Security is being transferred in reliance on Rule 144 under the Act. B-1 125 [ ] Such Security is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act other than Rule 144A or Rule 144 or Regulation S under the Act to a person other than an institutional "accredited investor." ---------------------------------------- [INSERT NAME OF TRANSFEROR] By: ------------------------------------- [Authorized Signatory] Date: ------------------------------------ *Check applicable box. B-2 126 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Institutional Accredited Investors ---------------, ----- State Street Bank and Trust Company, Trustee 2 Avenue de Lafayette Boston, MA 02111-1724 Re: Nuevo Energy Company Indenture (the "Indenture") relating to 9 1/2% Senior Subordinated Notes due 2008, Series A, or 9 1/2% Senior Subordinated Notes due 2008, Series B Ladies and Gentlemen: In connection with our proposed purchase of 9 1/2% Senior Subordinated Notes due 2008, Series A, or 9 1/2% Series Notes due 2008, Series B (the "Securities"), of Nuevo Energy Company (the "Company"), we confirm that: 1. We have received such information as we deem necessary in order to make our investment decision. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Securities, we will do so only (A) to the Company or any subsidiary thereof, (B) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee a signed letter substantially in the form hereof, (D) outside the United States in accordance with Regulation S under the Securities Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 4. We understand that, on any proposed resale of Securities, we will be required to furnish to you and the Company, such certification, legal opinions and other C-1 127 information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be, for an indefinite period. 6. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion, for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. You and the Company and yours and their respective counsel are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: --------------------------------- [Authorized Signatory] C-2 128 EXHIBIT D Form of Certificate to Be Delivered in Connection with Regulation S Transfers ---------------, ----- State Street Bank and Trust Company, Trustee 2 Avenue de Lafayette Boston, MA 02111-1724 Re: Nuevo Energy Company ("the Company") 9 1/2% Senior Subordinated Notes due 2008, Series A, and 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Securities") Ladies and Gentlemen: In connection with our proposed sale of $______________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knew that the transaction had been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) we have advised the transferee of the transfer restrictions applicable to the Securities. D-1 129 You and the Company and yours and their respective counsel are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S. Very truly yours, [Name of Transferor] By: ------------------------------------- [Authorized Signatory] D-2 130 EXHIBIT E ================================================================================ NUEVO ENERGY COMPANY and the Guarantors named herein ---------------------------------------- SERIES A AND SERIES B 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 ---------------------------------------- ------------------- FORM OF SUPPLEMENTAL INDENTURE AND AMENDMENT -- SUBSIDIARY GUARANTEE DATED AS OF ________ ___, ____ ------------------- STATE STREET BANK AND TRUST COMPANY Trustee ------------------- ================================================================================ E-1 131 This SUPPLEMENTAL INDENTURE, dated as of __________ ___, ____, is among Nuevo Energy Company, a Delaware corporation (the "Company"), each of the parties identified under the caption "Subsidiary Guarantors" on the signature page hereto (the "Subsidiary Guarantors") and State Street Bank and Trust Company, as Trustee. RECITALS WHEREAS, the Company and the Trustee entered into an Indenture, dated as of August 20, 1999 (the "Indenture"), pursuant to which the Company has originally issued $______________ in principal amount of 9 1/2% Senior Subordinated Notes due 2008 (the "Securities"); and WHEREAS, Section 9.1(g) of the Indenture provides that the Company and the Trustee may amend or supplement the Indenture in order to execute and deliver a guarantee (a "Subsidiary Guarantee") to comply with Section 10.13 or 13.2 thereof without the consent of the Holders of the Securities; and WHEREAS, all acts and things prescribed by the Indenture, by law and by the Certificate of Incorporation and the Bylaws (or comparable constituent documents) of the Company, of the Subsidiary Guarantors and of the Trustee necessary to make this Supplemental Indenture a valid instrument legally binding on the Company, the Subsidiary Guarantors and the Trustee, in accordance with its terms, have been duly done and performed; NOW, THEREFORE, to comply with the provisions of the Indenture and in consideration of the above premises, the Company, the Subsidiary Guarantors and the Trustee covenant and agree for the equal and proportionate benefit of the respective Holders of the Securities as follows: ARTICLE 1 SECTION 1.01. This Supplemental Indenture is supplemental to the Indenture and does and shall be deemed to form a part of, and shall be construed in connection with and as part of, the Indenture for any and all purposes. SECTION 1.02. This Supplemental Indenture shall become effective immediately upon its execution and delivery by each of the Company, the Subsidiary Guarantors and the Trustee. ARTICLE 2 From this date, in accordance with Section 10.13 or 13.2, as applicable, and by executing this Supplemental Indenture and the accompanying notation of Subsidiary Guarantee, the Subsidiary Guarantors whose signatures appear below are subject to the provisions of the Indenture to the extent provided for in Article XIII thereunder. ARTICLE 3 SECTION 3.01. Except as specifically modified herein, the Indenture and the Securities are in all respects ratified and confirmed (mutatis mutandis) and shall remain in full force and effect in accordance with their terms with all capitalized terms used herein E-2 132 without definition having the same respective meanings ascribed to them as in the Indenture. SECTION 3.02. Except as otherwise expressly provided herein, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture. This Supplemental Indenture is executed and accepted by the Trustee subject to all the terms and conditions set forth in the Indenture with the same force and effect as if those terms and conditions were repeated at length herein and made applicable to the Trustee with respect hereto. SECTION 3.03. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE AND ENFORCE THIS SUPPLEMENTAL INDENTURE. SECTION 3.04. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of such executed copies together shall represent the same agreement. [NEXT PAGE IS SIGNATURE PAGE] E-3 133 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. NUEVO ENERGY COMPANY By ------------------------------------- Name: Title: SUBSIDIARY GUARANTORS [ ] ----------------------------- By ------------------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY, as Trustee By ------------------------------------- Name: Title: E-4 EX-4.12 5 REGISTRATION AGREEMENT - DATED AUGUST 20, 1999 1 EXHIBIT 4.12 NUEVO ENERGY COMPANY 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 REGISTRATION AGREEMENT New York, New York August 20, 1999 Banc of America Securities LLC Bank of America Corporate Center 100 North Tryon Street, 6th Floor Charlotte, North Carolina 28255 Salomon Smith Barney Inc. Seven World Trade Center New York, New York 10048 Dear Sirs: Nuevo Energy Company, a Delaware corporation (the "Company"), proposes to issue upon the terms set forth in its Confidential Memorandum dated July 13, 1999, up to $260 million principal amount of its 9 1/2% Senior Subordinated Notes due 2008 (the "Securities"), in exchange for all of the Company's outstanding 8 7/8% Senior Subordinated Notes due 2008 and its 9 1/2% Senior Subordinated Notes due 2006. The Company has retained you to act as its exclusive dealer managers and solicitation agents with respect to such exchange offers and the related consent solicitations, pursuant to the Dealer Manager Agreement (herein so called), dated July 13, 1999, among you and the Company. As an inducement to you to enter into the Dealer Manager Agreement, the Company agrees with you, for the benefit of the holders from time to time of the Securities and the New Securities (as defined in Section 1 hereof), as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Dealer Manager Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. 2 "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Registration Agreement as the same may be amended from time to time in accordance with the terms hereof. "Closing Date" has the same meaning as is attributed to the term "Exchange Date" in the Dealer Manager Agreement. "Commission" means the Securities and Exchange Commission. "Dealer Manager Agreement" has the meaning set forth in the preamble hereto. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Period" means the 90 day period following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the Dealer Managers) which is a broker-dealer, electing to exchange Securities acquired for its own account as a result of market-making activities or other trading activities, for New Securities. "Holder" means a holder of either the Securities or the New Securities. "Indenture" means the Indenture relating to the Securities and the New Securities dated as of even date herewith, between the Company and State Street Bank and Trust Company, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Majority Holders" means the Holders of a majority of the aggregate principal amount of securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering. -2- 3 "New Securities" means debt securities of the Company identical in all material respects to the Securities (except that interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued under the Indenture. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the New Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Securities, a like principal amount of the New Securities. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Securities or the New Securities pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Securities" has the meaning set forth in the preamble hereto. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Securities or New Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Transfer Restricted Securities" means each Security until (i) the date on which such Security has been exchanged for a freely transferable New Security in the Exchange Offer, (ii) the date on which such Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iii) the date on which such Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. "Trustee" means the trustee with respect to the Securities and the New Securities under the Indenture. "underwriter" means any underwriter of Securities in connection with an offering thereof under a Shelf Registration Statement. -3- 4 2. Registered Exchange Offer; Resales of New Securities by Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, not later than 90 days following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its reasonable best efforts to cause the Exchange Offer Registration Statement to become effective under the Act as promptly as practicable after the filing thereof, but in any event on or prior to 150 days after the Closing Date. (b) Unless the Registered Exchange Offer would not be permitted by a policy of the Commission, the Company will commence the Registered Exchange Offer and will use its reasonable best efforts to consummate the Registered Exchange Offer as promptly as practicable, but in any event on or prior to 180 days after the Closing Date. (c) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for New Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Act, acquires the New Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the New Securities) to trade such New Securities from and after their receipt without any limitations or restrictions under the Act. (d) In connection with the Registered Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Registered Exchange Offer open for not less than 30 days (or longer if required by applicable law) after the date notice thereof is mailed to the Holders; (iii) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; and (iv) comply in all respects with all applicable laws. (e) As soon as practicable after the close of the Registered Exchange Offer, the Company shall: (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer; -4- 5 (ii) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (iii) cause the Trustee promptly to authenticate and deliver to each Holder of Securities New Securities equal in principal amount to the Securities of such Holder so accepted for exchange. (f) The Dealer Managers and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any New Securities received by such Exchanging Dealer pursuant to the Registered Exchanger Offer in exchange for Securities acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the substance of the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of New Securities received pursuant to the Registered Exchange Offer, as contemplated by Section 4(h) below. (g) In the event that any Initial Purchaser determines that it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of such Initial Purchaser, the Company shall issue and deliver to such Initial Purchaser or the party purchasing New Securities registered under a Shelf Registration Statement as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for such Securities, a like principal amount of New Securities. The Company shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for such New Securities as for New Securities issued pursuant to the Registered Exchange Offer. 3. Shelf Registration. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for any other reason the Exchange Offer Registration Statement is not declared effective within 150 days after the Closing Date or the Registered Exchange Offer is not consummated within 180 days after the Closing Date, or (iii) if either Dealer Manager so requests with respect to Securities (or any New Securities received pursuant to Section 2(f)) not eligible to be exchanged for New -5- 6 Securities in a Registered Exchange Offer or, in the case of a Dealer Manager that participates in any Registered Exchange Offer, such Dealer Manager does not receive freely tradeable New Securities, or (iv) if any Holder (other than a Dealer Manager) is not eligible to participate in the Registered Exchange Offer or such Holder does not receive freely tradeable New Securities in the Registered Exchange Offer other than by reason of such Holder being an affiliate of the Company (it being understood that, for purposes of this Section 3, (x) the requirement that a Dealer Manager deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of New Securities acquired in exchange for such Securities shall result in such New Securities being not "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of New Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such New Securities being not "freely tradeable"), or (v) any applicable law or interpretations do not permit any Holder of Securities to participate in the Registered Exchange Offer, or (vi) the Company so elects, the following provisions shall apply: (a) The Company shall as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3) file with the Commission and thereafter shall use its reasonable best efforts to cause to be declared effective under the Act as promptly as practicable after the filing thereof, a Shelf Registration Statement relating to Transfer Restricted Securities by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided, that the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its reasonable best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years after the Closing Date or such shorter period that will terminate when all the Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its reasonable best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Transfer Restricted Securities covered thereby not being able to offer and sell such Transfer Restricted Securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 4(k) hereof, if applicable. For so long as any Transfer Restricted Securities are outstanding, the Company will continue to provide to holders of the Securities and to prospective purchasers of the Securities the information required by Rule 144A(d)(4) under the Securities Act. -6- 7 4. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose. (b) The Company shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by you or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; -7- 8 (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits (including those incorporated by reference). (h) The Company shall, if required under applicable securities laws, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request in writing for delivery by such Exchanging Dealer in connection with a sale of New Securities received by it pursuant to the Registered Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. -8- 9 (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (j) The Company shall cooperate with the Holders of Securities to facilitate the timely preparation and delivery of certificates representing Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall promptly prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities or New Securities, as the case may be, registered under such Registration Statement, and provide the Trustee with certificates for such Securities or New Securities, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (n) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner. (o) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such securities as the Company may from time to time reasonably require for inclusion in such Registration Statement. (p) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information -9- 10 as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the securities registered thereunder, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 7 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any), with respect to all parties to be indemnified pursuant to Section 7 from Holders of Securities to the Company. (r) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Dealer Manager Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) -10- 11 and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed at (A) the effectiveness of such Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. 5. Special Interest. The parties hereto agree that the Holders of the Securities will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if (i) a Registration Statement is not filed with the Commission on or prior to 90 days after the Closing Date, (ii) the Exchange Offer Registration Statement or a Shelf Registration Statement, if applicable, is not declared effective on or prior to 150 days after the Closing Date, (iii) the Registered Exchange Offer is not consummated on or prior to 180 days after the Closing Date or (iv) a Registration Statement is filed and declared effective on or prior to 150 days after the Closing Date but shall thereafter cease to be effective or usable (at any time that the Company is obligated to maintain the effectiveness thereof) in connection with resales of Securities or New Securities without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective on or prior to the date specified for such effectiveness in this Agreement (each such event referred to in clauses (i) through (iv), a "Registration Default"), Special Interest will accrue on the Securities and the New Securities (in addition to the stated interest on the Securities and the New Securities) from and including the date on which the first such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Special Interest will accrue at a rate of 0.5% per annum during the 90-day period immediately following the occurrence of the first such Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 1.00% per annum. All accrued Special Interest shall be paid to Holders in the same manner as interest payments on the Securities on semi-annual payment dates which correspond to interest payment dates for the Securities. Following the cure of all Registration Defaults, the accrual of Special Interest will cease. The parties hereto agree that the Special Interest provided for in this Section 5 constitutes a reasonable estimate of the damages that may be incurred by Holders of Securities by reason of the occurrence of a Registration Default. 6. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3 and 4 hereof and, in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable fees and disbursements of one firm or counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith, and, in the case of any Exchange Offer Registration Statement, will reimburse the Initial Purchasers for the reasonable fees and disbursements of counsel acting in connection therewith. 7. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including each Dealer Manager and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of -11- 12 either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses (as defined below) of, as provided in Section 7(d), any underwriters of securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the selling Holders provided in this Section 7(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Dealer Manager and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 or notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except -12- 13 as set forth below); provided, however, that such counsel shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 7 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Registration Statement which resulted in such Losses; provided, however, that in no case shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the sum of (x) the aggregate principal amount of Securities issued in the Exchange Offer and (y) the total amount of additional interest which the Company was not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Dealer Managers shall be deemed to be equal to their respective fees received from the Company pursuant to Section 3 of the Dealer Manager Agreement, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or New Securities, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration -13- 14 Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by the pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 7 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in this Section 7, and will survive the sale by a Holder of securities covered by a Registration Statement. 8. Miscellaneous. (a) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Securities (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of New Securities); provided that, with respect to any matter that directly or indirectly affects the rights of either Dealer Manager hereunder, the Company shall obtain the written consent of such Dealer Manager against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telecopier, or air courier guaranteeing overnight delivery: -14- 15 (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 8(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the registrar under the Indenture; (2) if to you, initially at the respective addresses set forth in the Dealer Manager Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Dealer Managers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities and/or New Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and/or New Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in said State. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities or New Securities is required hereunder, Securities or New Securities, as applicable, held by the Company or its -15- 16 Affiliates (other than subsequent Holders of Securities or New Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or New Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. -16- 17 Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, NUEVO ENERGY COMPANY By: /s/ ROBERT M. KING -------------------------------- Name: Robert M. King Title: Senior Vice President and Chief Financial Officer Accepted in New York, New York August 20, 1999 - -------------- BANC OF AMERICA SECURITIES LLC By: /s/ Andrew C. Karp ------------------------------ Name: Andrew C. Karp Title: Managing Director SALOMON SMITH BARNEY INC. By: /s/ Michael Zicari ------------------------------ Name: Michael Zicari Title: Vice President 18 Annex A Each broker-dealer that receives New Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Securities where such New Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, if required under applicable securities laws and upon prior written request, it will make this Prospectus available to any broker-dealer for use in connection with any such resale for a period of 90 days after the consummation of the Exchange Offer. See "Plan of Distribution." 19 Annex B Each broker-dealer that receives New Securities for its own account in exchange for Securities, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. See "Plan of Distribution." 20 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives New Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 90 days after the consummation of the Exchange Offer, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale, if required under applicable securities laws and upon prior written request. In addition, until ______________, all dealers effecting transactions in the New Securities may be required to deliver a prospectus.* The Company will not receive any proceeds from any sale of New Securities by broker-dealers. New Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Securities. Any broker-dealer that resells New Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of New Securities may be deemed to be an "underwriter" within the meaning of the Act and any profit of any such resale of New Securities and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Act. For a period of 90 days after the consummation of the Exchange Offer, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Act. [If applicable, add information required by Regulation S-K Items 507 and/or 508.] - -------------------------- * In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer Prospectus. 21 ANNEX D Rider A CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ------------------------------------------- Address: -------------------------------------- -------------------------------------- Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Securities. If the undersigned is a broker-dealer that will receive New Securities for its own account in exchange for Securities that were acquired by it as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such New Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Act. EX-5.1 6 OPINION OF HAYNES AND BOONE, L.L.P. 1 EXHIBIT 5.1 [HAYNES AND BOONE, LLP LETTERHEAD] November 2, 1999 Nuevo Energy Company 1021 Main, Suite 2100 Houston, Texas 77002 Re: Registration Statement on Form S-4; Offer to Exchange $257,310,000 Aggregate Principal Amount of 9 1/2% Senior Subordinated Notes due 2008, Series B for an Equal Principal Amount of 9 1/2% Senior Subordinated Notes due 2008, Series A. Ladies and Gentlemen: We have acted as counsel for Nuevo Energy Company, a Delaware corporation (the "Company"), in connection with the proposed issuance by the Company of $257,310,000 aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes") in exchange for an equivalent amount of the Company's outstanding 9 1/2% Senior Subordinated Notes due 2008, Series A (the "Existing Notes"). The terms of the offer to exchange are described in the Registration Statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission for the registration of the Exchange Notes under the Securities Act of 1933, as amended (the "Act"). The Existing Notes have been, and the Exchange Notes will be, issued pursuant to an indenture dated as of August 20, 1999 (the "Indenture"), between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"). In connection with the foregoing, we have examined the Indenture, the Registration Statement and such corporate records and instruments of the Company as we have deemed necessary or appropriate for purposes of this opinion. We are opining herein as to the effect on the proposed issuance of the Exchange Notes of the federal laws of the United States, the laws of the State of Texas, the General Corporation Law of the State of Delaware and the laws of the State of New York. 2 Nuevo Energy Company October 1, 1999 Page 2 Specific Limitations and Qualifications on Opinions Regarding Enforceability of the Exchange Notes The enforceability of the Exchange Notes is subject to the effects of (i) applicable bankruptcy, insolvency, reorganization, moratorium, rearrangement, liquidation, conservatorship or similar laws and court decisions of general application (including, without limitation, statutory or other laws regarding fraudulent or preferential transfers) now or hereafter in effect relating to or affecting the rights or remedies of creditors generally, and (ii) general equity principles (regardless of whether enforcement is sought in a proceeding in equity or law). We express no opinion as to the enforceability of provisions of the Exchange Notes to the extent that such provisions: (i) state that any party's failure or delay in exercising rights, powers, privileges or remedies under the Exchange Notes shall not operate as a waiver thereof; (ii) purport to preclude the amendment, waiver, release or discharge of obligations except by an instrument in writing; (iii) purport to indemnify any person for (A) such person's violations of federal or state securities laws or environmental laws, or (B) any obligation to the extent such obligation arises from or is a result of such person's own negligence; (iv) purport to establish or satisfy certain factual standards or conditions; (v) purport to sever unenforceable provisions from the Exchange Notes, to the extent that the enforcement of remaining provisions would frustrate the fundamental intent of the parties to such instrument; (vi) restrict access to legal or equitable remedies; or (vii) purport to waive any claim arising out of, or in any way related to, the Exchange Notes. We express no opinion as to: (i) whether a court would grant specific performance or any other equitable remedy with respect to enforcement of any provision contained in the Exchange Notes; or (ii) the enforceability of any provision contained in the Indenture relating to the appointment of a receiver, to the extent that appointment of a receiver is governed by applicable statutory requirements, and to the extent that such provision may not be in compliance with such requirements. We express no opinion as to: (a) any provisions of the Exchange Notes or the Indenture regarding the remedies available to any person (1) to take action that is arbitrary, unreasonable or capricious or is not taken in good faith or in a commercially reasonable manner, whether or not such action is permitted by the Exchange Notes or the Indenture or (2) for violations or breaches that are determined by a court to be non-material or without substantially adverse effect upon the ability of the Company to perform its material obligations under the Exchanges Notes or the Indenture; or (b) the provisions of the Exchange Notes or the Indenture that may provide for interest on interest or penalty interest. 3 Nuevo Energy Company October 1, 1999 Page 3 Based upon the foregoing and subject to the qualifications stated herein, it is our opinion that, when (i) the Registration Statement has been declared effective under the Act, (ii) the Existing Notes have been validly exchanged by the Company, and (iii) the Exchange Notes have been executed and delivered by the Company and authenticated by the Trustee, all in accordance with the terms of the Indenture and the Registration Statement, the Exchange Notes will constitute binding obligations of the Company. To the extent that the obligations of the Company under the Indenture may be dependent upon such matters, we assume for purposes of this opinion that the Trustee is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the Indenture; that the Indenture has been duly authorized, executed and delivered by the Trustee and constitutes the legally valid and binding obligation of the Trustee, enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as a trustee under the Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the Indenture. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm contained therein under the heading "Legal Matters." Very truly yours, /s/ Haynes and Boone, L.L.P. Haynes and Boone, L.L.P. EX-12.1 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 CALCULATIONS OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands, except ratios)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- ------ EARNINGS (7,239) 6,730 57,952 (17,340) (126,897) (24,074) 26,305 Pret-tax income (loss) 12,560 15,389 36,009 27,357 32,471 14,444 16,400 Interest expense -- -- 165 6,613 6,613 3,306 3,306 -------- -------- -------- -------- -------- ------- ------ Adjusted earnings (loss) 5,321 22,119 94,126 16,630 (87,813) (6,324) 46,011 -------- -------- -------- -------- -------- ------- ------ FIXED CHARGES Interest expense 12,560 15,389 36,009 27,357 32,471 14,444 16,400 Capitalized interest 0 0 0 2,143 578 487 125 TECONS dividends 0 0 165 6,613 6,613 3,306 3,306 -------- -------- -------- -------- -------- ------- ------ Fixed Charges 12,560 15,389 36,174 36,113 39,662 18,237 19,831 -------- -------- -------- -------- -------- ------- ------ RATIOS Deficit of loss to fixed charges (7,239) 0 0 (19,483) (127,475) (24,561) 0 ======== ======== ======== ======== ======== ======= ====== Ratio of earnings to fixed charges(1) 0.00 1.44 2.60 0.00 0.00 0.00 2.32
(1) Earnings were not sufficient to cover fixed charges for 1994, 1997 and 1998 by $7.2 million, $19.5 million and $127.5 million, respectively, and for the six months ended June 30, 1998 by $24.6 million. EX-23.2 8 CONSENT OF KPMG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Nuevo Energy Company: We consent to the use of our reports included herein by reference and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated March 25, 1999, contains an explanatory paragraph that states that the Company has given retroactive effort to the change in accounting for oil and gas properties from the full cost method to the successful efforts method in 1998. November 2, 1999 /s/ KPMG LLP EX-23.3 9 COSENT OF RYDER SCOTT COMPANY 1 EXHIBIT 23.3 [RYDER SCOTT COMPANY LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM CONSULTANTS As independent petroleum consultants, Ryder Scott Company, L.P. consents to the references to our reports entitled "Nuevo Energy Company, Estimated Future Reserves and Income Attributable to Certain Leasehold, Royalty, and Gas Plant Interests", prepared as of December 31, 1996, as of December 31, 1997, and as of December 31, 1998, and to the reference to Ryder Scott Company, L.P. as experts in the field of petroleum engineering, which were incorporated in your Form S-4 Registration Statement. /s/ RYDER SCOTT COMPANY, L.P. RYDER SCOTT COMPANY, L.P. Houston, Texas November 2, 1999 EX-23.4 10 COSENT OF POCO OIL CO. 1 EXHIBIT 23.4 [POCO OIL CO. LETTERHEAD] November 3, 1999 CONSENT OF INDEPENDENT PETROLEUM AND GEOLOGICAL ENGINEERS The undersigned hereby consents to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-4 of our reserve reports relating to the oil and gas reserves of Nuevo Energy Company at December 31, 1998. We also consent to the references to us under the heading "Experts" and elsewhere in such Prospectus and the documents incorporated by reference therein. POCO OIL CO. /s/ ARTHUR BEAR --------------------------- Arthur Bear President EX-25.1 11 STATEMENT OF ELIGIBILITY & QUALIFICATION 1 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) NUEVO ENERGY COMPANY, ANY SUBSIDIARY GUARANTORS (Exact name of obligor as specified in its charter) DELAWARE 76-0304436 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1021 MAIN STREET, SUITE 2100, HOUSTON, TEXAS 77002 (713) 652-0706 (Address of principal executive offices) (Zip Code) SERIES A AND SERIES B 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the SEPTEMBER 30, 1999. STATE STREET BANK AND TRUST COMPANY By: /s/ Ruth Smith ------------------------------ RUTH SMITH VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by NUEVO ENERGY COMPANY AND ANY SUBSIDIARY GUARANTORS of its SERIES A AND SERIES B 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ Ruth Smith ------------------------------ RUTH SMITH VICE PRESIDENT DATED: SEPTEMBER 30, 1999 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business March 31, 1999, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ........................................ 1,249,670 Interest-bearing balances ................................................................. 13,236,699 Securities ......................................................................................... 10,970,415 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary ................................................................................ 9,561,556 Loans and lease financing receivables: Loans and leases, net of unearned income .................................................. 7,053,580 Allowance for loan and lease losses ....................................................... 85,416 Allocated transfer risk reserve ........................................................... 0 Loans and leases, net of unearned income and allowances ................................... 6,968,164 Assets held in trading accounts .................................................................... 1, 553,354 Premises and fixed assets .......................................................................... 536,535 Other real estate owned ............................................................................ 0 Investments in unconsolidated subsidiaries ......................................................... 606 Customers' liability to this bank on acceptances outstanding ....................................... 71,273 Intangible assets .................................................................................. 207,323 Other assets ....................................................................................... 1,371,043 ----------- Total assets ....................................................................................... 45,726,638 =========== LIABILITIES Deposits: In domestic offices ....................................................................... 10,101,297 Noninterest-bearing .............................................................. 6,932,549 Interest-bearing ................................................................. 3,168,748 In foreign offices and Edge subsidiary .................................................... 18,061,721 Noninterest-bearing .............................................................. 54,654 Interest-bearing ................................................................. 18,007,067 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary ....................................................... 12,063,069 Demand notes issued to the U.S. Treasury ........................................................... 149,322 Trading liabilities ............................................................... 1,140,080 Other borrowed money ............................................................................... 285,027 Subordinated notes and debentures .................................................................. 0 Bank's liability on acceptances executed and outstanding ........................................... 71,273 Other liabilities .................................................................................. 1,079,470 Total liabilities .................................................................................. 42,951,259 ----------- EQUITY CAPITAL Perpetual preferred stock and related surplus ...................................................... 0 Common stock ....................................................................................... 29,931 Surplus ............................................................................................ 480,330 Undivided profits and capital reserves/Net unrealized holding gains (losses) ....................... 2,258,177 Net unrealized holding gains (losses) on available-for-sale securities ............ 15,937 Cumulative foreign currency translation adjustments ................................................ (8,996) Total equity capital ............................................................................... 2,775,379 ----------- Total liabilities and equity capital ............................................................... 45,726,638 -----------
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-99.1 12 FORM OF LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 NUEVO ENERGY COMPANY LETTER TO CLIENTS FOR TENDER OF ALL OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A IN EXCHANGE FOR 9 1/2 % SENIOR SUBORDINATED NOTES DUE 2008, SERIES B THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _______________, 1999, UNLESS EXTENDED. NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To Our Clients: We are enclosing herewith a prospectus, dated ______________, 1999, of Nuevo Energy Company, a Delaware corporation and a related letter of transmittal, which together constitute Nuevo's offer to exchange its 9 1/2% Senior Subordinated Notes due 2008, Series B, which have been registered under the Securities Act of 1933 for a like principal amount of its issued and outstanding 9 1/2% Senior Subordinated Notes due 2008, Series A (the "Existing Notes"), upon the terms and subject to the conditions set forth in the prospectus and letter of transmittal. The exchange offer is not conditioned upon any minimum number of Existing Notes being tendered. We are the holder of record of Existing Notes held by us for your account. A tender of such Existing Notes can be made only by us as the record holder and pursuant to your instructions. The letter of transmittal is furnished to you for your information only and cannot be used by you to tender Existing Notes held by us for your account. We request instructions as to whether you wish to tender any or all of the Existing Notes held by us for your account pursuant to the terms and conditions of the prospectus and letter of transmittal. We also request that you confirm that we may on your behalf make the representations and warranties contained in the letter of transmittal. Very truly yours, PLEASE RETURN YOUR INSTRUCTIONS TO US IN THE ENCLOSED ENVELOPE WITHIN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION DATE. 2 NUEVO ENERGY COMPANY LETTER TO REGISTERED HOLDERS AND DEPOSITORY TRUST COMPANY PARTICIPANTS FOR TENDER OF ALL OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A IN EXCHANGE FOR 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ______________________, 1999, UNLESS EXTENDED. EXISTING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. To Registered Holders and Depository Trust Company Participants: We are enclosing herewith the material listed below relating to our offer to exchange our 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes"), which have been registered under the Securities Act of 1933, for a like principal amount of our issued and outstanding 9 1/2% Senior Subordinated Notes due 2008, Series A (the "Existing Notes") upon the terms and subject to the conditions set forth in our prospectus, dated _______________, 1999, and the related letter of transmittal. Enclosed herewith are copies of the following documents: 1. Prospectus dated _________________, 1999; 2. Letter of Transmittal (together with accompanying Substitute Form W-9 Guidelines); 3. Notice of Guaranteed Delivery; 4. Letter which may be sent to your clients for whose account you hold Existing Notes in your name or in the name of your nominee; and 5. Letter which may be sent from your clients to you with such client's instruction with regard to the exchange offer. We urge you to contact your clients promptly. Please note that the exchange offer will expire on the expiration date unless extended. The exchange offer is not conditioned upon any minimum number of Existing Notes being tendered. Pursuant to the letter of transmittal, each holder of Existing Notes will make certain representations, including but not limited to, representations that (i) the Exchange Notes acquired in exchange for Existing Notes pursuant to the exchange offer are being acquired in the ordinary course of business of the person receiving such Exchange Notes, whether or not the holder, (ii) if the holder is not a broker-dealer, the holder is not participating in and does not intend to participate in a distribution of the Exchange Notes, (iii) the holder does not have any arrangement or understanding with any person to participate in the distribution of Exchange Notes, (iv) neither the holder nor any such other person is our "affiliate" within the meaning of Rule 405 under the Securities Act, and (v) if the holder is a broker-dealer that will receive Exchange Notes for its own account in exchange for Existing Notes that were acquired as a result of market-making or other trading activities, it will deliver a prospectus in connection with any resale of such Exchange Notes. 3 The enclosed Letter to Clients contains an authorization by the beneficial owners of the Existing Notes for you to make the foregoing representations. The Company will not pay any fee or commission to any broker or dealer or to any other persons, other than the Exchange Agent, in connection with the solicitation of tenders of Existing Notes pursuant to the exchange offer. Additional copies of the enclosed material may be obtained from the undersigned. Very truly yours, NUEVO ENERGY COMPANY 2 4 INSTRUCTION TO REGISTERED HOLDER AND/OR DEPOSITORY TRUST COMPANY PARTICIPANT To Registered Holder and/or Depository Trust Company Participant: The undersigned hereby acknowledges receipt of the prospectus dated __________________, 1999 of Nuevo Energy Company, a Delaware corporation and the accompanying letter of transmittal, that together constitute Nuevo's offer to exchange its 9 1/2% Senior Subordinated Notes due 2008, Series B, for all of its outstanding 9 1/2% Senior Subordinated Notes due 2008, Series A (the "Existing Notes"). Terms used but not defined herein have the meaning given to them in the prospectus. This will instruct you, the registered holder and/or Depository Trust Company participant, as to the action to be taken by you relating to the exchange offer with respect to the Existing Notes held by you for the account of the undersigned. The aggregate face amount of the Existing Notes held by you for the account of the undersigned is (FILL IN AMOUNT): $_____________ of the 9 1/2% Senior Subordinated Notes due 2008, Series A. With respect to the Exchange Offer, the undersigned hereby instructs you (CHECK APPROPRIATE BOX): [ ] To TENDER the following Existing Notes held by you for the account of the undersigned (INSERT PRINCIPAL AMOUNT OF EXISTING NOTES TO BE TENDERED) (IF ANY); $_____________ of the 9 1/2% Senior Subordinated Notes due 2008, Series A. [ ] NOT to TENDER any Existing Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Existing Notes held by you for the account of the undersigned, it is understood that you are authorized to make, on behalf of the undersigned, and the undersigned by its signature below, hereby makes to you, the representations and warranties contained in the letter of transmittal that are to be made with respect to the undersigned as a beneficial owner, including but not limited to the representations, that (i) the Exchange Notes acquired in exchange for Existing Notes pursuant to the exchange offer are being acquired in the ordinary course of business of the person receiving such Exchange Notes, whether or not the undersigned, (ii) if the undersigned is not a broker-dealer, the undersigned is not participating in and does not intend to participate in a distribution of the Exchange Notes, (iii) the undersigned does not have any arrangement or understanding with any person to participate in the distribution of Exchange Notes, (iv) neither the undersigned nor any such other person is an "affiliate," within the meaning of Rule 405 under the Securities Act, of Nuevo Energy Company, and (v) if the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Existing Notes that were acquired as a result of market-making or other trading activities, it will deliver a prospectus in connection with any resale of such Exchange Notes. SIGN HERE Name of beneficial owner(s): ---------------------------------------------------- Signature(s) Name(s): ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ Telephone number: --------------------------------------------------------------- Taxpayer Identification or Social Security Number: ------------------------------ Date: --------------------------------------------------------------------------- 5 LETTER OF TRANSMITTAL NUEVO ENERGY COMPANY OFFER TO EXCHANGE 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 PURSUANT TO THE PROSPECTUS DATED _________________, 1999 FOR ALL OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIEs A THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON __________, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). EXISTING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME,ON THE EXPIRATION DATE. DELIVER TO STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT
by registered or certified mail: by hand or overnight delivery: State Street Bank and Trust Company State Street Bank and Trust Company Corporate Trust Two Avenue de Lafayette Post Office Box 778 Fifth Floor, Corporate Trust Division Boston, Massachusetts 02110-0778 Boston, Massachusetts 02110-1724 Attention: MacKenzie Elijah Attention: MacKenzie Elijah
Telephone: (617) 662-1525 Facsimile: (617) 662-1452 (originals of all documents sent by facsimile should be sent promptly by registered or certified mail, by hand, or by overnight delivery service.) DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated _______________, 1999 (the "Prospectus"), of Nuevo Energy Company, a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter" or "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer") to exchange, from the registered holders (the "holders") thereof an aggregate principal amount of up to $257,310,000 of the Company's 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for a like principal amount of the issued and outstanding 9 1/2% Senior 6 Subordinated Notes due 2008, Series A (the "Existing Notes") of the Company. Terms used but not defined herein have the meaning given to them in the Prospectus. For each Existing Note accepted for exchange, the holder of such Existing Note will receive an Exchange Note having a principal amount equal to that of the surrendered Existing Note. Accordingly, registered holders of Exchange Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Existing Notes or, if no interest has been paid, from August 20, 1999. Existing Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders whose Existing Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Existing Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. This Letter is to be completed by a holder of Existing Notes either if certificates for such Existing Notes are to be forwarded herewith or if a tender is to be made by book-entry transfer to the account maintained by State Street Bank and Trust Company (the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the procedures set forth in "The Exchange Offer--Procedures for Tendering--Existing Notes Held in Book-Entry Form" section of the Prospectus and an Agent's Message is not delivered. Tenders by book-entry transfer may also be made by delivering an Agent's Message in lieu of this Letter. The term "Agent's Message" means a message, transmitted by DTC, received by the Exchange Agent and forming a part of a Book-Entry Confirmation (as defined below), which states that DTC has received an express acknowledgment from the tendering holder, which acknowledgment states that such holder has received and agrees to be bound by the Letter of Transmittal and that the Company may enforce the Letter of Transmittal against such holder. Holders of Existing Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Existing Notes into the Exchange Agent's account at DTC (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, must tender their Existing Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange offer. The undersigned, by completing the box entitled "Description of 9 1/2% Senior Subordinated Notes due 2008, Series A" below and signing this Letter, will be deemed to have tendered the Existing Notes as set forth in such box below. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY BEFORE COMPLETING THE BOXES THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. 2 7 List below the Existing Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Existing Notes should be listed on a separate signed schedule affixed hereto. DESCRIPTION OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
NAME AND ADDRESS OF REGISTERED AGGREGATE PRINCIPAL AMOUNT HOLDERS (AS IT/THEY APPEAR(S) CERTIFICATE PRINCIPAL AMOUNT TENDERED (MUST BE ON THE EXISTING NOTES) NUMBERS(*) REPRESENTED BY IN INTEGRAL MULTIPLES (PLEASE FILL IN IF BLANK) CERTIFICATE(S) OF $1,000)** TOTAL
* Need not be completed by book-entry holders. ** Unless indicated in the column labeled "Principal Amount Tendered," any tendering holder of 9 1/2% Senior Subordinated Notes due 2008, Series A will be deemed to have tendered the entire aggregate principal amount represented by the column labeled "Aggregate Principal Amount Represented by Certificates(s)." If the space provided above is inadequate, list the certificate numbers and principal amounts an a separate signed schedule and affix the list to this Letter of Transmittal. The minimum permitted tender is $1,000 in principal amount of 9 1/2% Senior Subordinated Notes due 2008, Series A and all tenders must be in integral multiples of $1,000 in principal amount. [ ] Check here if tendered Existing Notes are enclosed herewith. [ ] Check here if tendered Existing Notes are being delivered by book-entry transfer made to the account maintained by the Exchange Agent with DTC and complete the following (for use by eligible institutions (as hereinafter defined) only): Name of Tendering Institution -------------------------------------------------- Account Number ----------------------------------------------------------------- Transaction Code Number -------------------------------------------------------- [ ] Check here and enclose a photocopy of the Notice of Guaranteed Delivery if tendered Existing Notes are being delivered pursuant to a Notice of Guaranteed Delivery previously sent to the Exchange Agent and complete the following (for use by eligible institutions only): Name(s)of Registered Holder(s) ------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery ----------------------------- Window Ticket Number (if available) -------------------------------------------- Name of Institution which Guaranteed Delivery ---------------------------------- Account Number (if delivered by book-entry transfer) --------------------------- Transaction Code Number (if delivered by book-entry transfer) ------------------- Tendering Institution (if delivered by book-entry transfer) -------------------- 3 8
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3, 4 and 5) (See Instructions 3 and 4) To be completed ONLY (i) if certificates for Existing To be completed ONLY if certificates for Existing Notes Notes not tendered, or Exchange Notes issued in not tendered, or Exchange Notes issued in exchange for exchange for Existing Notes accepted for exchange, are Existing Notes accepted for exchange, are to be to be issued in the name of someone other than the delivered to someone other than the undersigned, or to undersigned, or (ii) if Existing Notes tendered by book- the undersigned at an address other than that shown entry transfer which are not exchanged are to be above. returned by credit to an account maintained at the DTC other than the DTC Account Number set forth above. Mail to: Issue certificate(s) to: Name ------------------------------------------------------ (Please Print) Name Address -------------------------------------------------- --------------------------------------------------- (Please Print) Address ------------------------------------------------ ---------------------------------------------------------- (Include Zip Code) - ------------------------------------------------------- (Include Zip Code) - ------------------------------------------------------- ---------------------------------------------------------- (Tax Identification or Social Security No.) (Tax Identification or Social Security No.) Credit Existing Notes not exchanged and delivered by book-entry transfer to the DTC account set forth below: - ------------------------------------------------------- DTC Account Number
4 9 SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. Ladies and Gentlemen: 1. Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Existing Notes described above. Subject to, and effective upon, the acceptance for exchange of the Existing Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Existing Notes as are being tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to the tendered Existing Notes with full power of substitution to (i) deliver certificates for such Existing Notes, or transfer ownership of such Existing Notes on the account books maintained by DTC, to the Company and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Company and (ii) present such Existing Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Existing Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. 2. The undersigned hereby represents, warrants and agrees that the undersigned has full power and authority to tender, exchange, sell, assign and transfer the Existing Notes tendered hereby and to acquire the Exchange Notes issuable upon the exchange of such tendered Existing Notes and that the Company will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims or proxies when the same are accepted by the Company. 3. The undersigned also acknowledges that the Exchange Offer is being made in reliance on interpretations by the staff of the Securities and Exchange Commission (the "SEC"), as set forth in no-action letters issued to third parties, that the Exchange Notes issued pursuant to the Exchange Offer in exchange for the Existing Notes may be offered for resale, resold and otherwise transferred by holders thereof, other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or a broker-dealer, without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holders' business and such holders are not participating, and have no arrangement with any person to participate, in a distribution of such Exchange Notes; however, the SEC has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in other circumstances. If any holder is an affiliate of the Company, is engaged in or intends to engage in, or has any arrangement or understanding with any person to participate in, a distribution of the Exchange Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the SEC and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of the Exchange Notes. If the undersigned or person receiving the Exchange Notes is a broker-dealer that will receive Exchange Notes for its own account, it represents that the Existing Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges and agrees that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Each such broker-dealer agrees that upon receipt of notice from the Company of the occurrence of any event or the discovery of any fact which makes any statement contained in the Prospectus untrue in any material respect or which causes the Prospectus to omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or the occurrence of certain other events specified in the Registration Agreement, such broker-dealer will suspend the sale of Exchange Notes pursuant to the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such broker-dealer or the Company has given notice that the sale of the Exchange Notes may be resumed, as the case may be. The undersigned acknowledges that if the undersigned is participating in the Exchange offer for the 5 10 purpose of distributing the Exchange Notes (i) the undersigned cannot rely on the position of the staff of the SEC in the Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991) and similar SEC no-action letters, and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the Exchange Notes, in which case the registration statement must contain the selling security holder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Securities Act, and (ii) a broker-dealer that delivers such a prospectus to purchasers in connection with such resales will be subject to certain of the civil liability provisions under the Securities Act and will be bound by the provisions of the Registration Agreement (including certain indemnification rights and obligations). 4. Unless the box under the heading "Special Registration Instructions" is checked, the undersigned hereby represents and warrants that: (i) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the holder whether or not the undersigned; (ii) if the holder is not a broker-dealer, the holder is not participating in and does not intend to participate in a distribution (within the meaning of the Securities Act) of such Exchange Notes; (iii) the holder does not have an arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of such Exchange Notes; (iv) the holder is not an "affiliate," as such term is defined under Rule 405 promulgated under the Securities Act, of the Company or, if the undersigned is an affiliate, it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable; and (v) if the holder is a broker-dealer that will receive Exchanges Notes for its own account in exchange for Existing Notes that were acquired as a result of market-making or other activities, that it will deliver a prospectus, as required by the Securities Act, in connection with any resale of the Existing Notes. 5. The undersigned may, if, and only if, unable to make all of the representations and warranties contained in clauses (i) through (iv) of Item 4, above, elect to have its Existing Notes registered in the shelf registration statement described in the registration agreement (the "Registration Agreement") dated as of August 20, 1999, among the Company and Bank of America Securities LLC and Salomon Smith Barney Inc. Such election may be made by checking the box under "Special Registration Instructions" on page 7. By making such election, the undersigned agrees, as a holder of Existing Notes or Exchange Notes participating in a shelf registration, to indemnify and hold harmless the Company, each of its directors, each of its officers who signs such shelf registration statement and each person who controls the Company within the meaning of either the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act") against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the shelf registration statement as originally filed or in any amendment thereof, or any preliminary prospectus or prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; but only with respect to information relating to the undersigned furnished in writing by or on behalf of the undersigned expressly for use in the shelf registration statement, the preliminary prospectus or prospectus or any amendments or supplements thereto. Any such indemnification shall be governed by the terms and subject to the conditions set forth in the Registration Agreement, including, without limitation, the provisions regarding notice, retention of counsel, contribution and payment of expenses set forth therein. The above summary of the indemnification provision of the Registration Agreement is not intended to be exhaustive and is qualified in its entirety by the Registration Agreement. 6 11 6. The undersigned acknowledges that the Company's acceptance of properly tendered Existing Notes pursuant to the procedures described under the caption "The Exchange Offer--Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. The undersigned warrants and agrees to, upon request, execute and deliver any additional documents deemed by the Company or the Exchange Agent to be necessary or desirable to complete the exchange, sale, assignment and transfer of the Existing Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" above, please issue the Exchange Notes (and, if applicable, substitute certificates representing Existing Notes for any Existing Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Existing Notes, please credit the account indicated above maintained at the DTC. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" above, please send the Exchange Notes (and, if applicable, substitute certificates representing Existing Notes for any Existing Notes not exchanged) to the undersigned at the address(es) shown above in the box entitled "Description of 9 1/2% Senior Subordinated Notes due 2008, Series A." SPECIAL REGISTRATION INSTRUCTIONS To be completed ONLY if (i) the undersigned satisfies the conditions set forth in Item 5 above, (ii) the undersigned elects to register its Existing Notes in the shelf registration statement described in the Registration Agreement and (iii) the undersigned agrees to indemnify certain entities and individuals as set forth in Item 5 above. (See Item 5.) [ ] By checking this box the undersigned hereby (i) represents that it is unable to make all of the representations and warranties set forth in Item 4 above, (ii) elects to have its Existing Notes registered pursuant to the shelf registration statement described in the Registration Agreement and (iii) agrees to indemnify certain entities and individuals identified in, and to the extent provided in, Item 5 above. [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ------------------------------------------------ Address: --------------------------------------------- --------------------------------------------- --------------------------------------------- 7 12 PLEASE SIGN HERE TO BE COMPLETED BY ALL TENDERING HOLDERS (Complete accompanying Substitute W-9) , 1999 - ---------------------------------------------- ----------------------- Signature(s) of Holder(s) Date , 1999 - ---------------------------------------------- ----------------------- Signature(s) of Holder(s) Date Area Code and Telephone Number: This letter must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) for the Existing Notes hereby tendered or on a security position listing, or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s): ------------------------------------------------------------------------ (Please Type or Print) Capacity (Full Title): ---------------------------------------------------------- Address: ------------------------------------------------------------------------ (Including Zip Code) SIGNATURE GUARANTEE (if required by Instruction 3) Signature(s) Guaranteed by an Eligible Institution: - -------------------------------------------------------------------------------- (Authorized Signature) - -------------------------------------------------------------------------------- (Title) - -------------------------------------------------------------------------------- (Name of Firm) - -------------------------------------------------------------------------------- (Address) - -------------------------------------------------------------------------------- (Area Code and Telephone Number) Date: , 1999 ------------------------------- 8 13 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND EXISTING NOTES, GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by holders of Existing Notes either if certificates for such Existing Notes are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering--Existing Notes Held in Book-Entry Form" section of the Prospectus and an Agent's Message is not delivered. Tenders by book-entry transfer may also be made by delivering an Agent's Message in lieu of this Letter. The term "Agent's Message" means a message, transmitted by DTC to and received by the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that DTC has received an express acknowledgment from the tendering holder, which acknowledgment states that such holder has received and agrees to be bound by the Letter of Transmittal and that the Company may enforce the Letter of Transmittal against such holder. Certificates for all physically tendered Existing Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter (or facsimile hereof or Agent's Message in lieu thereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Existing Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Holders whose certificates for Existing Notes are not immediately available or who cannot deliver their certificates or a Book-Entry Confirmation and all other required documents to the Exchange Agent on or prior to the Expiration Date, may tender their Existing Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution; (ii) on or prior to 5:00 p.m., New York City time, on the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Existing Notes, the certificates number or numbers of the Existing Notes and the amount of Existing Notes tendered stating that the tender is being made thereby and guaranteeing that within five business days after the Expiration Date, the certificates for all physically tendered Existing Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, together with a Properly completed and duly executed Letter (or facsimile thereof or Agent's Message in lieu thereof) with any required signature guarantees and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates for all physically tendered Existing Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, together with a properly completed and duly executed Letter (or facsimile thereof or Agent's Message in lieu thereof) with any required signature guarantees and all other documents required by this Letter, are deposited by the Eligible Institution within five business days after the Expiration Date. Alternatively, tender may be made through DTC's Automated Tender Offer Program if (i) prior to 5:00 p.m. New York City time, on the Expiration Date, the Exchange Agent receives an agent's message from DTC stating that DTC has received an express acknowledgment from the participant in DTC tendering the Existing Notes that they have received and agree to be bound by the Notice of Guaranteed Delivery, and (ii) the certificates for all physically tendered Existing Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, together with a properly completed and duly executed Letter (or facsimile thereof or Agent's Message in lieu thereof) with any required signature guarantees and all other documents required by this Letter, are deposited by an Eligible Institution or through DTC's Automated Tender Offer Program within five business days after the Expiration Date. The method of delivery of this Letter, the Existing Notes and all other required documents is at the option and sole risk of the tendering holders, and the delivery will be deemed made only when actually received by the Exchange Agent. If Existing Notes are sent by mail, it is suggested that the mailing be registered mail, properly insured, with return receipt requested, or by an overnight delivery service, and made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., Now York City time, on the Expiration Date. 9 14 Only a holder may tender its Existing Notes in the Exchange Offer. Any beneficial owner whose Existing Notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee or are held in book-entry form and who wishes to tender should contact the registered holder promptly and instruct the registered holder to execute and deliver this Letter of Transmittal on his behalf. If the beneficial owner wishes to tender on his own behalf, the beneficial owner must, prior to completing and executing this Letter of Transmittal and delivering his Existing Notes, either make appropriate arrangements to register ownership of the Existing Notes in the owner's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Existing Notes and withdrawal of tendered Existing Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right, in its sole and absolute discretion, to reject any and all Existing Notes not properly tendered or any Existing Notes the Company's acceptance of which, or exchange for, would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the absolute right, subject to applicable law, to waive any of the conditions of the Exchange Offer or any irregularities or conditions of tender as to particular Existing Notes whether or not similar conditions or irregularities are waived in the case of other holders. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Existing Notes must be cured within such time as the Company shall determine. Neither the Company, any affiliates or assigns of the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Existing Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Existing Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Existing Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders of Existing Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTE HOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Existing Notes evidenced by a submitted certificate are to be tendered, the tendering holder(s) should fill in the aggregate principal amount of Existing Notes to be tendered in the box above entitled "Description of 9 1/2% Senior Subordinated Notes due 2008, Series A--Principal Amount Tendered." A reissued certificate representing the balance of nontendered Existing Notes will be sent to such tendering holder, unless otherwise provided in the appropriate box of this Letter, promptly after the Expiration Date. All of the Existing Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 3. SIGNATURES ON THIS LETTER, BOND POWERS AND ENDORSEMENTS, GUARANTEE OF SIGNATURES. If this Letter is signed by the holder of the Existing Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates or on a DTC security position listing without any change whatsoever. If any tendered Existing Notes are owned of record by two or more joint owners, all of such owners must sign this Letter. If any tendered Existing Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder or holders of the Existing Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the Exchange Notes are to be issued, or any untendered Existing Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly 10 15 as the name or names of the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Existing Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program (each, an "Eligible Institution"). Signatures on this Letter need not be guaranteed by an Eligible Institution, provided the Existing Notes are tendered: (i) by a registered holder of Existing Notes (or by a participant in DTC whose name appears on a security position listing as the owner) who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter and Exchange Notes are being issued directly to such registered holder (or deposited in the holder's account at DTC), or (ii) for the account of an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Existing Notes should indicate in the applicable box the name and address to which Exchange Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Existing Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. If no such instructions are given, such Existing Notes not exchanged will be returned to the name and address of the person signing this Letter. If a note holder is tendering Existing Notes by book-entry transfer, any Existing Notes not exchanged will be credited to such account maintained at the DTC. 5. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Existing Notes to it or its order pursuant to the Exchange Offer. If, however, Exchange Notes and/or substitute Existing Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Existing Notes tendered hereby, or if tendered Existing Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Existing Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed to such tendering holder and the Exchange Agent will retain possession of an amount of Exchange Notes with a face amount equal to the amount of such transfer taxes due by such tendering holder pending receipt by the Exchange Agent of the amount of such taxes. Except as provided in this Instruction 5, it will not be necessary for transfer tax stamps to be affixed to the Existing Notes specified in this Letter. 6. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions to the Exchange Offer enumerated in the Prospectus. 7. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Existing Notes, by execution of this Letter or an Agent's Message in lieu thereof, shall waive any right to receive notice of the acceptance of their Existing Notes for exchange. 8. MUTILATED, LOST, STOLEN OR DESTROYED EXISTING NOTES. Any holder whose Existing Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 11 16 9. WITHDRAWAL OF TENDERS. Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m., Now York City time, on the Expiration Date. For a withdrawal of a tender of Existing Notes to be effective, prior to 5:00 p.m., New York City time, on the Expiration Date, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth above or you must comply with the appropriate procedures for withdrawal under DTC's Automated Tender Offer Program. Any such notice of withdrawal must (i) specify the name of the person having deposited the Existing Notes to be withdrawn (the "Depositor"), (ii) identify the Existing Notes to be withdrawn (including the certificate number or numbers, where certificates for Existing Notes have been transmitted (or in the case of Existing Notes transferred by book-entry transfer, the name and number of the account at DTC to be credited) and principal amount of such Existing Notes), (iii) be signed by the holder in the same manner as the original signature on this Letter (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the trustee under the Indenture register the transfer of such Existing Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Existing Notes are registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion, whose determination shall be final and binding on all parties. Neither the Company, any affiliates or assigns of the Company, the Exchange Agent nor any other person shall be under any duty to give any notification of any irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. Any Existing Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Existing Notes that have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Existing Notes may be retendered by following the procedures described above at any time on or prior to 5:00 p.m., New York City time, on the Expiration Date. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus, this Letter and other related documents may be directed to the Exchange Agent, at the address and telephone number indicated above. 11. IMPORTANT TAX INFORMATION. Under current federal income tax law, a holder of Exchange Notes is required to provide the Company (as payor) with such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9 or otherwise establish a basis for exemption from backup withholding to prevent backup withholding on any Exchange Notes delivered pursuant to the Exchange Offer and any payments received in respect of the Exchange Notes. If a holder of Exchange Notes is an individual, the TIN is such holder's social security number. If the Company is not provided with the correct taxpayer identification number, a holder of Exchange Notes may be subject to a $50 penalty imposed by the Internal Revenue Service. Accordingly, each prospective holder of Exchange Notes to be issued pursuant to Special Issuance Instructions should complete the attached Substitute Form W-9. The Substitute Form W-9 need not be completed if the box entitled Special Issuance Instructions has not been completed. Certain holders of Exchange Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. Exempt prospective holders of Exchange Notes should indicate their exempt status on Substitute Form W-9. A foreign individual may qualify as an exempt recipient by submitting to the Company, through the Exchange Agent, a properly completed Internal Revenue Service Form W-8 (which the Exchange Agent will provide upon request) signed under penalty of perjury, attesting to the holder's exempt status. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Company is required to withhold 31% of any payment made to the holder of Exchange Notes or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. To prevent backup withholding on any Exchange Notes delivered pursuant to the Exchange Offer and any payments received in respect of the Exchange Notes, each prospective holder of Exchange Notes to be issued pursuant to Special Issuance Instructions must provide the Company, through the Exchange Agent, with either: (i) such prospective holder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such 12 17 prospective holder is awaiting a TIN) and that (A) such prospective holder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report all interest or dividends or (B) the Internal Revenue Service has notified such prospective holder that he or she is no longer subject to backup withholding; or (ii) an adequate basis for exemption. If the Existing Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Company within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Company. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF (TOGETHER WITH THE ORIGINAL NOTES DELIVERED BY BOOK-ENTRY TRANSFER OR IN ORIGINAL HARD COPY FORM) MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE EXPIRATION DATE. 13 18 TO BE COMPLETED BY TENDERING HOLDERS (SEE INSTRUCTION 11) PAYOR'S NAME: NUEVO ENERGY COMPANY SUBSTITUTE Form W-9 PART 1-- PLEASE PROVIDE YOUR TIN IN ------------------------------- THE BOX AT RIGHT AND CERTIFY BY Social Security Number SIGNING AND DATING BELOW. OR Department of the Treasury - ------------------------------- Internal Revenue Service Employer Identification Number PAYER'S REQUEST FOR PART 2 -- Certification Under penalties of perjury, I certify TAXPAYER IDENTIFICATION that: NUMBER (TIN) (1) The number shown on this form is my correct taxpayer Identification Number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions -- You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of under reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). PART 3 -- SIGNATURE Awaiting TIN [ ] ---------------------------- DATE , 1999 Please complete the certificate of --------------------------- Awaiting Taxpayer Identification Number below.
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 14 19 YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number to the payor within 60 days, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. Signature: Date , 1999 ---------------------------- ------------------------------ CERTIFICATE FOR FOREIGN RECORD HOLDERS Under penalties of perjury, I certify that I am not a United States citizen or resident (or I am signing for a foreign corporation, partnership, estate or trust). Signature: Date , 1999 ---------------------------- ------------------------------ 15 EX-99.2 13 FORM OF NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY FOR NUEVO ENERGY COMPANY This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Nuevo Energy Company (the "Company") made pursuant to the Prospectus, dated ______________________, 1999 (the "Prospectus"), if certificates for the outstanding 9 1/2% Senior Subordinated Notes due 2008, Series A (the "Existing Notes") of the Company are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by telegram, telex, facsimile transmission, mail or hand delivery to State Street Bank and Trust Company ("Exchange Agent") as set forth below. Capitalized terms not defined herein have the meaning given to them in the Prospectus. STATE STREET BANK AND TRUST COMPANY, Exchange Agent by registered or certified mail: by hand or overnight delivery: State Street Bank and Trust Company State Street Bank and Trust Company Corporate Trust Two Avenue de Lafayette Post Office Box 778 Fifth Floor, Corporate Trust Division Boston, Massachusetts 02110-0778 Boston, Massachusetts 02110-1724 Attention: MacKenzie Elijah Attention: MacKenzie Elijah ------------------------------- ---------------------------
Telephone: (617) 662-1525 Facsimile: (617) 662-1452 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF THIS INSTRUMENT VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, the signature guarantee must appear in the applicable space provided in the signature box in the Letter of Transmittal. 16 2 Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus, the undersigned hereby tenders to the Company the principal amount of Existing Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Principal Amount of Existing Notes If Existing Notes will be delivered Tendered: to DTC, provide account number. $ Account Number: --------------------------------------- -------------------- Certificate Nos. (if available): - ---------------------------------------- Total Principal Amount Represented by Certificate(s): $ --------------------------------------- All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. PLEASE SIGN HERE , 1999 - -------------------------------------------------- ------------------- Signatures of Holder(s) or Authorized Signatory Date , 1999 - -------------------------------------------------- ------------------- Signatures of Holder(s) or Authorized Signatory Date Must be signed by the holder(s) of Existing Notes as their name(s) appear(s) on certificates for Existing Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. If Existing Notes will be delivered by book-entry transfer to DTC, provide account number. Please print name(s) and address(es) Name(s): ----------------------------------------------------------------------- Capacity: ---------------------------------------------------------------------- Address(es): ------------------------------------------------------------------- Area Code and Telephone Number: ------------------------------------------------ Account Number: ---------------------------------------------------------------- 17 3 GUARANTEE (Not to be used for signature guarantees) The undersigned, a financial institution that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program, hereby guarantees that the undersigned will deliver to the Exchange Agent the certificates representing the Existing Notes being tendered hereby in proper form for transfer or confirmation of book-entry transfer of such Existing Notes into the Exchange Agent's account at DTC pursuant to the procedures for book-entry transfer set forth in the Prospectus, in either case, together with one or more properly completed and duly executed letters of transmittal/or facsimile thereof or Agent's Message in lieu thereof and any other documents required by the Letter of Transmittal within five business days after the Expiration Date. Name of Firm: ------------------------------------------------------------------ Address: ----------------------------------------------------------------------- Area Code & Telephone No.: ----------------------------------------------------- - ---------------------------------------------- Authorized Signature - ---------------------------------------------- Name (Please Type or Print) - ---------------------------------------------- Title , 1999 - ---------------------------------------- Date NOTE: DO NOT SEND CERTIFICATES OF EXISTING NOTES WITH THIS FORM. CERTIFICATES OF EXISTING NOTES SHOULD BE SENT ONLY WITH A COPY OF THE LETTER OF TRANSMITTAL. 18 -----END PRIVACY-ENHANCED MESSAGE-----