-----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, HQXLeZ2aY+Z5FniXEe4NsK5HasTuK4gUR6rNwIz2Kyq8usH/MeID1pGJEr4P9nEh yJt7g34/7F0lN7uX9vaD9A== 0000950129-99-000444.txt : 19990211 0000950129-99-000444.hdr.sgml : 19990211 ACCESSION NUMBER: 0000950129-99-000444 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POGO PRODUCING CO CENTRAL INDEX KEY: 0000230463 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 741659398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-72129 FILM NUMBER: 99529007 BUSINESS ADDRESS: STREET 1: 5 GREENWAY PLAZA STE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 BUSINESS PHONE: 7132975017 MAIL ADDRESS: STREET 1: 5 GREENWAY PLAZA SUITE 2700 STREET 2: P O BOX 2504 CITY: HOUSTON STATE: TX ZIP: 77046-0504 FORMER COMPANY: FORMER CONFORMED NAME: PENNZOIL OFFSHORE GAS OPERATORS INC /TX/ DATE OF NAME CHANGE: 19600201 S-4 1 POGO PRODUCING COMPANY 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------------- POGO PRODUCING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 1311 74-1659398 (State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
5 GREENWAY PLAZA, SUITE 2700 GERALD A. MORTON HOUSTON, TEXAS 77046 VICE PRESIDENT -- LAW (713) 297-5000 AND CORPORATE SECRETARY (Address, including zip code, and telephone number, 5 GREENWAY PLAZA, SUITE 2700 including area code, of registrant's principal executive offices) HOUSTON, TEXAS 77046 (713) 297-5000 (Name, Address, including zip code, and telephone number, including area code, of agent for service)
Copy to: STEPHEN A. MASSAD BAKER & BOTTS, L.L.P. 3000 ONE SHELL PLAZA HOUSTON, TEXAS 77002 (713) 229-1234 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable following the effectiveness of this Registration Statement. 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 of 1933, as amended (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. [ ] 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
====================================================================================================================== PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------- 10 3/8% Senior Subordinated $150,000,000 100% $150,000,000 $41,700 Notes due 2009............... ======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f) under the Securities Act of 1933, as amended. -------------------- 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 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 February 10, 1999 PROSPECTUS POGO PRODUCING COMPANY $150,000,000 OFFER TO EXCHANGE 10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2009 FOR ALL OUTSTANDING 10 3/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2009 THE NEW NOTES o will be freely tradeable and otherwise substantially identical to the outstanding notes o will accrue interest from January 15, 1999 at the rate of 10 3/8% per annum, payable semi-annually in arrears on each February 15 and August 15, beginning August 15, 1999. o will be unsecured and will rank equally with the outstanding notes and our other unsecured senior subordinated indebtedness. o will not be listed on any securities exchange or on any automated dealer quotation system THE EXCHANGE OFFER o expires at 5:00 p.m., New York City time, on , 1999, unless extended o is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered IN ADDITION, YOU SHOULD NOTE THAT o all outstanding notes that are validly tendered and not validly withdrawn will be exchanged for an equal principal amount of new notes that are registered under the Securities Act of 1933 o tenders of outstanding notes may be withdrawn any time prior to the expiration of the exchange offer o the exchange of outstanding notes for new notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 14 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 THE NEW NOTES 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
Forward-Looking Statements.....................................................2 Where You Can Find More Information............................................3 Incorporation of Certain Documents by Reference................................3 Certain Definitions............................................................4 Prospectus Summary.............................................................5 Risk Factors..................................................................14 Private Placement.............................................................24 Use of Proceeds...............................................................24 Capitalization................................................................24 Selected Financial Data.......................................................25 Selected Reserve and Operating Data...........................................27 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................29 Business and Properties.......................................................45 Management and Board of Directors.............................................66 The Exchange Offer............................................................68 Description of the Notes......................................................78 Outstanding Notes Registration Rights Agreement..............................121 Book Entry; Delivery and Form................................................122 Certain Federal Income Tax Consequences......................................124 Plan of Distribution.........................................................125 Transfer Restrictions on Outstanding Notes...................................126 Legal Matters................................................................126 Experts......................................................................126 Index to Consolidated Financial Statements...................................F-1
--------------------------- This prospectus is part of a registration statement we filed with the Securities and Exchange Commission. You should rely only on the information or representations provided in this prospectus. We have not authorized any person to provide information other than that provided in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this document. --------------------------- FORWARD-LOOKING STATEMENTS Certain of the statements contained or incorporated by reference in this prospectus are forward-looking statements. The use of any of the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expressions are intended to identify uncertainties. Although we believe the expectations reflected in those forward- looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we cannot assure that those expectations will prove to have been correct. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors set forth in or incorporated by reference in this prospectus. These factors include: o the cyclical nature of the oil and natural gas industries o uncertainties associated with the United States and worldwide economies 2 4 o current and potential governmental regulatory actions in countries where we own an interest o substantial competitor production increases resulting in oversupply and declining prices o our ability to implement cost reductions o our ability to raise additional capital or sell assets o operating interruptions (including leaks, explosions, fires, mechanical failure, unscheduled downtime, transportation interruptions, and spills and releases and other environmental risks) o fluctuations in foreign currency exchange rates in areas of the world where we own an interest, particularly Southeast Asia o covenant restrictions in our indebtedness o the impact of the Year 2000 problem Many of those factors are beyond our ability to control or predict. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this prospectus. WHERE YOU CAN FIND MORE INFORMATION This prospectus incorporates important business and financial information about us that we have not included in or delivered with this prospectus. This information is available without charge upon written or oral request. You should make any request to Gerald A. Morton, Pogo Producing Company, 5 Greenway Plaza, Suite 2700, Houston, Texas 77046-0504, telephone number: (713) 297-5000. To ensure timely delivery, you should request the information no later than , 1999. See "Incorporation of Certain Documents by Reference." We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (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 with the SEC at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also obtain information about us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE We "incorporate by reference" into this prospectus certain information we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus and information that we subsequently file with the SEC will automatically update this prospectus. We incorporate by reference the documents listed below (collectively, the "Reports") and any filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and before the termination of the offering made under this prospectus: o Our Annual Report on Form 10-K for the year ended December 31, 1997 (the "Annual Report") 3 5 o Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998, and September 30, 1998, as amended You may request a copy of these filings (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing) at no cost, by writing to or telephoning us at the following address: Pogo Producing Company Corporate Secretary 5 Greenway Plaza, Suite 2700 Houston, Texas 77046-0504 (713) 297-5017 CERTAIN DEFINITIONS As used in this prospectus, "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels and "MMBbls" means million barrels. "BOE" means barrel of oil equivalent, "Mcfe" means thousand cubic feet of natural gas equivalent, "MMcfe" means million cubic feet of natural gas equivalent and "Bcfe" means billion cubic feet of natural gas equivalent. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids ("NGL"). "EBITDA" means income from continuing operations before provision for income taxes, interest expense, depreciation, depletion and amortization, and dry hole and impairment costs. References to "$" and "dollars" refer to United States dollars. All estimates of reserves contained in this prospectus, unless otherwise noted, are reported on a "net" basis. Information regarding production, acreage and numbers of wells are set forth on a gross basis, unless otherwise noted. 4 6 PROSPECTUS SUMMARY This summary may not contain all the information that is important to you. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. The terms "the Company", "we", "our", "ours" and "us" as used in this prospectus refer to "Pogo Producing Company" and its subsidiaries and predecessors as a combined entity. We acquired Arch Petroleum Inc. and its subsidiaries ("Arch") on August 17, 1998, in a stock-for-stock, tax-free merger which was accounted for using the purchase method of accounting. Company financial and operating data as of dates and for periods after August 17, 1998, include financial and operating data for Arch. You should carefully consider the information set forth under the heading "Risk Factors." This prospectus contains certain forward-looking statements which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. See "Forward-Looking Statements." The term "outstanding notes" refers to the 10 3/8% Series A Senior Subordinated Notes due 2009 that were issued January 15, 1999. The term "new notes" refers to the 10 3/8% Series B Senior Subordinated Notes due 2009 issuable in the exchange offer. The term "notes" refers to the outstanding notes and the new notes collectively. POGO PRODUCING COMPANY We are an independent oil and gas exploration and production company with a well balanced portfolio of domestic and international properties. Our properties produced approximately 60% natural gas and 40% oil over the nine months ended September 30, 1998. As of December 31, 1997, approximately 52% of our proved reserves were located in the United States where we currently own interests in 105 lease blocks (comprising 455,600 gross acres) in the offshore Gulf of Mexico and approximately 378,000 gross acres onshore, primarily in Texas, New Mexico and Louisiana. Our remaining proved reserves, as of December 31, 1997, were located in the Gulf of Thailand where we currently own interests in 734,000 gross acres. We also own interests in approximately 150,000 gross acres in Western Canada, and we were recently awarded a license on 113,000 gross acres in the U.K. sector of the North Sea. Our 1997 year-end worldwide proved reserves totaled 64,045 MBbls of liquid hydrocarbons and 478,373 MMcf of natural gas or 862,643 MMcfe (including reserves we acquired in the Arch acquisition). For the twelve months ended September 30, 1998, our total revenues were $230,641,000 and EBITDA was $126,171,000. Our exploration strategy is to concentrate our efforts on selected areas where we believe that our expertise, competitive acreage position, or ability to quickly take advantage of new opportunities offers the potential for achieving a significant return on our investment. We have established a record of increasing our proven hydrocarbon reserves over the last seven years, principally through the exploration, exploitation and development of our properties and, to a lesser extent, the selective acquisition of additional interests in producing properties in which we already have an interest. An important measure of our success is our record for replacing the oil and gas which we produce each year. From 1993 through 1997, we replaced each year's production with new proved reserves at the following rates:
PERCENTAGE OF PRODUCTION YEAR REPLACED - ---- ------------- 1993............................................ 204% 1994............................................ 153% 1995............................................ 305% 1996............................................ 187% 1997............................................ 188%
5 7 Our cost for replacing these reserves averaged $5.43 per BOE over the five year period. As a result of our continuing successful exploration, exploitation and development activities, we currently believe that we have replaced our 1998 worldwide production (excluding the reserves we acquired in the Arch acquisition). We believe that another measure of our success is the number of successful wells that we have participated in drilling. Since December 31, 1993, we have participated in drilling 508 gross wells, 89% of which were successful. COMPETITIVE STRENGTHS We believe we are well positioned to continue to build upon our historical success by capitalizing on our strengths, including the following: o Diversified Portfolio of Core Properties. We benefit from a portfolio of existing properties which provide geographic diversification while being of sufficient size and potential to enable us to concentrate our resources and regional expertise. For example, as of December 31, 1997, 90% of our proved liquid hydrocarbon reserves and 82% of our proved natural gas reserves were located in six operating areas in four geographic regions. This concentration of core properties permits us to maintain a focused exploration and development program by using the substantial geological and operating expertise that we have gained over years of participating in these areas. We also use the experience that we gain in our core areas to evaluate new opportunities in areas with similar characteristics. For example, we used the experience we gained in the Gulf of Mexico to develop our concession in the Gulf of Thailand. Since our Thailand concession was granted in August 1991, we have discovered over 375 Bcfe of proven reserves (as of December 31, 1997) on this acreage net to our interest. o Significant Further Potential From Existing Properties. We believe that our existing properties continue to hold significant further potential for increased production and the discovery of additional reserves. For example, we expect a significant increase in our production rates when the Benchamas Field comes onstream in the third quarter of 1999. In addition, we currently expect to spend approximately $170,000,000 during 1999 to develop our existing properties, including drilling approximately 110 gross wells. o Balanced Risk Profile; Prudent Exposure to Higher Return Opportunities. We seek to manage our risk exposure by maintaining a prudent level of participation in our projects. We seek to operate properties where we believe that our working interest percentage, expertise or ability to control the timing or cost of a project provides a competitive advantage to us and our partners. On properties where we are not the operator, we try to have a meaningful working interest so that we can influence operating and development decisions regarding them. Generally, we seek a higher level of participation in projects which we view as having potentially high rates of return and relatively low anticipated exploration and development costs, such as our operations in southeastern New Mexico and West Texas. Conversely, we will generally seek a lower level of participation in projects that have high drilling costs, a long lead time until production can come onstream, or where development costs may be disproportionately high, such as wells in intermediate water depths (600 to 4,400 feet) in the Gulf of Mexico or wells that are unusually deep or are considered highly risky. We currently operate all or a portion of 27 of the 105 lease blocks in which we own interests in the Gulf of Mexico. o Technical Expertise. We have an experienced staff of engineers and geoscientists that comprise over 40% of our total full-time personnel. Our personnel's expertise, augmented by data from over 500 gross wells drilled since December 31, 1993, more than 4,800,000 acres of 3-D seismic data and 112,700 miles of 2-D seismic data, create a knowledge base which we use to establish our drilling priorities and associated capital budget. BUSINESS STRATEGY Our business strategy is to maximize profitability and shareholder value by: 6 8 o increasing hydrocarbon production levels, leading to increased revenues, cash flow and earnings o replacing and expanding our proven hydrocarbon reserves base o maintaining appropriate levels of debt and interest, and controlling overhead and operating costs o expanding exploration and production activities into new and promising geographic areas consistent with our expertise To implement our business strategy, we currently are principally focused in the following four geographic areas: DOMESTIC OPERATIONAL AREAS Gulf of Mexico. As of December 31, 1997, approximately 31% of our total proved oil and gas reserves and approximately 59% of our domestic proved oil and gas reserves were located in the Gulf of Mexico, where we have explored for nearly 30 years. Most of these proved reserves are concentrated in four significant producing areas, including eight fields in the Eugene Island area located off the Louisiana coast. This concentration allows us to closely manage costs and to develop detailed geologic and other information relating to these areas. We believe that the Gulf of Mexico will continue to provide us with substantial opportunities to expand our hydrocarbon reserves and increase our deliverability by using our extensive inventory of 3-D seismic data (covering the equivalent of 600 federal Gulf of Mexico lease blocks) to locate low risk exploration and development projects, and by using advanced drilling technology, including horizontal drilling, to accelerate development of these projects. For example, within the last several years we have acquired interests in 15 lease blocks in intermediate water depths (ranging from 600 feet to 4,400 feet). We have participated in drilling six wells on these lease blocks, all of which have been successful. Together with our partners, we are currently developing three projects on these blocks, two of which should commence producing during the first quarter of 1999, and the other should come onstream in the first quarter of 2000. Permian Basin. As of December 31, 1997, approximately 12% of our total proved oil and gas reserves, and approximately 24% of our domestic proved oil and gas reserves were located in the Permian Basin where we have explored for over 20 years. According to the most recently published annual figures, we are the ninth largest producer of crude oil in New Mexico. We believe that we will continue to be one of the most active companies drilling for oil and gas in the southeastern New Mexico portion of the Permian Basin, where we have interests in over 101,000 gross acres. Our primary drilling objective in this region is the Brushy Canyon (Delaware) formation, which produces oil at depths of approximately 6,000 to 9,000 feet. Commencing in late 1989 and continuing through December 31, 1998, we (excluding Arch) and our partners drilled 389 wells in the Permian Basin area, of which 96% were completed as productive. We generally achieve rapid cost recovery on our Permian Basin wells because of relatively low capital costs and high initial rates of production. We currently expect our Permian Basin operations to continue to be a source of significant future oil production. Onshore Gulf Coast Region. We have maintained an active presence in the Onshore Gulf Coast region for over 20 years. Over the last several years, we have committed considerable resources to increasing our presence in promising areas where we believe that our technological expertise, acreage position and comparatively low operating costs provide a competitive advantage. Commencing in 1994, we have participated in nine proprietary and several speculative 3-D seismic surveys in the Onshore Gulf Coast region. Since that time, we have participated in the drilling of 58 new wells based in part on prospects developed from those surveys. Successful drilling, based in large part on these surveys, has enabled us to more than double our proven reserves in this region from approximately 25 Bcfe as of December 31, 1995, to approximately 68 Bcfe as of December 31, 1997. INTERNATIONAL OPERATIONAL AREAS Gulf of Thailand. In August 1991, together with our joint venture partners, we were awarded a license to explore for oil and gas on the Kingdom of Thailand's Block B8/32 Concession in the Gulf of Thailand. Through 7 9 December 31, 1998, we have drilled 108 exploratory and development wells and acquired 3-D seismic surveys covering approximately 673,650 acres. At December 31, 1997, approximately 48% of the Company's total proved oil and gas reserves were located on the concession. The first portion of the concession that we developed was the Tantawan Field. Through December 31, 1998, we have drilled 19 exploration wells and 31 development wells in the Tantawan Field. Production from the Tantawan Field began in early February 1997. During the third quarter of 1998, production averaged 76.2 MMcf of natural gas per day and 5,605 Bbls of crude oil and condensate per day (35.3 MMcf per day and 2,598 Bbls per day net to our working interest). We plan to drill additional development wells in the Tantawan Field during the first quarter of 1999. We are currently developing a second field on the concession that is known as the Benchamas Field. The Benchamas Field does not appear to be as highly faulted and the depositional environment of the reservoir rock appears to be different from what we found in the Tantawan Field. We currently believe this means the reservoirs in the Benchamas Field will be larger and more contiguous than those in the Tantawan Field. Through December 31, 1998, we have drilled 21 exploration wells and 28 development wells in the Benchamas Field. Recently we announced the results of three wells in this field, the Benchamas 22, 19 and A-7 wells. The Benchamas 22 well contained 278 feet of hydrocarbon bearing sands. The Benchamas 19 well contained 257 feet of hydrocarbon bearing sands, and the Benchamas A-7 contained 435 feet of hydrocarbon bearing sands. Drilling and platform construction continue in the Benchamas Field, where we currently expect to begin producing in the third quarter of 1999. The government of the Kingdom of Thailand has also granted us a production license to develop a third field on the concession known as the Maliwan Field. We have also started exploring in another part of the concession known as the Jarmjuree area, where we drilled three wells which located hydrocarbons during the third quarter of 1998. We currently plan to drill additional appraisal wells in the Maliwan Field during 1999, as well as more exploratory wells on other parts of the concession that have not yet been designated as production licenses. Rutherford-Moran Oil Corporation, the parent company of Thai Romo Ltd., one of our partners in our Thailand concession, has recently announced that it has agreed to be acquired by Chevron Corporation. The acquisition is subject to conditions, several of which are outside of Rutherford-Moran's control. One of these conditions is that Chevron reach agreement with us on a new joint operating agreement that would include the transfer of operatorship on the Thailand concession from our subsidiary to a subsidiary of Chevron. Although we have held discussions with Chevron on this subject, we do not know whether we can reach a mutually satisfactory agreement with Chevron. In addition to developing our concession in the Gulf of Thailand, we continue to actively evaluate potentially high return projects in other areas of the world with relatively stable political and financial climates, such as Canada and certain European and ASEAN ("Association of Southeast Asian Nations") countries. As a result of our acquisition of Arch in August 1998, we own interests in approximately 150,000 gross acres located primarily in Alberta and British Columbia. In another promising development, in December 1998, the United Kingdom's Department of Trade and Industry announced that we, together with two partners, had been awarded two blocks in the Central Graben area of the North Sea covering approximately 113,000 gross acres. The license to explore these two blocks is for an initial six-year term. -------------------- Our principal executive offices are located at 5 Greenway Plaza, Suite 2700, Houston, Texas 77046, telephone (713) 297-5000. 8 10 SUMMARY OF THE EXCHANGE OFFER On January 15, 1999, we completed the private offering of the outstanding notes. We entered into a registration rights agreement with the initial purchasers in the private offering in which we agreed to deliver to you this prospectus and to complete the exchange offer within 180 days after the date we issued the outstanding notes. You are entitled to exchange in the exchange offer your outstanding notes for new notes with substantially identical terms. You should read the discussion under the headings "--Summary of the Terms of the New Notes" beginning on page 12 and "Description of the Notes" beginning on page 78 for further information regarding the new notes. We summarize the terms of the exchange offer below. You should read the discussion under the headings "The Exchange Offer" beginning on page 68 for further information regarding the exchange offer and resale of the new notes.
The Exchange Offer......................... We are offering to exchange up to $150 million aggregate principal amount of new notes for up to $150 million aggregate principal amount of the outstanding notes. Outstanding notes may be exchanged only in integral multiples of $1,000. Expiration Date............................ The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1999, or such later date and time to which we extend it. Withdrawal of Tenders...................... You may withdraw your tender of outstanding notes at any time prior to the expiration date, unless previously accepted for exchange. We will return to you, without charge, promptly after the expiration or termination of the exchange offer any outstanding notes that you tendered but that were not accepted for exchange. Conditions to the Exchange Offer........... We will not be required to accept outstanding notes for exchange if the exchange offer would be unlawful or would violate any interpretation of the staff of the SEC. The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered. Please read the section "The Exchange Offer--Conditions to the Exchange Offer" beginning on page 70 for more information regarding the conditions to the exchange offer. Procedures for Tendering Outstanding Notes....................... If your outstanding notes are held through The Depositary Trust Company and you wish to participate in the exchange offer, you may do so through the automated tender offer program of The Depositary Trust Company. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with this prospectus as though you had signed the letter of transmittal. By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things: o any new notes that you receive will be acquired in the ordinary course of your business o you have no arrangement or understanding with any person or entity to participate in the distribution of the new notes o if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the new notes
9 11
o if you are a broker-dealer that will receive new notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, you will deliver a prospectus, as required by law, in connection with any resale of such new notes o you are not our "affiliate," as defined in Rule 405 of the Securities Act of 1933, or, if you are our affiliate, you will comply with any applicable registration and prospectus delivery requirements of the Securities Act of 1933 Special Procedures for Beneficial Owners......................... If you own a beneficial interest in outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender the outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. Guaranteed Delivery Procedures............. If you wish to tender your outstanding notes and cannot comply, prior to the expiration date, with the applicable procedures under the automated tender program of The Depositary Trust Company, you must tender your outstanding notes according to the guaranteed delivery procedures described in "The Exchange Offer--Guaranteed Delivery Procedures" beginning on page 74. Certain U.S. Federal Income Tax Considerations...................... The exchange of outstanding notes for new notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. Please read "Certain Federal Income Tax Consequences" beginning on page 124. Use of Proceeds............................ We will not receive any cash proceeds from the issuance of new notes.
10 12 THE EXCHANGE AGENT We have appointed State Street Bank and Trust Company as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows: FOR DELIVERY BY MAIL: FOR OVERNIGHT DELIVERY ONLY OR BY HAND: State Street Bank and Trust Company State Street Bank and Trust Company Corporate Trust Department Corporate Trust Department P.O. Box 778 4th Floor, Two International Place Boston, MA 02102-0078 Boston, MA 02110 FOR FACSIMILE TRANSMISSION (FOR ELIGIBLE INSTITUTIONS ONLY): (617) 664-5739 To Confirm Receipt: (617) 664-5314 11 13 SUMMARY OF TERMS OF THE NEW NOTES The new notes will be freely tradeable and otherwise substantially identical to the outstanding notes. The new notes will not have registration rights or provisions for additional interest. The new notes will evidence the same debt as the outstanding notes, and the outstanding notes are and the new notes will be governed by the same indenture.
Notes Offered............................ $150,000,000 aggregate principal amount of 10 3/8% Series B Senior Subordinated Notes due 2009. Maturity Date............................ February 15, 2009. Interest Payment Dates................... February 15 and August 15 of each year, commencing August 15, 1999. Optional Redemption...................... We may redeem any or all of the new notes at any time on or after February 15, 2004. We will pay a redemption price equal to the principal amount of the notes we redeem plus a make-whole premium, which is described under "Description of the Notes -- Redemption; Optional Redemption" on page 79. We will also pay accrued and unpaid interest. Possible Subsidiary Guarantees............................... None of our subsidiaries will guarantee the new notes initially. If our existing or future restricted subsidiaries guarantee any of our other indebtedness, however, they will be required by the indenture governing the new notes to jointly and severally guarantee the new notes on a senior subordinated basis. We do not intend to cause any subsidiary to take any action that would require it to guarantee the new notes. Any subsidiary guarantees of the new notes that may be issued will be limited to the extent of any payment that would not constitute a fraudulent transfer or conveyance under federal or state law. See "Risk Factors -- Future subsidiary guarantees may be affected by fraudulent conveyance laws" on page 22 and "Description of the Notes -- Possible Subsidiary Guarantees of the Notes" beginning on page 82. Change of Control........................ Upon certain change of control events, each holder of notes may require us to purchase all or a portion of its notes at a purchase price equal to 101% of the principal amount of those notes, together with accrued and unpaid interest, if any, to the date of purchase. See "Description of the Notes -- Certain Covenants; Change of Control" beginning on page 88. Ranking.................................. The new notes will be our general unsecured senior subordinated obligations. They will be subordinated in right of payment to all our existing and future Senior Indebtedness. The new notes will rank equally with all our existing and future senior subordinated indebtedness and senior in right of payment to all our existing and future Subordinated Indebtedness. The terms "Senior Indebtedness" and "Subordinated Indebtedness" are defined with respect to the notes in "Description of the Notes -- Certain Definitions" which begins on page 99. Certain Covenants........................ The indenture governing the outstanding notes and the new notes contains covenants that, among other things, limit our ability, and the ability of our restricted subsidiaries to:
12 14
o incur additional indebtedness o make certain investments o pay dividends on, redeem or repurchase our capital stock o issue and sell our restricted subsidiaries' capital stock o engage in transactions with affiliates o create certain liens o dispose of asset sales proceeds o guarantee indebtedness o incur senior subordinated indebtedness that does not rank equal to the notes o merge, consolidate and sell assets These covenants have various exceptions and qualifications, which are described under "Description of the Notes -- Certain Covenants" which begins on page 83. Right under Registration Rights Agreement......................... If we fail to complete the exchange offer as required by the registration rights agreement, we will be obligated to pay additional interest to holders of the outstanding notes. Please read "Outstanding Notes Registration Rights Agreement" beginning on page 121 for more information regarding your rights as a holder of outstanding notes. Absence of a Public Market for the Notes............................ The new notes will be a new issue of securities for which there is currently no market. Although the initial purchasers of the outstanding notes have informed us that they each currently intend to make a market in the new notes issued in the exchange offer, they are not obligated to do so. Any such market making may be discontinued at any time without notice. Accordingly, we cannot assure you as to the development or liquidity of any market for the notes. Risk Factors............................. You should consider carefully the risks described in "Risk Factors," beginning on page 14.
SELECTED FINANCIAL DATA Please read "Selected Financial Data" beginning on page 25 for our selected financial date for the five-year period ended December 31, 1997, and the nine month periods ended September 30, 1998 and 1997. SELECTED RESERVE AND OPERATING DATA Please read "Selected Reserve and Operating Data" beginning on page 27 for our selected reserve and operating data for the five-year period ended December 31, 1997, and the nine month periods ended September 30, 1998 and 1997. 13 15 RISK FACTORS Your investment in the notes involves certain risks. You should carefully consider the following Risk Factors before making an investment decision. VOLATILITY OF OIL AND GAS MARKETS AFFECTS US Market prices are volatile Our profitability and cash flow depend greatly on the market prices of oil and natural gas. Those market prices have historically been seasonal, cyclical and volatile. They depend on many factors, including weather, economic, political and regulatory conditions that we cannot control. Commencing in 1997, the average prices for our production have generally declined. Oil prices have reached lows that, on a historic inflation adjusted basis, are almost unprecedented. In the past, we have at times curtailed production to mitigate the effects of low market prices. We may do so again. The significant drop in oil or gas prices has had a serious adverse effect on our cash flow and continued low prices could seriously affect our operations and financial condition and could in some cases result in a further reduction in funds available under our bank credit agreement. Hedging transactions may not prevent losses We cannot predict future oil and gas prices with certainty. Accordingly, we sometimes execute contracts on a portion of our production to hedge against market price changes. In the past, we have not entered hedging transactions exceeding 50% of our total oil and gas production on an energy equivalent basis for any given period. Hedging transactions are intended to limit the negative effect of further price declines, but could also limit our participation in significant price increases for the covered period. We cannot be certain that hedging transactions will reduce the effect of any substantial declines in oil and gas prices. As of December 31, 1998, we were not a party to any natural gas futures contracts, crude oil swap agreements or other commodity hedging agreements. WE ARE SUBJECT TO UNCERTAINTIES IN RESERVE ESTIMATES AND FUTURE NET REVENUES There is substantial uncertainty in estimating quantities of proved reserves and projecting future production rates and the timing of development expenditures. No one can measure underground accumulations of oil and gas in an exact way. Accordingly, oil and gas reserve engineering requires subjective estimations of those accumulations. Estimates of other engineers might differ widely from those of our reserve engineers, Ryder Scott. Accuracy of reserve estimates depends on the quality of available data and on engineering and geological interpretation and judgment. Ryder Scott may make material changes to reserve estimates based on the results of actual drilling, testing, and production. As a result, our reserve estimates often differ from the quantities of oil and gas we ultimately recover. Also, we make certain assumptions regarding future oil and gas prices, production levels, and operating and development costs that may prove incorrect. Any significant variance from these assumptions could greatly affect our estimates of reserves and future net revenues. The reserve estimates and estimates of future net income included in this prospectus were prepared as of December 31, 1997. See "Business and Properties -- Exploration and Production Data; Reserves." As a result of current low oil and natural gas prices, estimates of our future net revenues, as of December 31, 1998, will be significantly lower than they were at year-end 1997. See "Selected Reserve and Operating Data." WE ARE SUBJECT TO OPERATING AND UNINSURED RISKS We must continually acquire or explore for and develop new oil and natural gas reserves to replace those produced and sold. Our hydrocarbon reserves and revenues will decline if we are not successful in our drilling, acquisition or exploration activities. Although we have historically maintained our reserves base primarily through successful exploration and development operations, we cannot assure that future efforts will be similarly successful. Casualty risks and other operating risks could cause reserves and revenues to decline. 14 16 We are subject to various casualty risks Our onshore and offshore operations are subject to the following inherent casualty risks: o blowouts, cratering, and explosions o uncontrollable flows of oil, natural gas or well fluids o fires o pollution and other environmental risks o hazards of marine and helicopter operations (capsizing, collision and adverse weather and sea conditions) We could suffer substantial financial losses due to any of the following: o injury or loss of life o severe damage to and destruction of property and equipment o pollution and other environmental damage o suspension of operations We may not have enough insurance to cover some operating risks We carry insurance which we believe is in accordance with customary industry practices, but we are not fully insured against all casualty risks incident to our business. We are subject to various other operating risks Numerous risks affect drilling our activities, including the risk of drilling non-productive wells or dry holes. The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain. Also, our drilling operations could diminish or cease because of any of the following: o title problems o weather conditions o noncompliance with governmental requirements o shortages or delays in the delivery or availability of equipment or fabrication yards Moreover, effective marketing of our natural gas production depends on a number of factors, such as the following: o existing market supply of and demand for natural gas o the proximity of our reserves to pipelines o the available capacity of such pipelines o government regulations The marketing of oil and gas production similarly depends on the availability of pipelines and other transportation, processing and refining facilities, and the existence of adequate markets. As a result, even if hydrocarbons are discovered in commercial quantities, a substantial period of time may elapse before commercial production commences. If pipeline facilities in an area are insufficient, we may have to wait for the construction or expansion of pipeline capacity before we can market production from that area. See "-- We face additional risks related to our operations in the Kingdom of Thailand" and "Business and Properties -- Miscellaneous" and "-- Government Regulation." WE DEPEND ON OTHER OPERATORS Even on properties we do not operate, we try to maintain significant influence over the nature and timing of exploration and development activities to the extent we can. However, we have limited influence over operations on 15 17 a significant percentage of our oil and gas properties, including control over the maintenance of safety and environmental standards. For those properties: o operators could refuse to initiate exploration or development projects (in which case we may propose desired exploration or development activities) o if we proceed with any of those projects the operator has refused to initiate, we may not receive any funding from the operator with respect to that project o the operators may initiate exploration or development projects on a slower schedule than we prefer o the operator may propose to drill more wells or build more facilities on a project than we have funds for, which may mean that we cannot participate in those projects or share in a substantial share of the revenues from those projects Any of these events could significantly affect our anticipated exploration and development activities. See "Business and Properties -- Miscellaneous." WE HAVE SUBSTANTIAL CAPITAL REQUIREMENTS We have substantial anticipated capital requirements. Our ongoing capital requirements consist primarily of the following items: o funding the remainder of our 1998 capital and exploration budget o the capital and exploration budget for 1999 o other allocations for acquisition, development, production, exploration and abandonment of oil and gas reserves o costs associated with our Thailand operations o future dividend payments From 1996 to 1997, we increased our capital and exploration expenditures from $206.2 million to $229.5 million (excluding purchased reserves and interest capitalized). We budgeted $230 million for capital and exploration expenditures in 1998 (excluding purchased reserves and interest capitalized). Substantially all of our 1998 capital and exploration budget has been spent or incurred. Our 1999 capital and exploration budget has been established by our Board of Directors at $170 million (excluding purchased reserves and interest capitalized). We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources: o available cash and cash investments o cash provided by operating activities o funds available under our bank credit agreement after the application of proceeds from the notes offering o our uncommitted bank line of credit and banker's acceptances o capital we believe we can raise through debt and convertible preferred equity offerings o asset sales We believe the funds provided by these sources will be sufficient to meet our 1999 cash requirements. However, the uncertainties and risks associated with future performance and revenues, as described in this section, will ultimately determine our liquidity and ability to meet our anticipated capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Capital Structure; Credit Agreement and Uncommitted Credit Line." 16 18 WE FACE SIGNIFICANT COMPETITION The oil and gas industry is highly competitive. We compete with major oil companies, other independent oil and gas concerns and individual producers and operators. Many of these competitors have much greater financial and other resources than us. Moreover, the oil and gas industry competes with other industries in supplying the energy and fuel needs of industrial, commercial and other consumers. Increased competition causing oversupply or depressed prices could greatly affect our operations revenues. THE RIGHT TO RECEIVE PAYMENTS ON THE NOTES IS JUNIOR TO OUR SENIOR DEBT; THE NOTES ARE STRUCTURALLY SUBORDINATED TO OBLIGATIONS OF OUR SUBSIDIARIES The notes are senior subordinated obligations. Accordingly, the notes are subordinated to all of our existing and future senior indebtedness, including indebtedness under our bank credit agreement. We expect to incur additional senior indebtedness from time to time in the future under our bank credit agreement or otherwise. The indenture governing the notes limits, but does not prohibit, the incurrence of any other indebtedness by us or our subsidiaries, including senior indebtedness. The terms "senior indebtedness" and "indebtedness" are defined in the "Description of the Notes -- Certain Definitions" section of this prospectus. Assuming we had issued the outstanding notes and applied the proceeds on September 30, 1998, we would have had approximately $23,179,000 principal amount of outstanding senior indebtedness. Upon any distribution of assets, liquidation, dissolution, reorganization or any similar proceeding by or relating to us, the holders of our senior indebtedness would be entitled to receive payment in full before the holders of the notes would be entitled to receive any payment. The terms and conditions of the subordination provisions pertinent to the notes are described in more detail in "Description of the Notes -- Subordination." The notes are effectively subordinated to claims of creditors of our subsidiaries (other than us) that are not guarantors of the notes, including lessors, trade creditors, taxing authorities, creditors holding guarantees and tort claimants. In the event of a liquidation, reorganization or similar proceeding relating to a subsidiary that is not a guarantor of the notes, these persons generally will have priority as to the assets of that subsidiary over our claims and equity interest and, thereby indirectly, holders of our indebtedness, including the notes. Currently, none of our subsidiaries guarantee the notes. However, under certain circumstances, our payment obligations under the notes may in the future be required to be jointly and severally guaranteed by our existing or future subsidiaries. See "Description of the Notes -- Possible Subsidiary Guarantees of the Notes." THE NOTES ARE UNSECURED In addition to being subordinate to all of our senior indebtedness, the notes are not secured by any of our assets. Under certain circumstances, our obligations under our bank credit agreement may become secured by some of our oil and gas properties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Capital Structure." If the bank obligations become secured, and then we become insolvent, are liquidated, or payment under our bank credit agreement is accelerated, the lenders under our bank credit agreement would be entitled to exercise the remedies available to a secured lender under applicable law. Under these circumstances our bank lenders would have a secured claim on some of our assets before the holders of these notes. Because the notes are unsecured, there could be no assets remaining for the holders of the notes or any remaining assets could be insufficient to pay off the notes. OUR SUBSIDIARIES HAVE INDEBTEDNESS AND MAY INCUR ADDITIONAL INDEBTEDNESS At September 30, 1998, our subsidiaries (principally Thaipo Ltd. ("Thaipo") and Arch) had total combined assets of $370,029,000 (exclusive of net receivables to us) and liabilities of $39,313,000 (exclusive of net payables to us). Both the combined assets and liabilities are exclusive of assets and liabilities associated with transactions treated as operating leases in our consolidated financial statements. Among other obligations, Thaipo has guaranteed its pro rata portion of obligations under an eleven and a half year bareboat charter of a Floating Production, Storage and 17 19 Offloading system used for development of the Tantawan production area. The portion of the obligations under the bareboat charter guaranteed by Thaipo is currently estimated at $11,122,000 per year for the first ten years. Thaipo has also entered into a ten year bareboat charter of a Floating Storage and Offloading system for the Benchamas Field at an estimated annual cost of approximately $5,215,000, commencing in mid-1999. The documents governing such obligations state that we have no liability for those obligations. In addition, our subsidiaries may incur other liabilities in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Other Material Long-Term Commitments." The indenture governing the notes limits our and our subsidiaries' ability to incur additional indebtedness and liens and to enter into agreements that would restrict the ability of our subsidiaries to make distributions, loans or other payments to us. That indenture will also impose limits on our ability to transfer assets to unrestricted subsidiaries or acquire unrestricted subsidiaries. However, these limitations are subject to various qualifications. Subject to certain limitations, we and our subsidiaries may incur secured indebtedness. For additional details of these provisions and the applicable qualifications, see "Description of the Notes -- Subordination" and " -- Certain Covenants." WE ARE HIGHLY LEVERAGED Assuming we had issued the outstanding notes and applied the proceeds on September 30, 1998, our long-term debt (including the current portion) would have been $388,179,000 and shareholders' equity would have been $283,824,000. We believe that our cash flow from operations, together with funds available under our bank credit agreement after it is paid down with the net proceeds we receive from these notes, and other anticipated sources of liquidity, including additional debt and convertible preferred securities that we may offer in the future and proceeds from asset sales, will be adequate to meet our anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments. However, our ability to meet our debt service obligations will be dependent upon our future performance. Our future performance, in turn, will be subject to general economic conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. WE ARE SUBJECT TO VARIOUS COVENANT RESTRICTIONS We and our subsidiaries will be subject to significant operating and financial restrictions contained in the instruments governing the notes and our other indebtedness. Such restrictions will affect, and in many respects significantly limit or prohibit, among other things, our ability to: o incur additional indebtedness o make various investments o pay dividends on, redeem or repurchase our capital stock o issue and sell our restricted subsidiaries' capital stock o engage in transactions with affiliates o create certain liens o dispose of asset sales proceeds o guarantee indebtedness o incur senior subordinated indebtedness that does not rank equal to the notes o merge, consolidate and sell assets In addition, our bank credit agreement requires us to maintain various financial ratios. These restrictions could also limit our ability to obtain financing in the future, make needed capital expenditures, withstand a future downturn in our business or the economy in general or conduct necessary corporate activities. If we or our subsidiaries fail to comply with these restrictions, we may be in default under the terms of such indebtedness, even if we are otherwise able to meet our debt service obligations. In the event of a default, the holders of such indebtedness could elect to declare all such indebtedness, together with accrued interest, to be due and payable and a significant portion of our other indebtedness (including the notes) may become immediately due and payable. We cannot assure you that we 18 20 would be able to make such payments or borrow sufficient funds from alternative sources to make such payments. Even if we were to obtain additional financing, such financing may be on terms unfavorable to us. WE ARE SUBJECT TO VARIOUS GOVERNMENT REGULATIONS AND ENVIRONMENTAL RISKS We are subject to various legal limitations We and our subsidiaries are subject to various foreign and domestic laws and regulations on taxation, exploration and development, and environmental and safety matters in countries where we own or operate properties. Many laws and regulations require drilling permits and govern the spacing of wells, the prevention of waste, rates of production and other matters. These statutes and regulations, and any others that are passed by the jurisdictions where we have production could limit the total number of wells drilled or the total allowable production from successful wells, which could limit revenues. We are subject to various environmental liabilities We could incur liability to governments or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil or water, including responsibility for remedial costs. We could potentially discharge oil or natural gas into the environment in any of the following ways: o from a well or drilling equipment at a drill site o leakage from storage tanks, pipelines or other gathering and transportation facilities o damage to oil or natural gas wells resulting from accidents during normal operations o blowouts, cratering or explosions Environmental discharges may move through soil to water supplies or adjoining properties, giving rise to additional liabilities. Some laws and regulations could impose liability for failure to notify the proper authorities of a discharge and other failures to comply with those laws. Environmental laws may also affect the costs of our acquisitions of properties. We do not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry. However, we cannot assure that environmental laws will not, in the future, result in decreased production, substantially increased costs of operations or other adverse effects to our combined operations and financial condition. Pollution and similar environmental risks generally are not fully insurable. See "Business and Properties -- Government Regulations." OUR FOREIGN OPERATIONS SUBJECT US TO ADDITIONAL RISKS Our ownership and operations in Thailand, Canada, and any other foreign areas where we may choose to do business, are subject to the various risks inherent in foreign operations. These risks may include the following: o currency restrictions and exchange rate fluctuations o loss of revenue, property and equipment due to expropriation, nationalization, war, insurrection and other political risks o risks of increases in taxes and governmental royalties o renegotiation of contracts with governmental entities and quasi-governmental agencies o changes in laws and policies governing operations of foreign-based companies o other uncertainties arising out of foreign government sovereignty o inability to fund foreign operations from the United States United States laws and policies on foreign trade, taxation and investment may also adversely affect international operations. In addition, if a dispute arises from foreign operations, foreign courts may have exclusive jurisdiction over the dispute, or we may not be able to subject foreign persons to the jurisdiction of United States courts. We seek to manage these risks by concentrating our international operations in areas where we believe that the existing government is stable and favorably disposed towards United States oil and gas companies. 19 21 WE FACE ADDITIONAL RISKS RELATED TO OUR OPERATIONS IN THE KINGDOM OF THAILAND Additional risks and uncertainties affect the marketing and sales of hydrocarbons from our Block B8/32 Concession located in the Gulf of Thailand (the "Thailand Concession"). We expect that all the natural gas we produce from the Thailand Concession will be sold to The Petroleum Authority of Thailand ("PTT"), which maintains a monopoly over gas transmission and distribution in Thailand. Two major natural gas pipelines owned and operated by PTT cross the Thailand Concession. These pipelines may become full due to production from the Tantawan Field, the Benchamas Field and other fields in the Gulf of Thailand. We cannot assure, even if we are successful in exploration efforts, that we will be able to successfully and profitably transport, process, refine and market the oil and gas we produce. PTT has constructed a lateral pipeline from its main pipeline to the Tantawan production area and has agreed to take the gas produced from that area pursuant to a gas sales agreement (the "Gas Sales Agreement"). If the Company and our joint venture partners in the Tantawan Field fail to deliver the required reserves or production rates of natural gas at a specified quality level under the Gas Sales Agreement, we may be obligated to contribute to PTT's costs for the construction of the lateral pipeline. Also, if the Tantawan joint venturers fail to deliver the minimum daily rates under the Gas Sales Agreement, PTT has the right to take from subsequent deliveries an amount equal to the quantity of undelivered gas at 75% of the contract price. Commencing on October 1, 1998, we and our joint venture partners have been delivering less natural gas than is being nominated by PTT under the Gas Sales Agreement. We have not been able to meet our contractual minimum delivery obligations for a number of reasons, including declining production from existing wells, the need to shut-in existing wells while drilling or working over additional wells from the same platform and our decision to emphasize oil and condensate production from the Tantawan Field. We anticipate that we will suffer a penalty on a portion of our future production. Thai governmental royalties, other governmental charges and income taxes also affect our operations cash flow. We expect all gas sales to be carried out in Baht, the Thai currency. Fluctuations in the exchange rate between Baht and dollars could also adversely affect the anticipated profits of our operations in Thailand. SOUTHEAST ASIA ECONOMIC ISSUES AFFECT US We conduct a substantial portion of our oil and gas production and sales in Southeast Asia. In recent months, Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties, including sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The Thailand government and other governments in the region are currently acting to address these issues. However, the economic difficulties in Thailand and the volatility of the Thai Baht against the U.S. dollar will continue to have a material impact on our Thailand operations and the prices we receive for our oil and gas production there. In early July 1997, the government of the Kingdom of Thailand announced that the value of the Baht would be set against the dollar and other currencies under a "managed float" program arrangement. This led to a substantial decline in value of the Thai Baht compared to the U.S. dollar, resulting in our experiencing foreign currency transaction losses during 1997. During 1998, the value of the Thai Baht has generally strengthened against the U.S. dollar, resulting in our experiencing foreign currency transaction gains. However, we cannot predict what the Thai Baht to dollar exchange rate may be in the future. Moreover, we anticipate that this exchange rate will remain volatile. LIQUIDITY AND CASH FLOW PROBLEMS OF OUR PARTNERS MAY AFFECT US Due to the recent decline in oil and gas prices, many of our partners, particularly the smaller ones, are experiencing liquidity and cash flow problems. These problems may lead to their attempting to delay or slow down the pace of drilling or project development in order to conserve cash, to a point that we believe is detrimental to the project. In most cases, we have the ability to influence the pace of development through our joint operating agreements. Some partners may be unwilling or unable to pay their share of the costs of projects as they become due. At worst, a partner may declare bankruptcy and refuse or be unable to pay its share of the costs of a project. We would then be required to pay this partner's share of the project costs. In most instances, we believe that we are contractually protected from such an event through our ability to take over the non-paying partner's share of the 20 22 project and by applicable oil and gas lien laws and bankruptcy laws. We believe that we would ultimately recover any sums that we are owed by non-paying partners that do not meet their share of the costs of a project in a timely fashion. Rutherford-Moran Oil Corporation ("RMOC"), the parent company of Thai Romo Ltd., one of the partners in our Thailand Concession, has been actively seeking a sale or merger for some time. RMOC recently announced that it has agreed to be acquired by Chevron Corporation ("Chevron"). The acquisition is subject to conditions, several of which are outside of RMOC's control. One of these conditions is that Chevron reach agreement with us on a new joint operating agreement that would include the transfer of operatorship on the Thailand concession from our subsidiary Thaipo to a subsidiary of Chevron. Although we have held discussions with Chevron on this subject, we do not know whether we can reach a mutually satisfactory agreement with Chevron. RMOC has also stated that its financial resources will be exhausted in February 1999, and that its banks have currently refused to lend it any additional funds. Chevron has agreed to lend additional funds to RMOC if most of the conditions to the acquisition have been satisfied, including Chevron's reaching agreement with us on a new joint operating agreement. Thai Romo's failure to pay its share of the expenses of our projects in the Gulf of Thailand could have a material adverse effect on us, due to the increased capital requirements that funding Thai Romo's share of the project development costs could have on us. WE HAVE YEAR 2000 RISKS Many existing computer programs and components were designed and developed to use a two-digit field to indicate the year in an applicable date field, which could result from the improper processing of dates for years after 1999. This issue is commonly known as the "Year 2000 Issue." The Year 2000 Issue is a broad business issue, which could effect financial and business applications as well as automated systems and instrumentation of ours and third parties with whom we do business. There can be no guarantee that third parties of business importance to us will successfully reprogram or replace, and test, all of their own computer hardware, software and process control systems to ensure such systems are Year 2000 ready. Failure by us, third parties of business importance to us and/or other constituents such as governments to become Year 2000 ready on a timely basis could have a material adverse effect on our financial position and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Other Matters; Year 2000 Readiness Disclosure." WE MAY NOT HAVE SUFFICIENT FUNDS TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL Should certain change of control events occur, each holder of the notes will have the right to require us, subject to certain conditions, to repurchase all or any part of that holder's notes at a price equal to 101% of the principal of those notes, plus accrued and unpaid interest, if any, to the date of repurchase. See "Description of the Notes -- Certain Covenants; Change of Control." Existing senior indebtedness under our bank credit agreement and certain other of our indebtedness include, and future indebtedness may include, change of control provisions. Under those provisions, should a specified change of control event occur, we would be required to repurchase, or the lender could demand the repayment of, that indebtedness. We would be required to make that repurchase or repayment of senior indebtedness before repurchasing the notes (or then outstanding indebtedness ranking equally with the notes that contains similar change of control provisions). The term "Change of Control" with respect to the notes is defined in the "Description of the Notes -- Certain Definitions" section of this prospectus. We cannot assure you that we will have sufficient funds available or could obtain the financing necessary to repurchase the notes and any other outstanding indebtedness that rank equally with or senior to the notes tendered by holders of those obligations following a change of control. If a change of control occurred and we did not have the funds or financing available to pay for the notes and any other indebtedness ranking equally with, or senior to, the notes that are tendered for repurchase, an event of default would be triggered under the indenture governing the notes and under such other outstanding indebtedness. Each of these defaults could have a material adverse consequence for us and the holders of the notes. 21 23 In addition, we have two other series of notes outstanding that contain change of control provisions that are similar to the change of control provisions contained in the notes. Consequently, an event triggering a change of control repurchase obligation under the notes may also trigger a change of control repurchase obligation under those other series of notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Also, the definition of change of control includes a phrase relating to the sale or other disposition of the our properties and assets "substantially as an entirety." Although there is a developing body of case law interpreting phrases such as "substantially as an entirety," there is no precise established definition of such phrases under applicable law. Accordingly, the ability of a holder of the notes to require us to repurchase its notes as a result of our sale or other disposition of less than all our properties and assets on a consolidated basis to another person or related group of persons may be uncertain. See "Description of the Notes -- Certain Covenants; Change of Control." FUTURE SUBSIDIARY GUARANTEES MAY BE AFFECTED BY FRAUDULENT CONVEYANCE LAWS None of our subsidiaries currently guarantee the notes. If our existing or future restricted subsidiaries guarantee any of our other indebtedness, they will be required by the terms of the indenture governing the notes to jointly and severally guarantee the notes on a senior subordinated basis. We do not intend to cause any of our subsidiaries to take any action that would require it to issue a guarantee of the notes. Various applicable fraudulent conveyance laws have been enacted for the protection of creditors. A court may use those laws to subordinate or avoid any guarantee of the notes issued by any of our subsidiaries. It is also possible that under certain circumstances a court could hold that the direct obligations of a subsidiary guaranteeing the notes could be superior to the obligations under that guarantee. A court could avoid or subordinate the guarantee of the notes by any of our subsidiaries in favor of that subsidiary's other debts or liabilities to the extent that the court determined either of the following were true at the time the subsidiary issued the guarantee: o that subsidiary incurred the guarantee with the intent to hinder, delay or defraud any of its present or future creditors or that such subsidiary contemplated insolvency with a design to favor one or more creditors to the total or partial exclusion of others; or o that subsidiary did not receive fair consideration or reasonably equivalent value for issuing the guarantee and, at the time it issued the guarantee, that subsidiary: -- was insolvent or rendered insolvent by reason of the issuance of the guarantee, -- was engaged or about to engage in a business or transaction for which the remaining assets of that subsidiary constituted unreasonably small capital, or -- intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured. Among other things, a legal challenge of a subsidiary's guarantee of the notes on fraudulent conveyance grounds may focus on the benefits, if any, realized by that subsidiary as a result of our issuance of the notes. To the extent a subsidiary's guarantee of the notes is avoided as a result of fraudulent conveyance or held unenforceable for any other reason, the note holders would cease to have any claim in respect of that guarantee and would be creditors solely of ours. THE ABSENCE OF A TRADING MARKET AND OTHER FACTORS MAY AFFECT THE LIQUIDITY OF THE NOTES The new notes will be new securities for which currently there is no trading market. We do not currently intend to apply for listing of the new notes on any securities exchange or stock market. Although the initial purchasers of the new notes have informed us that they currently intend to make a market in the new notes, they are not obligated to do so. Any such market making may be discontinued at any time without notice. The liquidity of any market for the new notes will depend on the number of holders of those notes, the interest of securities dealers in making a market in those securities and other factors. Accordingly, we cannot assure you as to the development or liquidity of 22 24 any market for the new notes. Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the new notes. We cannot assure you that the market, if any, for the new notes will be free from similar disruptions. Any such disruptions may adversely effect the new note holders. 23 25 PRIVATE PLACEMENT On January 15, 1999, the Company issued $150,000,000 principal amount of the outstanding notes to the initial purchasers of those notes (the "Initial Purchasers") at a price of 95.95% of the principal amount of those notes in a private transaction not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon Section 4(2) of the Securities Act. The Initial Purchasers then offered and resold the outstanding notes only to qualified institutional buyers at an initial price to such purchasers of 97.70% of the principal amount of those notes. We used the approximately $143,675,000 of proceeds (after deducting the Initial Purchasers' discounts and the expenses of that offering) to repay a portion of our outstanding Senior Indebtedness. USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of the new notes. In consideration for issuing the new notes, the Company will receive in exchange a like principal amount of outstanding notes. The outstanding notes surrendered in exchange for the new notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the new notes will not result in any change in the Company's capitalization. CAPITALIZATION The following table sets forth the unaudited consolidated debt and capitalization of the Company and its subsidiaries at September 30, 1998. The table has also been adjusted to reflect the issuance of the outstanding notes and the application of the net proceeds therefrom as described under "Use of Proceeds" assuming the outstanding notes sale had occurred on September 30, 1998. This table should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's Reports and incorporated by reference in this prospectus. See "Incorporation of Certain Documents by Reference."
SEPTEMBER 30, 1998 ------------------------ ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Long-term debt, including current portion: Credit Agreement indebtedness(a) $154,000 $ 10,325 Uncommitted credit line with bank 2,000 2,000 Banker's acceptance loans 10,854 10,854 10 3/8% Senior Subordinated Notes, due 2009 -- 150,000 8 3/4% Senior Subordinated Notes, due 2007 100,000 100,000 5 1/2% Convertible subordinated notes, due 2006 115,000 115,000 -------- -------- Total long-term debt 381,854 388,179 -------- -------- Shareholders' equity: Preferred stock, $1 par value; 2,000,000 shares authorized; no shares issued and outstanding -- -- Common Stock, $1 par value; 100,000,000 shares authorized; 40,119,250 shares issued 40,119 40,119 Additional capital 290,133 290,133 Retained earnings (deficit) (46,104) (46,104) Treasury stock, at cost; 15,575 shares; and other (324) (324) -------- -------- Total shareholders' equity 283,824 283,824 -------- -------- Total capitalization $665,678 $672,003 ======== ========
- ---------------- (a) As of December 31, 1998, the outstanding indebtedness under the Credit Agreement was $205,000,000. 24 26 SELECTED FINANCIAL DATA The selected financial data presented below as of, and for each of the years in the five-year period ended December 31, 1997, are derived from the consolidated financial statements of the Company and its subsidiaries, which have been audited by independent public accountants. The financial data as of, and for the nine month periods ended September 30, 1997 and 1998, are derived from the Company's unaudited financial statements which, in the opinion of management, include all adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations of the Company for each such interim period. This data should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
NINE MONTHS ENDED Year Ended December 31, SEPTEMBER 30, ----------------------------------------------------- ------------------ 1993 1994 1995 1996 1997 1997 1998(e) ---- ---- ---- ---- ---- ---- ------- (IN THOUSANDS, EXCEPT RATIOS AND UNIT AMOUNTS) (Unaudited) INCOME STATEMENT DATA: Revenue: Crude oil and condensate $ 64,042 $ 65,141 $ 76,557 $ 96,908 $ 112,603 $ 84,776 $ 59,276 Natural gas 66,173 99,093 72,032 94,589 158,500 116,117 91,411 Natural gas liquids 7,288 9,189 8,097 11,867 13,748 11,746 8,149 --------- --------- --------- --------- --------- --------- --------- Oil and gas revenues 137,503 173,423 156,686 203,364 284,851 212,639 158,836 Pipeline and other, net (950) 133 773 778 349 1,274 842 Interest on tax refund 2,322 -- -- -- -- -- -- Gains (losses) on sales 679 52 100 (165) 1,100 1,318 (106) --------- --------- --------- --------- --------- --------- --------- Total 139,554 173,608 157,559 203,977 286,300 215,231 159,572 --------- --------- --------- --------- --------- --------- --------- Operating costs and expenses: Lease operating 26,633 29,768 35,071 37,628 63,501 45,116 51,196 General and administrative 14,550 15,984 16,400 18,028 21,412 15,746 19,843 Exploration 2,455 5,257 7,468 16,777 10,530 7,823 7,260 Dry hole and impairment 4,690 7,088 6,703 8,579 9,631 6,926 7,906 Depreciation, depletion and amortization 40,693 63,308 68,489 61,857 103,157 75,989 83,739 --------- --------- --------- --------- --------- --------- --------- Total 89,021 121,405 134,131 142,869 208,231 151,600 169,944 --------- --------- --------- --------- --------- --------- --------- Operating income (loss) 50,533 52,203 23,428 61,108 78,069 63,631 (10,372) Interest charges (10,956) (10,104) (11,167) (13,203) (21,886) (15,771) (17,513) Interest income 14 53 26 232 453 271 534 Interest capitalized 451 739 1,834 4,244 6,175 3,463 6,540 Foreign currency translation gain (loss) -- -- -- -- (7,604) (6,522) 953 --------- --------- --------- --------- --------- --------- --------- Income (loss) before taxes and extraordinary items 40,042 42,891 14,121 52,381 55,207 45,072 (19,858) Income tax (expense) benefit (14,981) (15,517) (4,891) (18,800) (18,091) (15,694) 9,052 --------- --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary items 25,061 27,374 9,230 33,581 37,116 29,378 (10,806) Extraordinary loss -- (307) -- (821) -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss) $ 25,061 $ 27,067 $ 9,230 $ 32,760 $ 37,116 $ 29,378 $ (10,806) ========= ========= ========= ========= ========= ========= =========
25 27
OTHER FINANCIAL DATA: EBITDA(a) $95,930 $122,652 $98,646 $131,776 $183,706 $140,295 $82,760 Capital and exploration expenditures (excluding interest capitalized 74,600 120,800 110,400 206,200 259,500 165,000 121,800 SELECTED RATIOS: EBITDA/Net interest expense 9.1x 13.1x 10.6x 14.7x 11.7x 11.4x 7.5x Ratio of earnings to fixed charges(b) 4.5x 5.1x 2.1x 4.6x 3.2x 3.6x (c) Long-term obligations/EBITDA(d) 1.4x 1.2x 1.7x 1.9x 1.9x 2.4x 4.6x Long-term obligations/Total proved reserves (BOE) $ 1.95 $ 2.01 $ 1.63 $ 2.24 $ 2.78 n/a n/a
September 30, 1998(e) ----------------------------- Actual As Adjusted(f) ------ -------------- BALANCE SHEET DATA: Total assets $823,350 $829,675 Long-term obligations, including current portion 381,854 388,179 Total shareholders' equity 283,824 283,824
- --------------------- (a) EBITDA represents income from continuing operations before income taxes, interest expense, depreciation, depletion and amortization, and dry hole and impairment costs. EBITDA is presented as a measure of the Company's debt service ability, and not as an alternative to (i) operating income (as determined in accordance with generally accepted accounting principals) as an indicator of the Company's operating performance, or (ii) cash flows from operating activities (as determined in accordance with generally accepted accounting principals) as a measure of liquidity. (b) Pre-tax earnings plus total interest charges, including amortization of debt issue expenses, divided by total interest charges, including amortization of debt issue expenses. (c) For the nine-month period ended September 30, 1998, earnings were insufficient to cover fixed charges by $26.5 million. (d) Long-term obligations includes the current portion of long-term debt. (e) Includes the results of Arch from August 17, 1998, the effective date of its acquisition by the Company. The acquisition was accounted for using the purchase method. (f) Adjusted to give effect to the sale of the outstanding notes and the application of the net proceeds from that sale as if it had occurred on September 30, 1998. 26 28 SELECTED RESERVE AND OPERATING DATA The selected reserve and operating data presented below under the captions "Production (Sales) Data" as of, and for each of the years in the five-year period ended, December 31, 1997, and for the nine month periods ended September 30, 1997, and 1998, is unaudited and should be read in conjunction with the consolidated financial statements and related notes thereto and "Business and Properties -- Exploration and Production Data; Production and Sales" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The reserve information presented under the caption "Reserve Data" as of, and for each of the years in the five-year period ended, December 31, 1997 has been derived from the summary reserve report prepared by Ryder Scott and should be read in conjunction with the notes to the Company's consolidated financial statements and "Business and Properties -- Exploration and Production Data; Reserves." The data included in the Reports is incorporated in this prospectus by reference. See "Incorporation of Certain Documents by Reference."
NINE MONTHS ENDED Year Ended December 31, SEPTEMBER 30, -------------------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT UNIT AMOUNTS) PRODUCTION (SALES) DATA: Net daily average and weighted average price: Natural gas: Mcf per day 91,700 144,800 121,000 107,700 181,700 184,500 164,400 Price per Mcf $ 1.98 $ 1.88 $ 1.63 $ 2.40 $ 2.39 $ 2.31 $ 2.04 Crude oil and condensate: Bbls per day 9,851 11,100 11,786 11,968 15,927 15,856 16,090 Price per Bbl $ 17.81 $ 16.08 $ 17.80 $ 22.12 $ 19.37 $ 19.52 $ 13.49 Natural gas liquids: Bbls per day 1,678 2,222 1,998 2,173 2,923 3,424 2,768 Price per Bbl $ 11.90 $ 11.33 $ 11.10 $ 14.92 $ 12.89 $ 12.57 $ 10.78 RESERVE DATA(A)(D): Estimated proved reserves: Crude oil, condensate and natural gas liquids (MBbls) 28,268 33,862 45,182 49,602 58,164 -- -- Natural gas (MMcf) 232,866 242,890 328,061 360,944 401,488 -- -- Natural gas equivalents (MMcfe) 402,474 446,062 599,153 658,556 750,472 -- -- Estimated future net revenues before income taxes, discounted at 10%(b)(c) $403,840 $382,980 $532,475 $954,545 $462,781 -- -- Estimated future net revenues after income taxes, discounted at 10%(b) $300,260 $290,069 $377,145 $686,040 $349,465 -- --
(a) Proved reserves were estimated in accordance with SEC guidelines using oil and gas prices and production and development costs as of December 31 of each such year. These amounts exclude Arch's proved reserves. See "Business and Properties -- Arch and its Subsidiaries; Oil and Gas Reserves." (b) These values were estimated in accordance with SEC guidelines. See "Business and Properties -- Exploration and Production Data; Reserves." 27 29 (c) Based on assumed Company-wide flat prices of $12.00 per Bbl for oil and condensate and $2.00 per Mcf for gas, the Company's reservoir engineers estimate that the present value of future net revenues before income taxes, discounted at 10%, of the Company's proved reserves would have been approximately $254,599,000 at December 31, 1997. This calculation represents an internal Company estimate, is presented for information purposes and has not been calculated entirely in accordance with SEC guidelines. (d) On a pro forma basis, giving effect to the Company's merger with Arch as if it had occurred on December 31, 1997, and using SEC pricing in effect on that date, the Company's estimated proved reserves of: (i) crude oil, condensate and natural gas liquids would have been 64,045 MBbls; (ii) natural gas would have been 478,373 MMcf; (iii) natural gas equivalents would have been 862,643 MMcfe; and estimated future net revenues before income taxes discounted at 10% would have been $528,745,000. Based on assumed Company-wide flat prices of $12.00 per Bbl for oil and condensate and $2.00 per Mcf for gas, the Company's reservoir engineers estimate that the present value of future net revenues before income taxes, discounted at 10%, of our proved reserves would have been approximately $305,806,000 at December 31, 1997 if Arch's reserves were included as of that date. 28 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's acquisition of Arch was initially accounted for as a pooling of interests which requires the financial results for all periods prior to the acquisition to be combined and restated as if the Company and Arch had always been combined. The Company then restated its consolidated financial statements for periods prior to the merger, including the first nine months of 1997 and the first nine months of 1998, to reflect the combined results of both the Company and Arch. A report on Form 10-Q for the quarter ended September 30, 1998 was filed on that basis. The Company recently concluded that, as a result of the current environment of low crude oil and natural gas prices, the Company must maintain maximum flexibility to address its cash flow needs, including the option of selling certain of the Company's assets. Under the current application of accounting principles, such transactions would preclude the pooling of interests method of accounting and require that the Company account for the acquisition using the purchase method of accounting. Consequently, on December 24, 1998, the Company filed an amended report on Form 10-Q for the quarter ended September 30, 1998, primarily for the purpose of restating the financial statements contained in such report and to make conforming changes to "Management's Discussion and Analysis of Financial Condition and Results of Operations" to reflect the change from the pooling method of accounting to the purchase method of accounting for the Arch acquisition. See "Incorporation of Certain Documents by Reference." NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1997 RESULTS OF OPERATIONS Net Income (Loss) For the first nine months of 1998, the Company reported a net loss of $10,806,000 or $0.29 per share (on both a basic and a diluted basis) compared to net income for the first nine months of 1997 of $29,378,000 or $0.88 per share ($31,689,000 or $0.83 on a diluted basis). Among other items affecting net income for the first nine months of 1998, were non-recurring expenses totaling approximately $2,285,000 ($1,485,000 or $0.04 per share on an after-tax basis), related to the Company's acquisition of Arch. Earnings per share are based on the weighted average number of common shares outstanding for the first nine months of 1998 of 37,171,000, compared to 33,374,000 for the first nine months of 1997. The increase in the weighted average number of common shares outstanding for the 1998 period, compared to the 1997 period, resulted primarily from the issuance of 3,882,023 shares of its common stock upon the conversion of the Company's 5 1/2% Convertible Subordinated Notes due 2004 (the "2004 Notes") prior to their being redeemed on March 16, 1998, the issuance as of August 17, 1998, of approximately 2,540,000 shares of common stock to former holders of Arch capital stock and convertible debt securities in connection with the Company's acquisition of Arch and, to a lesser extent, the issuance of common stock upon the exercise of stock options pursuant to the Company's stock option plans. The earnings per share computation on a diluted basis in the 1998 period is identical to the basic earnings per share computation because there were no securities of the Company that were dilutive during the period. The earnings per share computation on a diluted basis in the 1997 period primarily reflects additional shares of common stock issuable upon the assumed conversion of the 2004 Notes and the elimination of related interest requirements, as adjusted for applicable federal income taxes and, to a lesser extent, the assumed exercise of options to purchase common shares. The weighted average number of common shares outstanding on a diluted basis for the first nine months of 1997 were 38,064,000. Total Revenues The Company's total revenues for the first nine months of 1998 were $159,572,000, a decrease of approximately 26% compared to total revenues of $215,231,000 for the first nine months of 1997. The decrease in the Company's total revenues for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from decreases in revenue from the Company's oil and gas operations and, to a lesser extent, a decline in revenue from the 29 31 sale of non-strategic properties, pipeline sales revenues and other miscellaneous items. Total revenues for the first nine months of 1998 reflect the inclusion of pipeline revenues from Saginaw Pipeline, L.C. and its marketing subsidiary, Industrial Natural Gas, L.C., which the Company acquired through its acquisition of Arch on August 17, 1998. Total revenues for the first nine months of 1997 include a net gain of $1,459,000 on the sale of a compressor by the Company during the first half of 1997. Oil And Gas Revenues The following table reflects an analysis of differences in the Company's oil and gas revenues (expressed in thousands of dollars) between the first nine months of 1998 and the same period in the preceding year.
9 MONTHS 1998 COMPARED TO 9 MONTHS 1997 ------------- Increase (decrease) in oil and gas revenues resulting from differences in: NATURAL GAS -- Price...................................................................... $(13,598) Production................................................................. (11,108) -------- (24,706) CRUDE OIL AND CONDENSATE -- Price...................................................................... (26,366) Production................................................................. 866 -------- (25,500) NGL--......................................................................... (3,597) -------- Increase (decrease) in oil and gas revenues................................ $(53,803) ========
Prices and production volumes attributable to the Company's operations in Canada are included in the Company's domestic oil and gas prices and production volumes. This information is not presented separately because the Company does not believe that such information is material to an understanding of the Company's results of operations for the period presented due to the relatively small portion of the Company's oil and gas revenues which were attributable to such operations during the applicable periods. NATURAL GAS PRICES. Prices that the Company received for its natural gas production during the first nine months of 1998 averaged $2.04 per Mcf, a decrease of approximately 12% from an average price of $2.31 per Mcf that the Company received for its natural gas production during the first nine months of 1997. Domestic Prices. Prices that the Company received for its domestic natural gas production during the first nine months of 1998 averaged $2.13 per Mcf, a decrease of approximately 10% from an average price of $2.37 per Mcf that the Company received for its domestic natural gas production during the first nine months of 1997. Thailand Prices. The Company's Tantawan Field located in the Kingdom of Thailand commenced production of natural gas and liquid hydrocarbons in February 1997. During the first nine months of 1998, the prices that the Company received under its long term gas sales contract for natural gas production from the Tantawan Field averaged approximately 74 Thai Baht per Mcf. Based on the Thai Baht to U.S. dollar exchange rates in effect at the time that such production was recorded on the Company's financial statements, the average price in U.S. dollars that the Company recorded during the first nine months of 1998 for such production was approximately $1.73 per Mcf, a decrease of approximately 14% from an average price of $2.00 per Mcf that the Company recorded in the first nine months of 1997. The price that the Company receives under its Gas Sales Agreement normally adjusts on a semi-annual basis. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. Due to the volatility of the Thai Baht and the current economic difficulties in the Kingdom of Thailand and throughout Southeast Asia, the price that the Company received under the Gas Sales Agreement was adjusted several times during the first nine months of 1998. See "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." The Company cannot predict what the Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. See "; Foreign Currency 30 32 Transaction Gain (Loss)", "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues" and "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." NATURAL GAS PRODUCTION. The Company's total natural gas production during the first nine months of 1998 averaged 164.4 MMcf per day, a decrease of approximately 11% from an average of 184.5 MMcf per day that the Company produced during the first nine months of 1997. Domestic Production. The decrease in the Company's natural gas production during the first nine months of 1998, compared to the first nine months of 1997, was related in large measure to decreased production from the Company's East Cameron Block 334 "E" platform, and to a lesser extent, three periods in the third quarter of 1998 during which most of the Company's offshore production was shut-in as a precautionary measure due to hurricanes in the Gulf of Mexico and natural production declines, that was partially offset by increased production from the Company's onshore properties located in South Texas and South Louisiana. As of December 31, 1998, the Company was not a party to any future natural gas sales contracts. Thailand Production. The Company's share of natural gas production from the Tantawan Field during the first nine months of 1998 averaged 38.9 MMcf per day, an increase of approximately 21% from an average of 32.1 MMcf per day that the Company produced during the first nine months of 1997. The increase in the Company's average daily natural gas production from the Tantawan Field during the first nine months of 1998, compared to the first nine months of 1997, reflects the fact that production from the Tantawan Field did not commence until early in February 1997 and did not achieve sustained commercial production rates until March 15, 1997. Commencing on October 1, 1998, the Company and its joint venture partners have been delivering less natural gas than is being nominated by PTT under the Gas Sales Agreement. This could result in the Company receiving only 75% of the current contract price on a portion of its future natural gas sales to PTT. The Company is taking actions that it currently believes will minimize the penalty that it will incur on future gas sales to PTT by, among other things, increasing production from the Tantawan Field. CRUDE OIL AND CONDENSATE PRICES. Prices that the Company received for its crude oil and condensate production during the first nine months of 1998 averaged $13.49 per Bbl, a decrease of approximately 31% from an average price of $19.58 per Bbl that the Company received during the first nine months of 1997. Domestic Prices. Prices that the Company received for its domestic crude oil and condensate production during the first nine months of 1998 averaged $13.44 per Bbl, a decrease of approximately 32% from an average price of $19.69 per Bbl that the Company received during the first nine months of 1997. Thailand Prices. Since the inception of production from the Tantawan Field, crude oil and condensate have been stored in a Floating Production, Storage and Offloading System (the "FPSO") until an economic quantity is accumulated for offloading and sale. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. The price that the Company recorded for its crude oil and condensate production stored on the FPSO for the first nine months of 1998 was $13.72 per Bbl, a decrease of approximately 27% from the price of $18.84 per Bbl that was recorded for the first nine months of 1997. Prices that the Company receives for its crude oil and condensate production from Thailand are based on world benchmark prices, which are denominated in dollars. In addition, the Company is generally paid for its crude oil and condensate production from Thailand in U.S. dollars. CRUDE OIL AND CONDENSATE PRODUCTION. The Company's total crude oil and condensate production during the first nine months of 1998 averaged 16,090 Bbls per day, an increase of approximately 1% from an average of 15,856 Bbls per day during the first nine months of 1997. Domestic Production. The Company's domestic crude oil and condensate production during the first nine months of 1998 averaged 13,317 Bbls per day, a decrease of approximately 4% from an average of 13,927 Bbls per day during the first nine months of 1997. The decrease in the Company's domestic crude oil and condensate production during the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from a decrease 31 33 in condensate production from the Company's East Cameron Block 334 "E" platform, which was in part due to damage sustained in a marine accident at the crude oil and condensate pipeline from the platform, that was only partially offset by increased production from the Company's ongoing development drilling and workover programs in the offshore and onshore Gulf of Mexico regions. As of December 31, 1998, the Company was not a party to any crude oil swaps or futures contracts. Thailand Production. The Company's share of crude oil and condensate production from the Tantawan Field during the first nine months of 1998 averaged 2,773 Bbls per day, an increase of approximately 44% from an average of 1,930 Bbls per day during the first nine months of 1997. The increase in the Company's average daily crude oil and condensate production from the Tantawan Field during the first nine months of 1998, compared to the first nine months of 1997, primarily reflects the fact that production from the Tantawan Field did not commence until early in February 1997 and did not achieve sustained commercial production rates until March 15, 1997. NGL PRODUCTION. The Company's oil and gas revenues, and its total liquid hydrocarbon production volumes, reflect the production and sale by the Company. The Company's NGL revenues for the first nine months of 1998 decreased $3,597,000, from the first nine months of 1997. The decrease in the Company's NGL for the first nine months of 1998, compared to the first nine months of 1997, was related to both a decrease in NGL production volumes from the Company's domestic offshore properties and a decrease in the price that the Company received for its NGL production volumes. TOTAL LIQUID HYDROCARBON PRODUCTION. The Company's average liquid hydrocarbon production during the first nine months of 1998 was 18,858 Bbls per day, a decrease of approximately 2% from an average liquid hydrocarbon production of 19,280 Bbls per day during the first nine months of 1997. Lease Operating Expenses Company-wide lease operating expenses for the first nine months of 1998 were $51,196,000, an increase of approximately 13% from lease operating expenses of $45,116,000 for the first nine months of 1997. A discussion of lease operating expenses attributable to the Company's operations in Canada is included in the Company's domestic lease operating expenses. The information is not presented separately because the Company does not believe that such information is material to an understanding of the Company's results of operations for the periods presented due to the relatively small portion of the Company's lease operating expenses which were attributable to such operations during the applicable periods. DOMESTIC LEASE OPERATING EXPENSES. The Company's domestic lease operating expenses for the first nine months of 1998 were $35,249,000, an increase of approximately 11% from domestic lease operating expenses of $31,802,000 for the first nine months of 1997. The increase in domestic lease operating expenses for the first nine months of 1998, compared to the first nine months of 1997, were affected by a non-recurring maintenance project on the Company's East Cameron 334 "E" platform during the first quarter of 1998 and by expenses related to purchasing natural gas for transportation and subsequent resale on the pipeline system acquired in the merger with Arch, operating expenses related to the pipeline system for which no corresponding expenses were recorded during the first nine months of 1997. In addition, lease operating expenses for the first nine months of 1997 were reduced by a $954,000 refund in connection with the Company's audit of a joint venture partner, for which no corresponding refund of a similar magnitude was obtained in the first nine months of 1998. THAILAND LEASE OPERATING EXPENSES. The Company's lease operating expenses in the Kingdom of Thailand for the first nine months of 1998 were $15,947,000, an increase of approximately 20% from lease operating expenses of $13,314,000 for the first nine months of 1997. The increase in lease operating expenses in the Kingdom of Thailand for the first nine months of 1998, compared to the first nine months of 1997, was primarily related to the fact that prior to the commencement of production in the Tantawan Field on February 1, 1997, no lease operating expenses were incurred by the Company in Thailand. Consequently, the Company does not believe that a comparison of lease operating expenses in the Kingdom of Thailand between the first nine months of 1998 and the first nine months of 1997 is meaningful. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand 32 34 relate to lease payments made by Tantawan Services, L.C., in connection with its bareboat charter of the FPSO, which amounted to $8,318,000 and $7,404,000 (net to the Company's interest) for the first nine months of 1998 and 1997, respectively. See "-- Liquidity and Capital Resources; Capital Requirements; Other Material Long-Term Commitments." General and Administrative Expenses General and administrative expenses for the first nine months of 1998 were $19,843,000, an increase of approximately 26% from general and administrative expenses of $15,746,000 for the first nine months of 1997. The increase in general and administrative expenses for the first nine months of 1998, compared with the first nine months of 1997, was primarily related to a number of non-recurring expenses arising in connection with the Company's acquisition of Arch totaling approximately $2,285,000, that included severance payments to former officers and employees of Arch. In addition, the increase in general and administrative expense was attributable, in part, to an increase in the size of the Company's work force and normal salary and concomitant benefit expense adjustments. Exploration Expenses Exploration expenses consist primarily of rental payments required under oil and gas leases to hold non-producing properties ("delay rentals") and geological and geophysical costs which are expensed as incurred. Exploration expenses for the first nine months of 1998 were $7,260,000, a decrease of approximately 7% from exploration expenses of $7,823,000 for the first nine months of 1997. The decreases in exploration expenses for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from decreased geophysical activity in the Gulf of Mexico and West Texas, and a decrease in delay rental payments, that were partially offset, during the comparable nine month periods, by increased geophysical activity by the Company in East Texas, South Louisiana and in the Gulf of Thailand. Dry Hole and Impairment Expenses Dry hole and impairment expenses relate to costs of unsuccessful wells drilled, along with impairments due to decreases in expected reserves from producing wells. The Company's dry hole and impairment expenses for the first nine months of 1998 were $7,906,000, an increase of approximately 14% from dry hole and impairment expenses of $6,926,000 for the first nine months of 1997. Depreciation, Depletion and Amortization Expenses The Company accounts for its oil and gas activities using the successful efforts method of accounting. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization ("DD&A") is based on the capitalized costs, as determined in the preceding paragraph, plus future costs to abandon offshore wells and platforms, and is determined on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States. The Company's DD&A expense for the first nine months of 1998 was $83,739,000, an increase of approximately 10% from DD&A expense of $75,989,000 for the first nine months of 1997. The increases in DD&A expense for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an 33 35 increase in the Company's composite DD&A rate that was only partially offset by a decrease in production of oil and natural gas. The composite DD&A rate for all of the Company's producing fields for the first nine months of 1998 was $1.09 per equivalent Mcf ($6.54 per equivalent Bbl), an increase of approximately 20% from a composite DD&A rate of $0.91 per equivalent Mcf ($5.46 per equivalent Bbl) for the first nine months of 1997. The increase in the composite DD&A rate for all of the Company's producing fields for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. The Company produced 75,781,000 equivalent Mcf (12,630,000 equivalent Bbls) during the first nine months of 1998, a decrease of approximately 8% from the 82,036,000 equivalent Mcf (13,673,000 equivalent Bbls) produced by the Company during the first nine months of 1997. Interest INTEREST CHARGES. Interest charges incurred by the Company for the first nine months of 1998 were $17,513,000, an increase of approximately 11% from interest charges of $15,771,000 for the first nine months of 1997. The increase in interest charges for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an increase in the average amount of debt outstanding and, to a lesser extent, the average interest rate charged on the Company's outstanding debt. As of December 31, 1998, the Company was not a party to any interest rate swap agreements. CAPITALIZED INTEREST. Capitalized interest expense for the first nine months of 1998 was $6,540,000, an increase of approximately 89% from capitalized interest expense of $3,463,000 for the first nine months of 1997. The increase in capitalized interest for the first nine months of 1998, compared to the first nine months of 1997, resulted primarily from an increase in the amount of capital expenditures subject to interest capitalization during the first nine months of 1998 ($122,414,000), compared to the first nine months of 1997 ($73,086,000), and from an increase in the computed rate that the Company uses to apply on such capital expenditures to arrive at the total amount of capitalized interest. A substantial percentage of the Company's capitalized interest expense during the latter half of 1997 and the first nine months of 1998 resulted from capitalization of interest related to such capital expenditures for the development of the Benchamas Field in the Gulf of Thailand and, to a lesser extent, several development projects in the Gulf of Mexico. Foreign Currency Transaction Gain (Loss) The Company experienced a foreign currency transaction gain of $953,000 during the first nine months of 1998, compared to a foreign currency transaction loss of $6,522,000 during the first nine months of 1997. The foreign currency transaction gain and loss each resulted primarily from the fluctuation against the U.S. dollar of cash and other monetary assets and liabilities denominated in Thai Baht that were on the Company's subsidiary's financial statements during the respective periods and, to a much lesser extent, the fluctuation of the Canadian dollar against the U.S. dollar. In early July 1997, the government of the Kingdom of Thailand announced that the value of the Baht would be set against the dollar and other currencies under a "managed float" program arrangement. This led to a substantial decline in value of the Thai Baht compared to the U.S. dollar, resulting in the foreign currency transaction losses during the 1997 periods presented. During the 1998 periods presented, the value of the Thai Baht has generally strengthened against the U.S. dollar, resulting in corresponding foreign currency transaction gains. However, the Company cannot predict what the Thai Baht to dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. As of December 31, 1998, the Company was not a party to any financial instrument that was intended to constitute a foreign currency hedging arrangement. 34 36 Income Tax Benefit (Expense) The Company experienced an income tax benefit for the first nine months of 1998 of $9,052,000, compared to income tax expense of $15,694,000 for the first nine months of 1997. The income tax benefit for the first nine months of 1998, compared to the income tax expense for the first nine months of 1997, resulted primarily from a pre-tax loss resulting from substantially lower revenues in the United States and the tax benefit of accrued foreign losses from the Company's operations in the Kingdom of Thailand. YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEARS ENDED DECEMBER 31, 1996 AND 1995, RESPECTIVELY RESULTS OF OPERATIONS Net income The Company reported net income for 1997 of $37,116,000 or $1.11 per share ($40,198,000 or $1.06 per share on a diluted basis) compared to net income for 1996 of $32,760,000 or $0.99 per share ($35,843,000 or $0.95 per share on a diluted basis)and net income for 1995 of $9,230,000 or $0.28 per share (on both a basic and a diluted basis). The Company recorded an extraordinary loss of $821,000 during the second quarter of 1996 related to the early retirement of the Company's 8% Convertible Subordinated Debentures, due 2005 with the proceeds from the Company's issuance on June 18, 1996, of its 5 1/2% Convertible Subordinated Notes, due 2006 (the "2006 Notes"). Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding for 1997 of 33,421,000 (38,064,000 on a diluted basis), compared to 33,203,000 (37,920,000 on a diluted basis) for 1996 and 32,893,000 (33,490,000 on a diluted basis) for 1995. The yearly increases in the weighted average number of common shares outstanding resulted primarily from the issuance of shares of Common Stock upon the exercise of stock options pursuant to the Company's stock option plans. Earnings per common share computations on a diluted basis primarily reflect additional common shares issuable upon the assumed conversion of the 2004 Notes in 1996 and 1997 (the only convertible securities of the Company that were dilutive during the applicable periods) and the elimination of related interest requirements, as adjusted for applicable federal income taxes. In addition, the number of common shares outstanding in the diluted computation is adjusted, in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128 ("SFAS 128"), to include dilutive shares that are assumed to have been issued by the Company in connection with options exercised during the year, less treasury shares that are assumed to have been purchased by the Company from the option proceeds. SFAS 128 was adopted by the Company in 1997, resulting in a restatement of the earnings per share calculations for 1996 and 1995, and all preceding years. Total Revenues The Company's total revenues for 1997 were $286,300,000, an increase of approximately 40% from total revenues of $203,977,000 for 1996, and an increase of approximately 82% from total revenues of $157,559,000 for 1995. The increase in the Company's total revenues for 1997, compared to 1996, resulted primarily from the substantial increase in the Company's natural gas and liquid hydrocarbon (including crude oil, condensate and NGL) production, which was only partially offset by a decline in the average price that the Company received for its liquid hydrocarbon production and, to a much lesser extent, the average price that the Company received for its natural gas production. The increase in the Company's total revenues for 1997, compared to 1995, resulted primarily from the substantial increases in the Company's natural gas production, the average price that the Company received for its natural gas production, the Company's liquid hydrocarbon production and, to a lesser extent, the average price that the Company received for its liquid hydrocarbon production. Oil and Gas Revenues The Company's oil and gas revenues for 1997 were $285,200,000, an increase of approximately 40% from oil and gas revenues of $204,142,000 for 1996, and an increase of approximately 81% from oil and gas revenues of 35 37 $157,459,000 for 1995. The following table reflects an analysis of variances in the Company's oil and gas revenues (expressed in thousands) between 1997 and the previous two years:
1997 COMPARED TO ---------------------- 1996 1995 -------- -------- Increase (decrease) in oil and gas revenues resulting from variances in: NATURAL GAS -- Price................................................ $ (394) $ 33,466 Production........................................... 64,305 53,002 -------- -------- 63,911 86,468 CRUDE OIL AND CONDENSATE -- Price................................................ (12,064) 6,767 Production........................................... 27,759 29,279 -------- -------- 15,695 36,046 NGL AND OTHER, NET --................................... 1,452 5,227 -------- -------- Increase in oil and gas revenues..................... $ 81,058 $127,741 ======== ========
NATURAL GAS PRICES. Prices per Mcf that the Company received for its natural gas production during 1997 averaged $2.39 per Mcf. The average price that the Company received for its natural gas production in 1997 was approximately equal to the average price that the Company had received during 1996 of $2.40 per Mcf, but was a substantial increase (of approximately 47%) from the average price of $1.63 that it received during 1995. Domestic Prices. Prices that the Company received for its domestic natural gas production during 1997 averaged $2.50 per Mcf, an increase of approximately 4% from an average price of $2.40 per Mcf that the Company received for its domestic natural gas production during 1996, and an increase of approximately 53% from an average price of $1.63 that the Company received for its natural gas production during 1995. Thailand Prices. The Company's Tantawan Field located in the Kingdom of Thailand commenced production of natural gas and liquid hydrocarbons in February 1997. During 1997, the price that the Company received under the Gas Sales Agreement averaged approximately 60 Thai Baht per Mcf. The price that the Company receives under the Gas Sales Agreement would normally adjust on a semi-annual basis. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. See "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." Due to the volatility of the Thai Baht and the current economic difficulties in the Kingdom of Thailand and throughout Southeast Asia, the price that the Company receives under the Gas Sales Agreement has been adjusted on almost a monthly basis since July 1997. As a result of these adjustments, during December 1997 the price that the Company received under the Gas Sales Agreement for its production from the Thailand Concession averaged approximately 68 Thai Baht per Mcf. However, the increases that the Company received during 1997 in the Thai Baht price for its natural gas production from the Thailand Concession were not sufficient to completely ameliorate, in U.S. dollar terms, the decline of the Thai Baht against the U.S. dollar. The Company cannot predict when, if ever, the adjustments provided for in the Gas Sales Agreement will completely recompense the Company for the decline of the Thai Baht against the U.S. dollar. See ";Foreign Currency Transaction Loss," "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues" and "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession." NATURAL GAS PRODUCTION. The Company's natural gas production for 1997 averaged 181.7 MMcf per day, an increase of approximately 69% from average production of 107.7 MMcf per day during 1996, and an increase of approximately 50% from average production of 121 MMcf per day during 1995. 36 38 Domestic Production. The Company's domestic natural gas production for 1997 averaged 147.2 MMcf per day, an increase of approximately 37% from average production of 107.7 MMcf per day during 1996, and an increase of approximately 22% from average production of 121 MMcf per day during 1995. The increase in the Company's average domestic natural gas production for 1997, compared to 1996 and 1995, was related in large measure to production from the Company's East Cameron Block 334 "E" platform, which commenced production in April 1997, and, to a lesser extent, the results of successful drilling in the Company's Lopeno Field in South Texas and its Eugene Island Block 261 field, that was only partially offset by the anticipated natural decline in deliverability from certain of the Company's properties. Thailand Production. The Company commenced production from its Tantawan Field early in February 1997. Following a field startup phase which ended on March 15, 1997, production from the Tantawan Field stabilized. During 1997, the Company's share of natural gas production from the Tantawan Field averaged approximately 37.7 MMcf per day. CRUDE OIL AND CONDENSATE PRICES. Prices received by the Company for its crude oil and condensate production averaged $19.37 per Bbl during 1997, a decrease of approximately 12% compared to an average of $22.12 per Bbl during 1996, and an increase of approximately 9% compared to an average price of $17.80 per Bbl that the Company received during 1995. Domestic Prices. Prices that the Company received for its domestic crude oil and condensate production during 1997 averaged $19.49 per Bbl, a decrease of approximately 12% from an average price of $22.12 per Bbl that the Company received for its domestic crude oil and condensate production during 1996, and an increase of approximately 9% from an average price of $17.80 per Bbl that the Company received for its crude oil and condensate production during 1995. Thailand Prices. Since the inception of production from the Tantawan Field, crude oil and condensate has been stored on the FPSO until an economic quantity was accumulated for offloading and sale. The first such sale of crude oil and condensate from the Tantawan Field occurred in July 1997. The average price that the Company recorded for its crude oil and condensate production stored on the FPSO during 1997 was $18.60 per Bbl. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are generally paid in U.S. dollars. CRUDE OIL AND CONDENSATE PRODUCTION. The Company's crude oil and condensate production for 1997 averaged 15,927 Bbls per day, an increase of approximately 33% from 11,968 Bbls per day for 1996, and an increase of approximately 35% from 11,786 Bbls per day for 1995. Domestic Production. The Company's domestic crude oil and condensate production for 1997 averaged 13,711 Bbls per day, an increase of approximately 15% from 11,968 Bbls per day for 1996, and an increase of approximately 16% from 11,786 Bbls per day for 1995. The increase in the Company's crude oil and condensate production for 1997, compared to 1996 and 1995, resulted primarily from increased condensate production from wells located in the Gulf of Mexico and, to a lesser extent, increased crude oil production from certain of the Company's onshore properties, which was only partially offset by the natural decline in deliverability from certain of the Company's more mature properties. Thailand Production. The Company commenced production from its Tantawan Field early in February 1997. Following a field startup phase which ended on March 15, 1997, production from the Tantawan Field stabilized. During 1997, the Company's share of crude oil and condensate production from the Tantawan Field averaged approximately 2,216 Bbls per day. NGL PRODUCTION AND "OTHER" NET REVENUE ITEMS. The Company's oil and gas revenues, and its total liquid hydrocarbon production, reflect the production and sale by the Company of NGL, which are liquid products that are extracted from natural gas production. In addition, the Company's oil and gas revenues for 1997, 1996 and 1995 also reflect adjustments for various miscellaneous items. The Company's NGL and other, net revenues for 1997 37 39 increased $1,452,000 from those reported in 1996, and $5,227,000 from those reported in 1995. The increase in NGL and other, net revenues in 1997, compared with 1996, primarily related to an increase in the Company's NGL production that was partially offset by a decrease in the average price that the Company received for such NGL production. The increase in NGL and other, net revenues in 1997, compared with 1995, primarily related to an increase in the Company's NGL production and, to a lesser extent, an increase in the price that the Company received for its NGL production. TOTAL LIQUID HYDROCARBON PRODUCTION. The Company's average liquid hydrocarbon (including crude oil, condensate and NGL) production during 1997 was 18,851 Bbls per day, an increase of approximately 33% from an average total liquids production of 14,141 Bbls per day for 1996, and an increase of approximately 37% from an average total liquids production of 13,784 Bbls per day for 1995. Lease Operating Expenses Lease operating expenses for 1997 were $63,501,000, an increase of approximately 69% from lease operating expenses of $37,628,000 for 1996, and an increase of approximately 81% from lease operating expenses of $35,071,000 for 1995. DOMESTIC LEASE OPERATING EXPENSES. The Company's domestic lease operating expenses for 1997 were $43,934,000, an increase of approximately 17% from domestic lease operating expenses of $37,628,000 for 1996, and an increase of approximately 25% from domestic lease operating expenses of $35,071,000 for 1995. The increase in domestic lease operating expenses for 1997, compared to 1996 and 1995, resulted primarily from increased costs to the Company (and the entire offshore oil industry) because of a shortage of qualified offshore service contractors, which permitted such contractors to increase the costs of their services significantly during 1997, increased expenses related to the leasing of certain equipment in the Gulf of Mexico, a year to year increase in the level of the Company's operating activities, including increased operating costs related to additional properties brought on production and an increased ownership interest in certain properties as a result of the acquisition of such interests. THAILAND LEASE OPERATING EXPENSES. The Company's lease operating expenses in Thailand for 1997 were $19,567,000. Prior to the commencement of production in the Tantawan Field on February 1, 1997, there were no lease operating expenses incurred by the Company in Thailand. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter of the FPSO, which amounted to $10,200,000 during 1997. See " -- Liquidity and Capital Resources; Capital Requirements; Other Material Long-Term Commitments." General and Administrative Expenses General and administrative expenses for 1997 were $21,412,000, an increase of approximately 19% from general and administrative expenses of $18,028,000 for 1996, and an increase of approximately 31% from general and administrative expenses of $16,400,000 for 1995. The increase in general and administrative expenses for 1997, compared to 1996 and 1995, was primarily related to salary and benefit expenses incurred in connection with the increase in the Company's work force in its Bangkok, Thailand office as a result of the Company's increased activities there. Exploration Expenses Exploration expenses for 1997 were $10,530,000, a decrease of approximately 37% from exploration expenses of $16,777,000 for 1996, and an increase of approximately 41% from exploration expenses of $7,468,000 for 1995. The decrease in exploration expenses for 1997, compared to 1996, resulted primarily from the incurrence of costs associated with conducting several 3-D seismic surveys by the Company on its leases in South Louisiana, East Texas and the Permian Basin during 1996 for which no similar costs of their magnitude were incurred during the comparative periods, although such costs were partially offset in 1997 by the costs associated with conducting the 38 40 Jarmjuree 3-D seismic survey in the Gulf of Thailand and by increased seismic data acquisition in the Gulf of Mexico. The increase in exploration expenses for 1997, compared to 1995, resulted primarily from increased geophysical activity by the Company, including the costs of conducting and processing the Jarmjuree 3-D seismic surveys. In addition, exploration expenses attributable to increased delay rental expense resulting from the Company's acquisition of additional prospective oil and gas acreage during 1997, as compared to 1996 and 1995, served to offset the decrease in exploration expenses for 1997, compared to 1996, and to increase the exploration expenses incurred during 1997, compared to 1995. The Company does not currently expect its exploration expenses in 1998 to increase significantly over those incurred during 1997. Dry Hole and Impairment Expenses Dry hole and impairment expenses relate to costs of unsuccessful wells drilled along with impairments due to decreases in expected reserves from producing wells. The Company's dry hole and impairment expenses for 1997 were $9,631,000, an increase of approximately 12% from dry hole and impairment costs of $8,579,000 for 1996, and an increase of approximately 44% from dry hole and impairment costs of $6,703,000 for 1995. Depreciation, Depletion and Amortization Expenses The Company's DD&A expense for 1997 was $103,157,000, an increase of approximately 67% from DD&A expenses of $61,857,000 for 1996, and an increase of approximately 51% from DD&A expenses of $68,489,000 for 1995. The increase in the Company's DD&A expenses for 1997, compared to 1996 and 1995, resulted primarily from an increase in the Company's natural gas and liquid hydrocarbon production and, to a lesser extent, an increase in the Company's composite DD&A rate. The composite DD&A rate for all of the Company's producing fields for 1997 was $0.95 per equivalent Mcf ($5.68 per equivalent Bbl), an increase of approximately 9% from a composite DD&A rate of $0.87 per equivalent Mcf ($5.20 per equivalent Bbl) for 1996, and an increase of approximately 3% from a composite DD&A rate of $0.91 per equivalent Mcf ($5.47 per equivalent Bbl) for 1995. The increase in the composite DD&A rate for all of the Company's producing fields for 1997, compared to 1996 and 1995, resulted primarily from an increased percentage of the Company's production coming from certain of the Company's fields that have DD&A rates that are higher than the Company's recent historical composite rate and a corresponding decrease in the percentage of the Company's production coming from fields that have DD&A rates that are lower than the Company's recent historical composite DD&A rate. Management currently anticipates that this trend will continue for the foreseeable future, resulting in generally increasing DD&A rates. The Company produced 107,605,000 equivalent Mcf (17,934,000 equivalent Bbls) in 1997, an increase of approximately 53% from the 70,472,000 equivalent Mcf (11,745,000 equivalent Bbls) produced in 1996, and an increase of approximately 45% from the 74,337,000 equivalent Mcf (12,389,000 equivalent Bbls) produced in 1995. Interest INTEREST CHARGES. The Company incurred interest charges for 1997 of $21,886,000, an increase of approximately 66% from interest charges of $13,203,000 for 1996, and an increase of approximately 96% from interest charges of $11,167,000 for 1995. The increase in the Company's interest charges for 1997, compared to 1996 and 1995, resulted primarily from an increase in the average amount of the Company's outstanding debt and, to a lesser extent, increased average interest rates on the debt outstanding (resulting primarily from the issuance of the 8 3/4% Senior Subordinated Notes due 2007 (the "2007 Notes") on May 22, 1997, which bear interest at an 8 3/4% annual interest rate) and increased expenses related to amortization of debt issuance expenses resulting from the issuance of the 2006 Notes in 1996. CAPITALIZED INTEREST EXPENSE. Capitalized interest for 1997 was $6,175,000 an increase of approximately 46% from capitalized interest of $4,244,000 for 1996, and an increase of approximately 237% from capitalized interest of $1,834,000 for 1995. The increase in capitalized interest for 1997, compared to 1996 and 1995, resulted primarily from the requirement to capitalize interest expense attributable to capital expenditures on non-producing properties, 39 41 principally capital expenditures related to the Company's development of the Tantawan Field and the East Cameron Block 334 "E" platform during the first quarter of 1997 and its development of the Benchamas Field commencing in 1997, which substantially exceeded the Company's capital expenditures on non-producing properties (principally the Tantawan Field) during 1996 and 1995. To a lesser extent, the increase in capitalized interest expense is also attributable to an increase in the rate used to compute the interest that was capitalized. The Company expects its capitalized interest costs to increase in the future, primarily as a result of the requirement to capitalize interest expense attributable to capital expenditures incurred in connection with its development of the Benchamas Field in the Gulf Thailand. See "Business and Properties -- International Operations; Significant International Operating Areas During 1997." Foreign Currency Transaction Loss The Company incurred a foreign currency transaction loss of $7,604,000 during 1997. No comparable losses were incurred in 1996 or 1995. The foreign currency transaction loss resulted from the devaluation against the U.S. dollar of cash and other monetary assets and liabilities denominated in Thai Baht that were on the Company's subsidiary's financial statements during 1997. In early July 1997, the government of the Kingdom of Thailand announced that the value of the Thai Baht would be set against the U.S. dollar and other currencies under a "managed float" program arrangement. Since that time the value of the Thai Baht has generally declined, although in recent weeks it has shown some sign of stabilizing. During the last two weeks of the month of February 1998, the Thai Baht traded in a range of approximately 43 to 48 Thai Baht to the U.S. dollar. The Company cannot predict what the Thai Baht to U.S. dollar exchange rate may be in the future. Moreover, it is anticipated that this exchange rate will remain volatile. Income Tax Expense Income tax expense for 1997 was $18,091,000, a decrease of approximately 4% from income tax expense of $18,800,000 for 1996, and an increase of approximately 270% from income tax expense of $4,891,000 for 1995. The decrease in income tax expense for 1997, compared to 1996, resulted primarily from the foreign currency transaction loss discussed in the preceding paragraph, which was partially offset by increased taxable income. The increase in income tax expense for 1997, compared to 1995, resulted primarily from increased taxable income. LIQUIDITY AND CAPITAL RESOURCES Cash Flows The Company's Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 1998, reflects net cash provided by operating activities of $70,466,000. In addition to net cash provided by operating activities, the Company received net proceeds of $998,000 from the exercise of stock options, $350,000 from the sale of certain non-strategic properties, and had net borrowings of $83,354,000 under its Credit Agreement and other senior debt facilities. During the first nine months of 1998, the Company invested $135,964,000 of such cash flow in capital projects, retired a production payment obligation for $15,246,000, spent $2,961,000 to purchase proved reserves, paid $3,327,000 ($0.03 per share for each of the first three quarters of 1998) in cash dividends to holders of the Company's common stock and paid a net amount of $621,000 in miscellaneous other expenditures. As of September 30, 1998, the Company's cash and cash investments were $17,422,000 and its long-term debt stood at $381,854,000. Future Capital Requirements The Company's capital and exploration budget for 1998, which does not include any amounts that may be expended for the purchase of proved reserves or any interest which may be capitalized resulting from projects in progress, was established by the Company's Board of Directors at $230,000,000. Substantially all of the Company's 1998 capital and exploration budget was spent or incurred during 1998. The Company currently anticipates that its 40 42 available cash and cash investments, cash provided by operating activities, funds available under its Credit Agreement and an uncommitted line of credit and amounts that the Company currently believes that it can obtain from external sources including the issuance of new debt (including the Notes) and convertible preferred securities, or asset sales, will be sufficient to fund the Company's ongoing operating, interest and general and administrative expenses, the remainder of its 1998 capital and exploration budget, any currently anticipated costs associated with the Company's projects during 1999, and future dividend payments at current levels. Subject to favorable market conditions and other factors, the Company also currently intends to issue convertible preferred equity securities during 1999 to assist in funding its future capital and exploration plans. The declaration of future dividends on the Company's common stock will depend upon, among other things, the Company's future earnings and financial condition, liquidity and capital requirements, its ability to pay dividends under certain covenants contained in its debt instruments, the general economic and regulatory climate and other factors deemed relevant by the Company's Board of Directors. Other Material Long-Term Commitments As of February 9, 1996, Tantawan Services, LLC ("TS"), a company that is currently a wholly owned subsidiary of the Company, entered into a Bareboat Charter Agreement (the "Charter") with Tantawan Production B.V. for the charter of the FPSO for use in the Tantawan Field. See "Business and Properties -- International Operations." The term of the Charter is for a period ending July 31, 2008, subject to extension. In addition, TS has a purchase option on the FPSO throughout the term of the Charter. TS has also contracted with another company, SBM Marine Services Thailand Ltd., to operate the FPSO on a reimbursable basis throughout the initial term of the Charter. Performance of both the Charter and the agreement to operate the FPSO are non-recourse to TS and the Company. However, performance is secured by a negative pledge on any hydrocarbons stored on the FPSO and is guaranteed by each of the working interest holders in the Tantawan Field, including Thaipo. Thaipo's guarantee is limited to its percentage interest in the Tantawan Field (currently 46.34%). The Charter currently provides for an estimated charter hire commitment of $24,000,000 per year ($11,122,000 net to Thaipo). As of August 24, 1998, Thaipo and its joint venture partners (collectively, the "Charterers") entered into a Bareboat Charter Agreement (the "BCA") with Watertight Shipping B.V. for the charter of a Floating Storage and Offloading system named the "Benchamas Explorer" (the "FSO"). See "Business and Properties - -- International Operations." The term of the BCA is for a period of ten years commencing on the date that the FSO is ready to begin operations in the Benchamas Field. In addition, the Charterers have a purchase option on the FSO throughout the term of the BCA. The Charterers have also contracted with another company, Tanker Pacific (Thailand) Co. Ltd, to operate the FSO on a fixed fee basis throughout the initial term of the BCA. Performance of both the BCA and the agreement to operate the FSO are non-recourse to the Company. However the obligations of each joint venturer are full recourse to each joint venturer, but the obligations are several, meaning that each joint venturer's obligations are limited to its percentage interest in the Thailand Concession. Collectively, the BCA and the operating agreement currently provides for an estimated expense of chartering and operating the FSO of $11,253,000 per year ($5,215,000 net to Thaipo). Capital Structure CREDIT AGREEMENT AND UNCOMMITTED CREDIT LINE. Effective August 1, 1997, the Company entered into an amended and restated Credit Agreement, which has subsequently been amended several times, most recently on December 21, 1998. The Credit Agreement provides for a $250,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2000. A portion of the amount that may be borrowed under the Credit Agreement (the "Primary Tranche") may not exceed a borrowing base which is composed of domestic, Canadian and Thai properties. Generally, the borrowing base is determined semi-annually by the lenders in accordance with the Credit Agreement, based on the lenders' usual and customary criteria for oil and gas transactions. As of December 21, 1998, the Company's total borrowing base was set at $200,000,000, which amount cannot be reduced until after April 30, 1999. In addition, certain lenders that are parties to the Credit Agreement have agreed to extend an additional $50,000,000 in credit (the "Secondary Tranche") under the Credit Agreement without reference to the 41 43 borrowing base limitations of the Credit Agreement. The term of the Secondary Tranche is until the earlier of April 30, 1999 or the completion of the Offering. The Credit Agreement is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and a fixed charge coverage ratio, and limitations on indebtedness, creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidations, investments and asset dispositions. Upon the occurrence or declaration of certain events, the lenders would be entitled to a security interest in the Company's domestic borrowing base properties. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Primary Tranche bear interest at a rate based upon the percentage of the borrowing base that is being utilized, ranging from a base (prime) rate or LIBOR plus 1.25% to a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Primary Tranche currently bear interest at a base rate plus 0.25% or LIBOR plus 2.0%, at the Company's option. Borrowings under the Secondary Tranche currently bear interest at a base rate plus 0.75% or LIBOR plus 2.5%, at the Company's option. A commitment fee on the unborrowed amount under the Primary Tranche is also charged and is based upon the percentage of the borrowing base that is being utilized, ranging from 0.25% to 0.375%. The commitment fee is currently 0.375% per annum on the unborrowed amount under the Primary Tranche. As of December 31, 1998, there was $155,000,000 outstanding under the Primary Tranche and $50,000,000 outstanding under the Secondary Tranche. As of December 31, 1998, the Company had also entered into a separate letter agreement with a bank under which the bank may provide a $20,000,000 uncommitted money market line of credit. The line of credit is on an as available or offered basis and the bank has no obligation to make any advances under its line of credit. Although loans made under that letter agreement are for a maximum term of 30 days, they are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under its Credit Agreement. The letter agreement permits either party to terminate such letter agreement at any time. Under its Credit Agreement, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include debt incurred under that line of credit and under the banker's acceptances discussed below. Further, the 2007 Notes and the Notes offered hereby also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "Description of the Notes -- Certain Covenants; Limitation on Indebtedness." BANKER'S ACCEPTANCES. On June 3, 1998, the Company entered into a Master Banker's Acceptance Agreement under which one of the Company's lenders has offered to accept up to $20,000,000 in bank drafts from the Company. The banker's drafts are available on an uncommitted basis and the bank has no obligation to accept the Company's request for drafts. Drafts drawn under this agreement are for a maximum term of 182 days; however, they are reflected as long-term debt on the Company's balance sheet because the Company currently has the ability and intent to reborrow such amounts under the Credit Agreement. Under its Credit Agreement, the Company is currently limited to incurring a maximum of $20,000,000 of additional senior debt, which would include banker's acceptances as well as debt incurred under the line of credit discussed previously. Further, the 2007 Notes and the Notes offered hereby also restrict the incurrence of additional senior indebtedness. See "; 2007 Notes" and "Description of the Notes -- Certain Covenants; Limitation on Indebtedness." The Master Banker's Acceptance Agreement permits either party to terminate the letter agreement at any time upon five business days notice. As of September 30, 1998, bank drafts in the principal amount of $10,854,000 bearing interest at a rate of 6.1% were outstanding under this agreement. 2007 NOTES. On May 22, 1997, the Company issued $100,000,000 principal amount of 2007 Notes. The proceeds from the issuance of the 2007 Notes were used to repay amounts outstanding under the Credit Agreement, and to purchase short-term cash investments. The 2007 Notes bear interest at a rate of 8 3/4%, payable semi-annually in arrears on May 15 and November 15 of each year, commencing November 15, 1997. The 2007 Notes are general unsecured senior subordinated obligations of the Company, are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under the Credit Agreement, its unsecured credit line and its banker's acceptances, are equal in right of payment to the Notes offered hereby, but are senior in right of payment to the Company's subordinated indebtedness, which currently includes the 2006 Notes. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2007 Notes. The 2007 Notes are redeemable at the option of any holder, upon the 42 44 occurrence of a change of control (as defined in the indenture governing the 2007 Notes), at 101% of their principal amount. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are substantially identical to the covenants contained in the indenture governing the Notes, including covenants limiting: incurrence of indebtedness including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of assets sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. 2004 NOTES. The Company's 2004 Notes were called for redemption on March 13, 1998, at a price equal to 103.30% of their principal amount. Prior thereto, holders of all but $95,000 principal amount of the 2004 Notes chose to convert their 2004 Notes into Common Stock at a conversion price of $22.188 per common share, rather than receive cash for their 2004 Notes resulting in the issuance of 3,879,726 shares of Common Stock. 2006 NOTES. The outstanding principal amount of 2006 Notes was $115,000,000 as of September 30, 1998. The 2006 Notes are convertible into Common Stock at $42.185 per share, subject to adjustment upon the occurrence of certain events. The 2006 Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 1999, at a redemption price of 103.85% of their principal amount and decreasing percentages thereafter. No sinking fund payments are required on the 2006 Notes. The 2006 Notes are redeemable at the option of any holder, upon the occurrence of a repurchase event (a change of control and other circumstances as defined in the indenture governing the 2006 Notes), at 100% of the principal amount. Other Matters INFLATION. Publicly held companies are asked to comment on the effects of inflation on their business. Currently annual inflation in terms of the decrease in the general purchasing power of the U.S. dollar is running much below the general annual inflation rates experienced in the past. While the Company, like other companies, continues to be affected by fluctuations in the purchasing power of the U.S. dollar due to inflation, such effect is not currently considered significant. SOUTHEAST ASIA ECONOMIC ISSUES. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquid hydrocarbon production are sold there. In recent months, Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties which have been characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai Baht against the U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand, together with the prices that the company receives for its oil and natural gas production there. See "-- Results of Operations; Oil and Gas Revenues" and "-- Results of Operations; Foreign Currency Transaction Gain (Loss)" for both the nine month and yearly comparative periods. All of the Company's current natural gas production from the Thailand Concession is committed under a long term Gas Sales Agreement to PTT at a price denominated in Thai Baht which is determined in accordance with a formula that is intended to ameliorate, at least in part, any decline in the purchasing power of the Thai Baht against the U.S. dollar. See "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession" and "Business and Properties -- Miscellaneous; Sales." Although the Company currently believes that PTT will honor its commitments under the Gas Sales Agreement, a failure by PTT to honor such commitments could have a material adverse effect on the Company. The Company's crude oil and condensate production from the Thailand Concession is sold on a tanker load by tanker load basis. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are typically paid in U.S. dollars. See "Business and Properties -- International Operations; Contractual Terms Governing the Thailand Concession and Related Production" and "Business and 43 45 Properties -- Miscellaneous; Sales." The Company believes that the current economic difficulties in Southeast Asia have resulted in a decreased demand for petroleum products in the region, which has contributed to the recent general decline in crude oil and condensate prices throughout the world. This price decline has had an adverse effect on all oil and gas companies that sell their production on the world spot markets, including the Company, without regard to where their respective production is located. YEAR 2000 READINESS DISCLOSURE. Many computer software systems, as well as certain hardware and equipment using date-sensitive data, were structured to use a two-digit date field meaning that they may not be able to properly recognize dates in the year 2000. The Company is addressing this issue through a process that entails evaluation of the Company's critical software and, to the extent possible, its hardware and equipment to identify and assess Year 2000 issues and to remediate, replace or establish alternative procedures addressing non-Year 2000 compliant systems, hardware and equipment. The Company has substantially completed an inventory of its systems and equipment including computer systems and business applications. Based upon this review, the Company currently believes that all of its critical software and computer hardware systems are either Year 2000 compliant or will be within the next six months. The Company continues to inventory its equipment and facilities to determine if they contain embedded date-sensitive technology. If problems are discovered, remediation, replacement or alternative procedures for non-compliant equipment and facilities will be undertaken on a business priority basis. This process will continue and, depending upon the equipment and facilities, is scheduled for completion during the first three quarters of 1999. As of September 30, 1998, the Company had incurred approximately $50,000 in expenses related to its Year 2000 compliance efforts. These costs are currently being expensed as they are incurred. However, in certain instances the Company may determine that replacing existing equipment may be more efficient, particularly where additional functionality is available. These replacements may be capitalized and therefore would reduce the estimated 1998 and 1999 expenses associated with the Year 2000 issue. The Company currently expects total out-of-pocket costs to become Year 2000 compliant to be less than $1,000,000. The Company currently expects that such costs will not have a material adverse effect on the Company's financial condition, operations or liquidity. The foregoing timetable and assessment of costs to become Year 2000 compliant reflect management's current best estimates. These estimates are based on many assumptions, including assumptions about the cost, availability and ability of resources to locate, remediate and modify affected systems, equipment and facilities. Based upon its activities to date, the Company does not currently believe that these factors will cause results to differ significantly from those estimated. However, the Company cannot reasonably estimate the potential impact on its financial condition and operations if key third parties including, among others, suppliers, contractors, joint venture partners, financial institutions, customers and governments do not become Year 2000 compliant on a timely basis. The Company is contacting many of these third parties to determine whether they will be able to resolve in a timely fashion their Year 2000 issues as they may affect the Company. In the event that the Company is unable to complete the remediation or replacement of its critical systems, facilities and equipment, establish alternative procedures in a timely manner, or if those with whom the Company conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on the Company's liquidity and results of operations. At this time, the potential effect in the event the Company and/or third parties are unable to timely resolve their Year 2000 problems is not determinable; however, the Company currently believes that it will be able to resolve its own Year 2000 issues in a timely manner. The disclosure set forth in this section is provided pursuant to Securities Act Release No. 33-7558. As such it is protected as a forward-looking statement under the Private Securities Litigation Reform Act of 1995. See "Forward- Looking Statements." This disclosure is also subject to protection under the Year 2000 Information and Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement" and "Year 2000 Readiness Disclosure" as defined therein. 44 46 BUSINESS AND PROPERTIES The Company was incorporated in 1970 and is engaged in oil and gas exploration, development and production activities on its properties located offshore in the Gulf of Mexico, onshore in selected areas in New Mexico, Texas and Louisiana, and internationally, primarily in the Gulf of Thailand. As of December 31, 1998, the Company had interests in 105 lease blocks offshore Louisiana and Texas, approximately 378,000 gross acres onshore in the United States, approximately 734,000 gross acres offshore in the Kingdom of Thailand, 150,000 gross acres in Canada and 113,000 gross acres in the British North Sea. On August 17, 1998, a wholly owned subsidiary of the Company merged with and into Arch in a tax free, stock for stock transaction through which Arch became a wholly owned subsidiary of the Company. The Company issued approximately 2,540,000 of its common shares in connection with the merger, or approximately 6% of its common stock outstanding at the time of the merger. For a description of the Arch and its subsidiaries' businesses, properties and operations, please see "-- Arch and its Subsidiaries." Quantitative information in this "Business and Properties" section which precedes "-- Arch and its Subsidiaries" does not include any such information relating to Arch and its subsidiaries. Quantitative and geological information in the "-- Arch and its Subsidiaries" subsection includes only information relating to Arch and its subsidiaries. Unless otherwise specifically identified, the information set forth in this offering memorandum, including production rates and the number of wells, platforms and blocks, is presented on a gross basis, rather than net to the Company or Arch, as applicable. Unless otherwise stated, quantitative data set forth in this "Business and Properties" section was current as of March 13, 1998. The Company has not attempted to update this information but it believes that any changes in this quantitative information are not material to an understanding of the Company and its subsidiaries. In recent years, the Company has concentrated its efforts in selected areas where it believes that its expertise, competitive acreage position, or ability to quickly take advantage of new opportunities offer the possibility of superior rates of return. As of December 31, 1997, six significant operating areas, of which three are located in the Gulf of Mexico and one each in South Texas, New Mexico and Thailand, accounted for approximately 82% of the Company's estimated proved natural gas reserves, approximately 90% of the Company's estimated proved oil, condensate and natural gas liquids reserves, approximately 80% of the Company's natural gas production and 89% of the Company's oil, condensate and natural gas liquids production for 1997. Reserves, as estimated by Ryder Scott, and production data, as estimated by the Company, for the six significant operating areas are shown in the following table. No other producing area accounted for more than 3% of the Company's estimated proved reserves as of December 31, 1997. SIGNIFICANT OPERATING AREAS
1997 AVERAGE NET NET PROVED RESERVES(A) DAILY PRODUCTION ---------------------------------------- --------------------------------------- TOTAL NET NATURAL GAS LIQUIDS(B) NATURAL GAS LIQUIDS(B) PROVED ----------------- ----------------- ----------------- ---------------- RESERVES(a) MMCF % MBBLS % MCF % BBLS % % ------- ---- ------ ---- ------ ---- ----- ---- ---- DOMESTIC OFFSHORE Eugene Island........ 27,182 6.8 7,607 13.1 23,334 13.5 4,673 24.5 10.7 Main Pass............ 14,570 3.6 3,830 6.6 7,104 4.1 2,777 14.6 5.0 East Cameron......... 30,199 7.5 1,006 1.7 53,893 31.2 3,242 17.0 4.8 DOMESTIC ONSHORE New Mexico........... 20,578 5.1 11,287 19.4 9,151 5.3 4,008 21.0 11.8 South Texas.......... 52,724 13.1 1 0.0 11,484 6.6 0 0.0 7.0 INTERNATIONAL Kingdom of Thailand.. 184,768 46.0 28,783 49.5 37,733 19.0 2,421 14.0 47.6
- ------------- 45 47 (a) Net proved reserves and total net proved reserves are each as of December 31, 1997. (b) "Liquids," includes oil, condensate and NGL. DOMESTIC OFFSHORE OPERATIONS Historically, the Company's interests have been concentrated in the Gulf of Mexico, where approximately 59% of the Company's domestic proved reserves and 31% of its total proved reserves were located as of December 31, 1997. During 1997, approximately 65% of the Company's natural gas production and approximately 59% of its oil and condensate production was from its domestic offshore properties, contributing approximately 62% of the Company's consolidated oil and gas revenues. Three offshore producing areas, Eugene Island, Main Pass and East Cameron, accounted for approximately 18% of the Company's net proved natural gas reserves and approximately 21% of the Company's proved crude oil, condensate and natural gas liquids reserves as of December 31, 1997. See "-- Significant Domestic Offshore Operating Areas During 1997." Lease Acquisitions The Company has participated, either on its own or with other companies, in bidding on and acquiring interests in federal and state leases offshore in the Gulf of Mexico since December 1970. As a result of such sales and subsequent activities, as of December 31, 1997, the Company owned interests in 93 federal leases and 8 state leases offshore Louisiana and Texas. Federal leases generally have primary terms of five, eight or ten years, depending on water depth, and state leases generally have terms of three or five years, depending on location, in each case subject to extension by development and production operations. As part of its strategy, the Company intends to continue an active lease evaluation program in the Gulf of Mexico in order to identify exploration and exploitation opportunities. During 1997, the Company was successful in acquiring interests in 19 lease blocks through federal Outer Continental Shelf oil and gas lease sales and 1 lease block by assignment from a third party. As in the case of prior sales, the extent to which the Company participates in future bidding on federal or state offshore lease sales will depend on the availability of funds and its estimates of hydrocarbon deposits, operating expenses and future revenues which reasonably may be expected from available lease blocks. Such estimates typically take into account, among other things, estimates of future hydrocarbon prices, federal regulations, and taxation policies applicable to the petroleum industry. It is also the Company's objective to acquire certain producing leasehold properties in areas where additional low-risk drilling or improved production methods by the Company can provide attractive rates of return. Exploration and Development The scope of exploration and development programs relating to the Company's offshore interests is affected by prices for oil and gas, and by federal, state and local legislation, regulations and ordinances applicable to the petroleum industry. The Company's domestic offshore capital and exploration expenditures for 1997 were approximately $86,300,000, or 9% lower than the Company's domestic offshore capital and exploration expenditures of approximately $94,400,000 (excluding approximately $2,000,000 of net property acquisitions) for 1996 and 128% higher than the Company's domestic offshore capital and exploration expenditures of approximately $37,800,000 for 1995 (excluding approximately $650,000 of net property acquisitions) for 1995. The decrease in the Company's domestic offshore capital and exploration expenditures for 1997, compared with 1996, resulted primarily from a decrease in drilling activity and in construction and installation of offshore platforms, pipelines and other facilities, which was partially offset by the increased costs to the Company (and the entire oil and gas industry generally) because of price increases by the oil and gas services, construction and supply industries due to the shortage of skilled workers and the comparative scarcity of certain equipment, such as drilling rigs, and critical materials, such as certain types of steel pipe. The increase in the Company's domestic offshore capital and exploration expenditures for 1997, compared to 1995, resulted primarily from increased drilling activity and increased costs associated with 46 48 the construction and installation of offshore platforms, pipelines and other facilities and the increase in prices discussed above. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Leases acquired by the Company and other participants in its bidding groups are customarily committed, on a block-by-block basis, to separate operating agreements under which the appointed operator supervises exploration and development operations for the account and at the expense of the group. These agreements usually contain terms and conditions which have become relatively standardized in the industry. Major decisions regarding development and operations typically require the consent of at least a majority (in working interest) of the participants. Because the Company generally has a meaningful working interest position, the Company believes it can significantly influence (but not always control) decisions regarding development and operations on most of the leases in which it has a working interest even though it may not be the operator of a particular lease. The Company was the operator on all or a portion of 30 of the 101 offshore leases in which it had an interest on December 31, 1997. Platforms and related facilities are installed on an offshore lease block when, in the judgment of the lease interest owners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment. Platforms are used to accommodate both development drilling and additional exploratory drilling. Over the three years ended December 31, 1997, the gross cost of production platforms and related facilities to the joint ventures in which the Company has varying net interests has ranged from approximately $3,000,000 to approximately $16,500,000. Platform costs vary and more expensive platforms could be required in the future depending on, among other factors, the number of slots, water depth, currents, and sea floor conditions. For example, during 1997, the Company and its joint venture partners approved construction of a platform located on Viosca Knoll Block 823 which will be located in approximately 1,200 feet of water. This platform, together with its related pipelines and other facilities, is estimated to have a gross cost of approximately $140,000,000 (approximately $15,100,000 net to the Company's current working interest). Significant Domestic Offshore Operating Areas During 1997 EUGENE ISLAND. A significant portion of the Company's reserves and a substantial part of its production are located in the Eugene Island area off the Louisiana coast in the Gulf of Mexico. The Eugene Island area has been an important part of the Company's operations since the first lease in that area was purchased in 1970 and production began in 1973. As of December 31, 1997, the Company held interests in 10 blocks in the Eugene Island area. These blocks comprise eight fields containing 64 oil and gas wells producing from multiple reservoirs and horizons. During 1997, the Company participated in the drilling of eight wells in the Eugene Island operating area. The Eugene Island Block 330 field is one of the Company's most significant producing assets. This field, located in 245 feet of water, contains three drilling and production platforms in which the Company holds a 35% working interest, as well as an additional platform in which the Company holds a 30% working interest. As of December 31, 1997, there were 12 wells producing primarily natural gas and 34 wells producing primarily oil on the block. The Company and its joint venture partners drilled six new wells which added significant new reserves in this field during 1997. MAIN PASS. The Company's 12 lease blocks in the Main Pass area, including two acquired in 1997, are located near the mouth of the Mississippi River in the Gulf of Mexico and include leases in which the Company has held an interest since 1974. The majority of the Company's production from the Main Pass area comes from a field that includes Main Pass Blocks 72, 73 and 72/74 which was unitized in 1982. The Company's working interest in this field is 35%. As of December 31, 1997, this field contained 20 producing oil wells and nine producing natural gas wells from three platforms operated by the Company's joint venture partner and is located in 125 feet of water. The Company participated in the drilling of 3 exploratory wells in the Main Pass area during 1997. EAST CAMERON. The first leasehold interest acquired by the Company in the East Cameron area off the Texas/Louisiana border in the Gulf of Mexico commenced production in February 1973. Presently, the Company has interests in five offshore blocks in this area which contain two fields and 19 producing gas wells. Two of the 47 49 five blocks were awarded to the Company and its joint venture partners during 1997 and have yet to be fully evaluated. During 1997, the Company and its partners were active in the East Cameron Block 334/335 field. In February 1997, the Company and one of its joint venture partners completed construction of the East Cameron "E" platform and commenced production from two wells. Following mechanical problems in one of these wells which caused it to be shut in, production was restored in the first week of January 1998. The Company and its joint venture partners completed construction of a sixth platform during 1997, known as the "F" platform. Production from the well served by this platform, in which the Company holds a 42% interest, commenced in December 1997. DOMESTIC ONSHORE OPERATIONS The Company has onshore division staffs in Houston and Midland, Texas. Its onshore activities are concentrated in known oil and gas provinces, principally the Permian Basin area of southeastern New Mexico, West Texas and Northwest Texas, and in the onshore Gulf Coast areas of South Texas, East Texas and South Louisiana. See "-- Significant Domestic Onshore Operating Areas During 1997." Lease Acquisitions Commencing in 1995 and continuing into 1997, the Company increased its activities in the onshore Gulf Coast areas of East Texas and South Louisiana through its participation in several large proprietary 3-D seismic surveys, in connection with which the Company typically purchases an option to acquire an interest in the acreage covered by the 3-D seismic survey. As it has in recent years, in 1997 the Company also successfully participated in various onshore federal and state lease sales and acquired interests in prospective acreage from private individuals. As of December 31, 1997, the Company held interests in approximately 237,000 gross (113,000 net) acres onshore in the United States, an increase of approximately 12% from year end 1996. Exploration and Development The Company's primary drilling objective in the Permian Basin is the Brushy Canyon (Delaware) formation which generally produces oil from depths of 6,000 to 9,000 feet. Since the Company began exploring in the Brushy Canyon (Delaware) formation in October 1989, it has participated in drilling 357 wells in the Permian Basin, West and Northwest Texas areas through December 31, 1997, including 58 wells in 1997. The Company's primary drilling activity in East Texas has been in the Cotton Valley formation reef play. In South Louisiana, the Company participated in drilling 11 wells in 1997 to test various Hackberry formation and Yegua formation prospects, all of which were identified on proprietary 3-D seismic surveys that the Company and its industry partners have acquired since 1995. The Company also actively explores for oil and gas onshore in South Texas. In total, the Company participated in the drilling of 25 wells in the onshore Gulf Coast areas of South Texas, East Texas and South Louisiana, including 14 exploratory wells (principally in East Texas and South Louisiana) and 11 developmental wells (principally in the Lopeno Field in South Texas). See "-- Significant Domestic Onshore Operating Areas During 1997; South Texas." Domestic onshore reserves as of December 31, 1997, accounted for approximately 41% of the Company's domestic proved reserves and approximately 21% of its total proved reserves. During 1997, approximately 16% of the Company's natural gas production and 27% of its oil and condensate production was from its domestic onshore properties, contributing approximately 20% of the Company's consolidated oil and gas revenues. The Company generally conducts its onshore activities through joint ventures and other interest-sharing arrangements with major and independent oil companies. The Company operates many of its own onshore properties using independent contractors. The Company's domestic onshore capital and exploration expenditures were approximately $60,000,000 (excluding approximately $1,700,000 of net property acquisitions) for 1997, or 28% higher than the Company's 48 50 domestic onshore capital and exploration expenditures of approximately $47,000,000 (excluding approximately $3,800,000 of net property acquisitions) for 1996 and 82% higher than the Company's domestic onshore capital and exploration expenditures of approximately $33,000,000 (excluding approximately $7,800,000 of net property acquisitions) for 1995. The increase in the Company's domestic onshore capital and exploration expenditures for 1997, compared to 1996 and 1995, resulted primarily from increased drilling activity in South Texas, East Texas and South Louisiana and, to a lesser extent, by the increased costs to the Company (and the entire oil and gas industry generally) because of price increases by the oil and gas services, construction and supply industries due to the shortage of skilled workers and the comparative scarcity of certain equipment, such as drilling rigs and critical materials, such as certain types of steel pipe. Significant Domestic Onshore Operating Areas During 1997 NEW MEXICO. The Company believes that during the past five years it has been one of the most active companies drilling for oil and natural gas in the southeastern New Mexico (Lea and Eddy Counties) portion of the Permian Basin where the Company has interests in over 79,000 gross acres. The Company's primary drilling objective is the Brushy Canyon (Delaware) formation. Fields in the Brushy Canyon (Delaware) formation in the southeastern New Mexico portion of the Permian Basin are generally characterized by production from relatively shallow depths (6,000 to 9,000 feet), multiple producing zones in most wells and relatively high initial rates of production (frequently equaling the top field allowables which typically range from 142 Bbls to 230 Bbls per day, depending on the depth of production from the field). The Company has achieved rapid cost recovery with respect to its New Mexico wells drilled to date because of relatively low capital costs and high initial rates of production. Since the Company began exploring in the Brushy Canyon (Delaware) formation in the southeastern New Mexico portion of the Permian Basin in October 1989, it has participated through December 31, 1997, in the drilling of, among others, 94 wells in the Sand Dunes field where the Company's working interest ranges from 4% to 100%, 27 wells in the East Loving field where the Company's working interest ranges from 33% to 98%, 60 wells in the Livingston Ridge field where the Company's working interest ranges from 25% to 100%, 61 wells in the Red Tank field where the Company's working interest ranges from 89% to 100%, 31 wells in the Cedar Canyon field where the Company's working interest ranges from 38% to 100% (including 15 during 1997), 15 wells in the Lost Tank field where the Company's working interest ranges from 50% to 100% (including 12 during 1997), and 3 wells in the Poker Lake Field where the Company's working interest ranges from 60% to 100%. SOUTH TEXAS. The Company has increased its activity in South Texas in recent years, where, as of December 31, 1997, it was active in two fields, both of which primarily produce natural gas. The most significant of these two fields is the Lopeno Field, which is located within 40 miles of the border with Mexico. The Company acquired its initial interest in the Lopeno Field in 1983. As of December 31, 1997, the Company had interests in over 7,800 gross acres in South Texas containing 29 producing wells, with working interests generally averaging approximately 50%. The Lopeno Field produces from over 20 upper Wilcox sandstone reservoirs ranging in depth up to 12,500 feet. Based in part on a 3-D seismic survey acquired over the field in 1994, the Company and its joint venture partners commenced an active development drilling program in the fourth quarter of 1995. In 1997, the Company drilled seven successful wells in the Lopeno Field and drilled additional wells in this field during 1998. INTERNATIONAL OPERATIONS The Company has conducted international exploration activities since the late 1970's in numerous oil and gas areas throughout the world. Currently, the Company maintains an office in Bangkok, Thailand from which it directs field operations in the Gulf of Thailand on its Thailand Concession through its wholly owned subsidiary Thaipo. As a result of its acquisition in 1995 and March 1997 of portions of the original interest of Maersk Oil (Thailand) Ltd., a former joint venture partner that owned a 31.67% interest in the Thailand Concession, the Company has increased its ownership interest in the Thailand Concession so that it currently owns, directly or indirectly, a 46.34% working interest in the entire Thailand Concession. The remainder of the working interest is owned, directly or indirectly by Thai Romo Ltd. (46.34%), a subsidiary of RMOC, and Palang Sophon Limited ("Palang") (7.32%). Thaipo is currently the operator of the Thailand Concession, pursuant to the joint operating agreement and as designated by the 49 51 government of Thailand. On December 23, 1998, RMOC, the parent company of Thai Romo, Ltd., announced that it had agreed to be acquired by Chevron. Their agreement is subject to conditions, several of which are outside of RMOC's control. One of these conditions is that Chevron reach agreement with the Company on a new joint operating agreement that would include the transfer of operatorship on the Thailand Concession from Thaipo to a subsidiary of Chevron. The merger is also conditioned upon Chevron reaching agreement with Palang, the third partner in the Thailand Concession, to acquire at least a 5 percent interest in the Concession from Palang and upon all parties waiving any preferential rights that may arise in connection with the acquisition. The Company cannot predict whether Chevron will reach agreement with the Company and Palang or whether the other conditions to Chevron's acquisition of RMOC will be satisfied or waived. RMOC has also stated that its financial resources will be exhausted in February 1999, and that its banks have currently refused to lend it any additional funds. Chevron has agreed to lend additional funds to RMOC if most of the conditions to the acquisition have been satisfied, including Chevron's reaching agreement with us on a new joint operating agreement. Thai Romo's failure to pay its share of the expenses of our projects in the Gulf of Thailand could have a material adverse effect on the Company, due to the increased capital requirements that funding Thai Romo's share of the project development costs could have on the Company. As of December 31, 1997, the Company's proved reserves located in the Kingdom of Thailand accounted for approximately 48% of the Company's total proved reserves. During 1997, approximately 19% of the Company's natural gas production and 14% of its oil and condensate production came from its operations on the Thailand Concession, contributing approximately 14% of the Company's consolidated oil and gas revenues. Exploration and Development The Company's international capital and exploration expenditures were approximately $88,300,000 (excluding approximately $28,600,000 of net property acquisitions) for 1997, or 37% higher than the Company's international capital and exploration expenditures of approximately $64,400,000 for 1996 and 152% higher than the Company's international capital and exploration expenditures of approximately $35,000,000 (excluding approximately $4,200,000 of net property acquisitions) for 1995. The increase in the Company's international capital and exploration expenditures for 1997, compared to 1996 and 1995, resulted primarily from increased platform and facilities construction costs related to initial development of the Benchamas Field, increased drilling activity and, to a lesser extent, by the increased costs to the Company (and the entire oil and gas industry generally) because of price increases by the oil and gas services, construction and supply industries due to the shortage of skilled workers and the comparative scarcity of certain equipment, such as drilling rigs, and certain critical materials, such as certain types of steel pipe. Substantially all of the Company's international capital and exploration expenditures for 1997 were related to the Company's license in the Kingdom of Thailand. In addition, the Company continues to evaluate other international opportunities that are consistent with the Company's international exploration strategy. Platforms are installed on the Thailand Concession in fields where, in the judgment of Thaipo and its joint venture partners, the necessary capital expenditures are justified. A decision to install a platform generally is made after the drilling of one or more exploratory wells with contracted drilling equipment and the area where the platform would be located has been designated a production area by the Thai government. See "-- Contractual Terms Governing the Thailand Concession and Related Production." Platforms are used to accommodate both development drilling and additional exploratory drilling. Over the three years ended December 31, 1997, the gross cost of the first four production platforms and related facilities in the Tantawan Field has averaged approximately $20,000,000. Platform costs vary and more (or less) expensive platforms could be required in the future depending on, among other factors, the number of slots, water depth, currents, and sea floor conditions. See "-- Significant International Operating Areas During 1997; Tantawan Field." Significant International Operating Areas During 1997 TANTAWAN FIELD. In August 1995, at the request of Thaipo and its joint venture partners, the government of Thailand designated a portion of the Thailand Concession comprising approximately 68,000 acres as the Tantawan production area. The Tantawan production area has been named the Tantawan Field. Through March 13, 1998, 19 exploration and 29 development wells have been drilled in the Tantawan Field. Initial production from the Tantawan Field commenced on February 1, 1997, from wells located on two platforms. Currently, there are wells producing 50 52 from four platforms. The Company is currently planning to install a fifth platform in the Tantawan Field from which production is currently expected to commence in the second half of 1999. Oil and gas production from the Tantawan Field is gathered through pipelines from the platforms into the FPSO named the "Tantawan Explorer." The FPSO is a converted oil tanker with a capacity of slightly less than 1,000,000 Bbls, that is moored in the Tantawan Field, on which hydrocarbon processing, separation, dehydration, compression, metering and other production related equipment is installed. Following processing on board the FPSO, natural gas produced from the field is delivered to PTT through an export pipeline. Oil and condensate produced from the field is stored on board the FPSO and transferred to shore by oil tanker. The FPSO and its processing equipment is leased from a third party under a bareboat charter by Tantawan Services, LLC, an affiliate of Thaipo. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Thaipo and its joint venture partners pay a processing fee to Tantawan Services, LLC to process the production from the Tantawan Field through the FPSO. BENCHAMAS FIELD AND THE MALIWAN PRODUCTION AREA. In July 1997, the government of Thailand designated another portion of the Thailand Concession comprising approximately 102,000 acres of the Benchamas and Pakakrong production area as the Benchamas Field. This area includes at least two discrete geologic structures which were previously designated as the Benchamas and Pakakrong areas, respectively. In September 1997, the government of Thailand designated an additional 91,000 acres of the Thailand Concession as the Maliwan production area. Through March 13, 1998, 14 exploration wells have been drilled in the Benchamas Field and four exploration wells have been drilled in the Maliwan production area. Current development plans call for the staged development of these fields, with the Benchamas Field to be brought on production first. The Benchamas Field development plan contemplates the initial installation of three production platforms, with natural gas and oil from these platforms delivered by undersea pipeline to a central processing and compression platform where the oil, condensate and natural gas will be processed and separated. The natural gas will then be sold to PTT and delivered into export pipelines for transportation to shore, while the oil and condensate produced from the field will be stored on board the FSO for sale and ultimate transfer to shore by oil tanker. The FSO will be moored in the Benchamas Field. Its capacity will be approximately 1,400,000 Bbls of oil, or slightly more than the FPSO. The field's current development plan calls for initial production to commence in the third quarter of 1999. OTHER AREAS. In addition to the above mentioned fields, Thaipo and its joint venture partners have identified other potentially promising areas on the Thailand Concession. Since acquiring their interest in the Thailand Concession, Thaipo and its joint venture partners have acquired 3-D seismic surveys covering approximately 673,650 acres of the Thailand Concession, including 221,650 acres during the fourth quarter of 1997 over what is known as the Jarmjuree area. Interpretation of the Jarmjuree 3-D seismic survey commenced in the first quarter of 1998 and is ongoing. Contractual Terms Governing the Thailand Concession and Related Production The Thailand Concession was granted in August 1991. The original exploratory term of the concession agreement governing those portions of the Thailand Concession not designated as a production area expired on July 31, 1997. However, on application from Thaipo and its joint venture partners, the government of Thailand agreed in a supplemental concession agreement to extend the exploratory term for those portions of the Thailand Concession that have not yet been designated a production area (comprising approximately 474,000 acres) until July 31, 2000. In exchange, the Company and its joint venture partners committed to, among other things, an additional work program which includes the drilling of two wells and the acquisition of 148,000 acres of 3-D seismic data during the remainder of the exploratory term. (This work commitment was satisfied during the ordinary course of the Company's operations on the Thailand Concession during 1998.) For those portions of the Thailand Concession that have been designated as production areas the initial production period term is 20 years, which is also subject to extension, generally for a term of ten years. See also "-- Miscellaneous; Sales." Currently, the Tantawan, Maliwan, and Benchamas and Pakakrong areas have been designated as production areas. Subject to governmental approval, other portions of the Thailand Concession may be designated production areas in the future. 51 53 Production resulting from the Thailand Concession is subject to a royalty ranging from 5% to 15% of oil and gas sales, plus certain fixed U.S. dollar amounts payable at specified cumulative production levels. Revenue from production in Thailand is also subject to income taxes and other similar governmental charges including a Special Remuneratory Benefit tax ("SRB"). On November 7, 1995, Thaipo and its joint venture partners announced the signing of a thirty-year Gas Sales Agreement with PTT, initially governing gas production from the Tantawan Field. On November 12, 1997, Thaipo and its joint venture partners entered into an amendment to the gas sales agreement to include the reserves and anticipated gas production from the Benchamas Field. The terms of the Gas Sales Agreement currently include a minimum daily contract quantity ("DCQ") of 85 MMcf per day, which the Company currently anticipates will continue until the Benchamas Field commences production, at which time the DCQ will, subject to certain exceptions, be based on a percentage of the remaining proved reserves, but in any event, will not be less than 125 MMcf per day. The DCQ is the minimum daily volume that PTT has agreed to take, or pay for if not taken under the agreement. Likewise, Thaipo and its joint venture partners are subject to certain penalties if they are unable to meet the DCQ, principal among which is a decrease in sales price of up to 25% of the then current sales price. As a result of declining production from existing wells in the Tantawan Field, the need to shut-in existing wells while drilling additional wells from the same platform, and the decision to emphasize oil and condensate production from the Tantawan Field, commencing on October 1, 1998, the Company and its joint venture partners are currently delivering less natural gas than is being nominated by PTT under the Gas Sales Agreement. This could result in the Company receiving only 75% of the current contract price on a portion of its future natural gas sales to PTT. The Company is taking actions that it currently believes will minimize the penalty that it will incur on future gas sales to PTT by, among other things, increasing production from the Tantawan Field. The contract sales price is subject to automatic semi-annual adjustments based upon a formula which takes into account, among other things, changes in: Singapore fuel oil prices; the U.S. Bureau of Labor Statistics Oilfield Machinery and Tool Index; the Thai wholesale producer price index; and the U.S./Thai currency exchange rate. However, the Gas Sales Agreement provides for adjustment on a more frequent basis in the event that certain indices and factors on which the price is based fluctuate outside a given range. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations; Foreign Currency Transaction Gain (Loss)" and "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." MISCELLANEOUS Other Assets The Company and a subsidiary, Pogo Offshore Pipeline Co., own interests in eight pipelines (excluding field gathering pipelines) through which offshore hydrocarbon production is transported. In addition, the Company owns approximately 19% interest in a cryogenic gas processing plant near Erath, Louisiana, which entitles it to process up to 186 MMcf of natural gas and 5,478 Bbls of natural gas liquids per day. The plant is not currently operating at full capacity. See also "-- Arch and its Subsidiaries." In 1989, the Company entered into a limited partnership agreement as general partner of Pogo Gulf Coast, Ltd., a Texas limited partnership ("Pogo Gulf Coast"). As of December 31, 1997, Pogo Gulf Coast had interests in 5 federal offshore leases. The Company owned 40% of any interest in properties acquired by the limited partnership. Unless otherwise noted, the statistical data reported in this offering memorandum reflect only the Company's share of Pogo Gulf Coast's holdings as of March 13, 1998. Effective September 1, 1998, the Company acquired all of the limited partnership interest of Pogo Gulf Coast. Sales The marketing of offshore oil and gas production is subject to the availability of pipelines and other transportation, processing and refining facilities, as well as the existence of adequate markets. As a result, even if hydrocarbons are discovered in commercial quantities, a substantial period of time may elapse before commercial production commences. If pipeline facilities in an area are insufficient, the Company may have to await the construction or expansion of pipeline capacity before production from that area can be marketed. The Company's 52 54 domestic offshore properties are generally located in areas where a pipeline infrastructure is well developed and there is adequate availability in such pipelines to handle the Company's current and projected future production. The Company's Thailand Concession is traversed by two major (34 inches and 36 inches in diameter, respectively) natural gas pipelines that are owned and operated by PTT and which come within approximately 25 miles of the Tantawan Field (and are slightly closer to the Benchamas Field). Thaipo and its joint venture partners in the Tantawan Field signed a long term gas sales contract with PTT in November 1995 which has since been amended to include production from the Benchamas Field. All oil and condensate production from the Tantawan field is initially stored aboard the FPSO and is then sold to various third parties, including PTT, on a tanker load by tanker load basis at prices based on then current world oil prices, typically with reference to the Malaysian Tapis crude oil benchmark price. The buyer is responsible for sending a tanker to off load the oil and condensate it has purchased. It is currently anticipated that crude oil and condensate production from the Benchamas Field, when it commences production, will be initially stored aboard the FSO and sold in the same manner. See "-- International Operations; Contractual Terms Governing the Thailand Concession and Related Production." The marketing of domestic onshore oil and gas production is also subject to the availability of pipelines, crude oil hauling and other transportation, processing and refining facilities as well as the existence of adequate markets. Generally, the Company's onshore domestic oil and gas production is located in areas where commercial production of economic discoveries can be rapidly effectuated. Most of the Company's domestic natural gas sales are currently made in the "spot market" for no more than one month at a time at then currently available prices. Prices on the spot market fluctuate with demand. Crude oil and condensate production is also generally sold one month at a time at the price that is then currently available. Other than any futures contracts which may exist from time to time, and which are referred to in "-- Miscellaneous; Competition and Market Conditions," and the Gas Sales Agreement with PTT for production from the Tantawan and Benchamas Fields (see "-- International Operations; Contractual Terms Governing the Thailand Concession and Related Production"), the Company has no existing contracts that require the delivery of fixed quantities of oil or natural gas other than on a best efforts basis. Enron Corp. and its affiliates and PTT, who purchased $57,965,000 (20% of the Company's consolidated gross revenues) and $30,108,000 (11% of the Company's consolidated gross revenues) of the Company's oil and gas production during 1997, respectively, were the Company's only customers to which sales exceeded 10% of its 1997 revenues. The oil and gas sold to Enron Corp. and its affiliates was sold under a number of short term, generally month to month, contracts. Competition and Market Conditions The Company experiences competition from other oil and gas companies in all phases of its operations, as well as competition from other energy related industries. The Company's profitability and cash flow are highly dependent upon the prices of oil and natural gas, which historically have been seasonal, cyclical and volatile. In general, prices of oil and gas are dependent upon numerous factors beyond the control of the Company, including various weather, economic, political and regulatory conditions. In the past, when natural gas prices in the United States were low, the Company at times elected to curtail certain quantities of its production. In the future, the Company may again elect to curtail certain quantities of its natural gas production. Current oil prices which, on an inflation adjusted basis are at historic lows, continue to have a material adverse effect on the Company's cash flows and, if sustained for a significant length, could have a material adverse effect on the Company's operations and financial condition and may result in a further reduction in funds available under the Company's Credit Agreement. Because it is impossible to predict future oil and gas price movements with any certainty, the Company from time to time enters into contracts on a portion of its production to hedge against the volatility in oil and gas prices. Such hedging transactions, historically, have never exceeded 50% of the Company's total oil and gas production on an energy equivalent basis for any given period. While intended to limit the negative effect of price declines, such transactions could effectively limit the Company's participation in price increases for the covered period, which increases could be significant. As of December 31, 1998, the Company was not a party to any natural gas futures contracts, crude oil swap agreements or other commodity hedging arrangements. When the Company does engage in 53 55 such hedging activities, it may satisfy its obligations with its own production or by the purchase (or sale) of third party production. The Company may also cancel all delivery obligations by offsetting such obligations with equivalent agreements, thereby effecting a purely cash transaction. Operating and Uninsured Risks The Company's operations are subject to risks inherent in the exploration for and production of oil and natural gas, such as blowouts, cratering, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, pollution and other environmental risks. Offshore oil and gas operations are subject to the additional hazards of marine and helicopter operations, such as capsizing, collision and adverse weather and sea conditions. These hazards could result in substantial losses to the Company due to injury or loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. The Company carries insurance which it believes is in accordance with customary industry practices, but is not fully insured against all risks incident to its business. Drilling activities are subject to numerous risks, including the risk that no commercially productive hydrocarbon reserves will be encountered. The cost of drilling, completing and operating wells and of installing production facilities and pipelines is often uncertain. The Company's drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery or availability of material, equipment and fabrication yards. The availability of a ready market for the Company's natural gas production depends on a number of factors, including the demand for and supply of natural gas, the proximity of natural gas reserves to pipelines, the capacity of such pipelines and government regulations. Risks of Foreign Operations Ownership of property interests and production operations in Thailand, and in any other areas outside the United States in which the Company may choose to do business, are subject to the various risks inherent in foreign operations. These risks may include, among other things, currency restrictions and exchange rate fluctuations, loss of revenue, property and equipment as a result of hazards such as expropriation, nationalization, war, insurrection and other political risks, risks of increases in taxes and governmental royalties, renegotiation of contracts with governmental entities, changes in laws and policies governing operations of foreign-based companies and other uncertainties arising out of foreign government sovereignty over the Company's international operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations; Foreign Currency Transaction Gain (Loss)," and "-- Liquidity and Capital Resources; Other Matters; Southeast Asia Economic Issues." The Company's international operations may also be adversely affected by laws and policies of the United States affecting foreign trade, taxation and investment. In addition, in the event of a dispute arising from foreign operations, the Company may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States. The Company seeks to manage these risks by concentrating its international exploration efforts in areas where the Company believes that the existing government is stable and favorably disposed towards United States exploration and production companies. EXPLORATION AND PRODUCTION DATA In the following data "gross" refers to the total acres or wells in which the Company has an interest and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company. Acreage The following table shows the Company's interest in developed and undeveloped oil and gas acreage as of December 31, 1997: 54 56
DEVELOPED UNDEVELOPED ACREAGE(a) ACREAGE(b) ------------------- --------------------- Gross Net Gross Net ----- --- ----- --- DOMESTIC ONSHORE Louisiana.............................. 2,475 598 36,074 10,895 New Mexico............................. 21,021 12,591 58,410 42,932 Texas.................................. 12,084 4,346 103,100 40,769 Other.................................. 3,200 333 238 55 ------ ------ ------ ------ Total Domestic Onshore......... 38,780 17,868 197,822 94,651 ------ ------ ------- ------ DOMESTIC OFFSHORE Louisiana (State)...................... 7,942 3,255 1,508 753 Louisiana (Federal)(c)................. 186,422 61,378 152,879 56,061 Texas (Federal)........................ 40,320 10,251 56,905 16,530 ------ ------ ------ ------ Total Domestic Offshore........ 234,684 74,854 211,292 73,344 ------- ------ ------- ------ Total Domestic................. 273,464 92,722 409,114 167,995 ------- ------ ------- ------- INTERNATIONAL Kingdom of Thailand.................... 260,407 120,682 473,733 219,530 ------- ------- ------- ------- Total Company.................. 533,871 213,404 882,847 387,525 ======= ======= ======= =======
- ----------------- (a) "Developed acreage" consists of lease acres spaced or assignable to production (including acreage held by production) on which wells have been drilled or completed to a point that would permit production of commercial quantities of oil or natural gas. "Developed acreage" in Thailand includes all acreage designated as production area by the Thai government, which currently includes the Tantawan, Maliwan, Benchamas and Pakakrong production areas. (b) "Undeveloped acreage" includes acreage under lease or subject to lease or purchase options that the Company currently expects to exercise. Less than 1% of the Company's total domestic offshore net undeveloped acreage is under leases that have terms expiring in 1998 (unless otherwise extended) and another approximately 1% of total domestic offshore net undeveloped acreage will expire in 1999 (unless otherwise extended). Approximately 7% of the Company's total domestic onshore net undeveloped acreage is under leases that have terms expiring in 1998 (unless otherwise extended) and another approximately 15% of total domestic onshore net undeveloped acreage will expire in 1999 (unless otherwise extended). The Company's total international net undeveloped acreage must be relinquished to the Thai government on July 31, 2000, unless designated as a production area or unless the exploration term is extended. See "--International Operations; Contractual Terms Governing the Thailand Concession and Related Production." (c) The Company also owns overriding royalty interests in one federal lease offshore Louisiana totaling 5,000 gross acres (1,250 net acres). Productive Wells and Drilling Activity The following table shows the Company's interest in productive oil and natural gas wells as of December 31, 1997. For purposes of this table "productive wells" are defined as wells producing hydrocarbons and wells "capable of production" (e.g., natural gas wells waiting for pipeline connections or necessary governmental certification to commence deliveries and oil wells waiting to be connected to currently installed production facilities). This table does not include exploratory or developmental wells which have located commercial quantities of oil or natural gas but which are not capable of commercial production without the installation of material production facilities or which, for a variety of reasons, the Company does not currently believe will be placed on production. 55 57
NATURAL GAS OIL WELLS(a) WELLS(a) ------------------ ---------------- GROSS NET GROSS NET ----- --- ----- --- Offshore United States......................... 129 33.3 113 33.8 Onshore United States.......................... 339 214.4 91 33.1 Kingdom of Thailand............................ -- -- 34 15.8 --- ----- --- ---- Total................................ 468 247.7 238 82.7 === ===== === ====
- ------------------- (a) One or more completions in the same bore hole are counted as one well. The data in the above table includes five gross (.6 net) oil wells and 45 gross (20.4 net) natural gas wells with multiple completions. The following table shows the number of successful gross and net exploratory and development wells in which the Company has participated and the number of gross and net wells abandoned as dry holes during the periods indicated. An onshore well is considered successful upon the installation of permanent equipment for the production of hydrocarbons or when electric logs run to evaluate such wells indicate the presence of commercial hydrocarbons and the Company currently intends to complete such wells. Successful offshore wells consist of exploratory or development wells that have been completed or are "suspended" pending completion (which has been determined to be feasible and economic) and exploratory test wells that were not intended to be completed and that encountered commercially producible hydrocarbons. A well is considered a dry hole upon reporting of permanent abandonment to the appropriate agency.
1997 1996 1995 ------------------ ---------------- ----------------- SUCCESSFUL DRY SUCCESSFUL DRY SUCCESSFUL DRY ---------- --- ---------- --- ---------- --- Gross Wells: Offshore United States Exploratory....................... 4.0 1.0 4.0 2.0 7.0 4.0 Development....................... 12.0 3.0 17.0 3.0 3.0 1.0 Onshore United States Exploratory....................... 18.0 12.0 12.0 4.0 8.0 1.0 Development....................... 50.0 3.0 39.0 1.0 47.0 1.0 Offshore Kingdom of Thailand Exploratory....................... 18.0 1.0 7.0 -- 3.0 -- Development....................... 12.0 -- 16.0 -- 7.0 -- ----- ----- ---- ---- ---- ---- Total........................ 114.0 20.0 95.0 10.0 75.0 7.0 ===== ===== ==== ==== ==== ==== NET WELLS: Offshore United States Exploratory....................... 1.21 .25 1.7 1.5 3.0 1.6 Development....................... 4.15 1.05 4.9 1.5 1.0 0.4 Onshore United States Exploratory....................... 11.27 7.40 6.5 0.9 4.6 1.0 Development....................... 30.18 1.41 24.4 0.7 31.3 0.1 Onshore Kingdom of Thailand Exploratory....................... 8.34 .46 2.4 -- 1.1 -- Development....................... 5.11 -- 7.4 -- 3.2 -- ----- ----- --- ---- ---- --- Total........................ 60.26 10.57 47.3 4.6 44.2 3.1 ===== ===== ==== ==== ==== ===
As of December 31, 1997, the Company was participating in the drilling of 3 gross (1.1 net) offshore domestic wells, 6 gross (4.2 net) onshore wells and 1 gross (0.5 net) wells offshore the Kingdom of Thailand. 56 58 Production and Sales The following table summarizes the Company's average daily production, net of all royalties, overriding royalties and other outstanding interests, for the periods indicated. Natural gas production refers only to marketable production of natural gas on an "as sold" basis.
1997 1996 1995 ------- ------- ------- Located in the United States Natural Gas (Mcf per day)................................... 147,200 107,700 121,000 ======= ======= ======= Liquid Hydrocarbons (Bbls per day) Crude Oil and Condensate................................. 13,712 11,968 11,786 Natural Gas Liquids(a)................................... 2,923 2,173 1,998 ------- ------- ------- Total Domestic Liquid Hydrocarbons.................. 16,635 14,141 13,784 ======= ======= ======= Located in the Kingdom of Thailand Natural Gas (Mcf per day)................................... 37,700 -- -- ======= ======= ======= Liquid Hydrocarbons (Bbls per day) Crude Oil and Condensate................................. 2,421 -- -- ======= ======= =======
- ------------------- (a) NGL production sales includes sales attributable to both the Company's leasehold and plant ownership. The following table shows the average sales prices received by the Company for its production and the average production (lifting) costs per unit of production during the periods indicated. See "-- Miscellaneous; Competition" and "-- Miscellaneous; Market Conditions and Sales."
1997 1996 1995 ------- -------- -------- SALES PRICES: Located in the United States Natural Gas (per Mcf).................................. $ 2.50 $ 2.40 $ 1.63 Crude Oil and Condensate (per Bbl)..................... $ 19.49 $ 22.12 $ 17.80 Natural Gas Liquids (per Bbl).......................... $ 12.89 $ 14.92 $ 11.10 Located in the Kingdom of Thailand Natural Gas (per Mcf).................................. $ 1.93 -- -- Crude Oil and Condensate (per Bbl).......................... $ 18.60 -- -- PRODUCTION (LIFTING) COSTS(a): Located in the United States Natural Gas, Crude Oil, Condensate and Natural Gas Liquids (per Mcf equivalent)...................... $ .49 $ .53 $ .47 Located in the Kingdom of Thailand Natural Gas, Crude Oil and Condensate (per Mcf equivalent)(b)........................................ $ 1.12 -- --
- -------------------- (a) Production costs were converted to common units of measure on the basis of relative energy content. Such production costs exclude all depletion and amortization associated with property and equipment. (b) The major contributing factor to lifting costs are lease operating expenses. A substantial portion of the Company's lease operating expenses in the Kingdom of Thailand relate to lease payments made by a subsidiary of the Company in connection with its bareboat charter of the FPSO, which amounted to $10,200,000 during 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources; Future Capital Requirements; Other Material Long-Term Commitments." 57 59 Reserves The following table sets forth information as to the Company's net proved and proved developed reserves as of December 31, 1997, 1996, and 1995, and the present value as of such dates (based on an annual discount rate of 10%) of the estimated future net revenues from the production and sale of those reserves, as estimated by Ryder Scott in accordance with criteria prescribed by the SEC.
AS OF DECEMBER 31, ----------------------------------- 1997 1996 1995 -------- -------- ------- TOTAL PROVED RESERVES(a): Oil, condensate, and natural gas liquids (MBbls) Located in the United States............................ 29,382 28,270 26,185 Located in the Kingdom of Thailand...................... 28,783 21,332 18,997 -------- -------- -------- Total Company...................................... 58,165 49,602 45,182 ======== ======== ======== Natural Gas (MMcf) Located in the United States............................ 216,720 215,946 196,454 Located in the Kingdom of Thailand...................... 184,768 144,998 131,607 -------- -------- -------- Total Company...................................... 401,488 360,944 328,061 ======== ======== ======== Present value of estimated future net revenues, before income taxes (in thousands)(b) Located in the United States............................ $406,161 $773,127 $400,845 Located in the Kingdom of Thailand...................... 56,620 181,418 131,630 -------- -------- -------- Total Company...................................... $462,781 $954,545 $532,745 ======== ======== ======== TOTAL DEVELOPED RESERVES(a): Oil, condensate, and natural gas liquids (MBbls) Located in the United States............................ 26,168 25,898 22,488 Located in the Kingdom of Thailand...................... 6,982 5,192 -- -------- -------- -------- Total Company...................................... 33,150 31,090 22,488 ======== ======== ======== Natural Gas (MMcf) Located in the United States............................ 179,972 192,034 164,679 Located in the Kingdom of Thailand...................... 59,760 45,998 -- -------- -------- -------- Total Company...................................... 239,732 238,032 164,679 ======== ======== ======== Present value of estimated future net revenues, before income taxes (in thousands)(b) Located in the United States............................ $377,530 $710,871 $359,984 Located in the Kingdom of Thailand...................... 36,692 69,062 -- -------- -------- -------- Total Company...................................... $414,222 $779,933 $359,984 ======== ======== ========
- ------------------------ (a) Gives no effect to the Company's acquisition of Arch in August 1998. See "-- Arch and its Subsidiaries; Oil and Gas Reserves." (b) The Company believes, for the reasons set forth in succeeding paragraphs, that the present value of estimated future net revenues set forth in the Annual Report and calculated in accordance with SEC guidelines are not necessarily indicative of the true present value of the Company's reserves and, due to the fact that essentially all of the Company's domestic natural gas production is currently sold on the spot market, whereas all of the Company's Thai natural gas production is sold pursuant to a long term gas sales contract, such estimates of future net revenues from the Company's domestic and Thai reserves are, accordingly, not useful for comparative purposes. See the discussion on the following pages for the prices used in making these calculations. Natural gas liquids comprised approximately 7% of the Company's total proved liquids reserves and approximately 11% of the Company's proved developed liquids reserves as of December 31, 1997. All hydrocarbon liquid reserves are expressed in standard 42 gallon Bbls. All gas volumes and gas sales are expressed in MMcf at the pressure and temperature bases of the area where the gas reserves are located. Proved reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. Reservoirs are considered proved if economic producibility is supported by 58 60 actual production or formation tests. In certain instances, proved reserves are assigned on the basis of a combination of core analysis and electrical and other type logs which indicate the reservoirs are analogous to reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test. The area of a reservoir considered proved includes (i) that portion delineated by drilling and defined by fluid contacts, if any, and (ii) the adjoining portions not yet drilled that can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of data on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to be recovered from a given date forward. They may be revised as hydrocarbons are produced and additional data becomes available. Proved natural gas reserves are comprised of non-associated, associated and dissolved gas. An appropriate reduction in gas reserves has been made for the expected removal of liquids, for lease and plant fuel and the exclusion of non-hydrocarbon gases if they occur in significant quantities and are removed prior to sale. Reserves that can be produced economically through the application of established improved recovery techniques are included in the proved classification when these qualifications are met: (i) 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, and (ii) it is reasonably certain the project will proceed. Improved recovery includes all methods for supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, including, (i) pressure maintenance, (ii) cycling, and (iii) secondary recovery in its original sense. Improved recovery also includes the enhanced recovery methods of thermal, chemical flooding, and the use of miscible and immiscible displacement fluids. Estimates of proved reserves do not include crude oil, condensate, natural gas, or natural gas liquids being held in underground storage. Depending on the status of development, these proved reserves are further subdivided into: (i) "developed reserves" which are those proved reserves reasonably expected to be recovered through existing wells with existing equipment and operating methods, including (a) "developed producing reserves" which are those proved developed reserves reasonably expected to be produced from existing completion intervals now open for production in existing wells, and (b) "developed non-producing reserves" which are those proved developed reserves which exist behind casing of existing wells which are reasonably expected to be produced through these wells in the predictable future where the cost of making such hydrocarbons available for production should be relatively small compared to the cost of new wells; and (ii) "undeveloped reserves" which are those proved reserves reasonably expected to be recovered from new wells on undrilled acreage, from existing wells where a relatively large expenditure is required and from acreage for which an application of fluid injection or other improved recovery technique is contemplated where the technique has been proved effective by actual tests in the area in the same reservoir. Reserves from undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are included only where it can be demonstrated with reasonable certainty that there is continuity of production from the existing productive formation. In computing future revenues from gas reserves attributable to the Company's domestic interests, prices in effect at December 31, 1997 were used, including current market prices, contract prices and fixed and determinable price escalations where applicable. In accordance with SEC guidelines, the gas prices that were used make no allowances for seasonal variations in gas prices which are likely to cause future yearly average gas prices to be somewhat lower than December gas prices. For domestic gas sold under contract, the contract gas price including fixed and determinable escalations, exclusive of inflation adjustments, was used until the contract expires and then was adjusted to the current market price for the area and held at this adjusted price to depletion of the reserves. In computing future revenues from liquids attributable to the Company's domestic interests, prices in effect at December 31, 1997 were used and these prices were held constant to depletion of the properties. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves as well as any ad valorem and other severance taxes but do not include, unless otherwise noted, any provisions for corporate income taxes. 59 61 In computing future revenues from the Company's gas reserves attributable to the Company's interests in the Kingdom of Thailand, the current contract price under the Gas Sales Agreement was used, without giving effect to any of the adjustments provided for in the Gas Sales Agreement, due to their indeterminate nature as of December 31, 1997, in accordance with SEC guidelines. In computing future revenues from liquids attributable to the Company's interests in the Kingdom of Thailand, a price was used which the Company believes approximates the price that the Company would have received for its production from the Thailand Concession based upon the world market price for Tapis benchmark crude on December 31, 1997, and this price was held constant until depletion of the Company's reserves in the Kingdom of Thailand. The future revenues are adjusted to reflect the Company's net revenue interest in these reserves and the Company's obligations under the Thailand Concession, including the payment of SRB and applicable production bonuses, but does not include, unless otherwise noted, any provisions for U.S. or Thai corporate income or other taxes. In accordance with SEC guidelines, the prices used by the Company to calculate the present value of estimated future revenues are determined on a well or field by field basis, as applicable, as described above and were held constant over the productive life of the reserves. The initial weighted average prices used by Ryder Scott were as follows:
AS OF DECEMBER 31, ------------------------------- 1997 1996 1995 ------ ------ ------ INITIAL WEIGHTED AVERAGE PRICE (in U.S. dollars): Oil, condensate, and natural gas liquids (per Bbl) Located in the United States............................ $16.60 $24.06 $19.10 Located in the Kingdom of Thailand...................... $16.00 $24.56 $18.71 Natural Gas (per Mcf) Located in the United States............................ $ 2.30 $ 3.93 $ 2.08 Located in the Kingdom of Thailand...................... $ 1.83 $ 2.09 $ 2.02
The estimates of future net revenue from the Company's domestic and Thailand properties are based on existing law where the properties are located and are calculated in accordance with SEC guidelines. Operating costs for the leases and wells include only those costs directly applicable to the leases or wells. When applicable, the operating costs include a portion of general and administrative costs allocated directly to the leases and wells under terms of operating agreements. Development costs are based on authorization for expenditure for the proposed work or actual costs for similar projects. The current operating and development costs were held constant throughout the life of the properties. For properties located onshore, the estimates of future net revenues and the present value thereof do not consider the salvage value of the lease equipment or the abandonment cost of the lease since both are relatively insignificant and tend to offset each other. The estimated net cost of abandonment after salvage was considered for offshore properties where such costs net of salvage are significant. No deduction was made for indirect costs such as general and administrative and overhead expenses, loan repayments, interest expenses, and exploration and development prepayments. Accumulated gas production imbalances, if any, have been taken into account. Production data used to arrive at the estimates set forth above includes estimated production for the last few months of 1997. The future production rates from reservoirs now on production may be more or less than estimated because of, among other reasons, mechanical breakdowns and changes in market demand or allocable set by regulatory bodies. Properties which are not currently producing may start producing earlier or later than anticipated in the estimates of future production rates. The future prices received by the Company for the sales of its production may be higher or lower than the prices used in calculating the estimates of future net revenues and the present value thereof as set forth herein, and the operating costs and other costs relating to such production may also increase or decrease from existing levels; however, such possible changes in prices and costs were, in accordance with rules adopted by the SEC, omitted from consideration in arriving at such estimates. See "Risk Factors -- Volatility of oil and gas markets affects us" and "-- Miscellaneous; Competition and Market Conditions." 60 62 There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those of Ryder Scott, the Company's reserve engineers. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate, which revisions may be material. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The Company is periodically required to file estimates of its oil and gas reserve data with various U.S. governmental regulatory authorities and agencies, including the Federal Energy Regulatory Commission ("FERC") and the Federal Trade Commission; with respect to reserves located in Canada, with the Alberta Energy Utilities Board and, with respect to reserves located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT, which the Company considers a quasi-governmental authority. In addition, estimates are from time to time furnished to governmental agencies in connection with specific matters pending before such agencies. The basis for reporting reserves to these agencies, in some cases, is not comparable to that furnished by Ryder Scott in accordance with SEC guidelines because of the nature of the various reports required. The major differences generally include differences in the time as of which such estimates are made, differences in the definition of reserves, requirements to report in some instances on a gross, net or total operator basis and requirements to report in terms of smaller geographical units. During 1997, no estimates by the Company of its total proved net oil and gas reserves were filed with or included in reports to any governmental authority or agency other than the SEC and, with respect to reserves relating to the Company's properties located in Thailand, the Kingdom of Thailand's Department of Mineral Resources and PTT. GOVERNMENT REGULATION The Company's operations are affected from time to time in varying degrees by political developments and governmental laws and regulations. Rates of production of oil and gas have for many years been subject to governmental conservation laws and regulations, and the petroleum industry has been subject to federal and state tax laws dealing specifically with it. Federal Income Tax The Company's operations are significantly affected by certain provisions of the federal income tax laws applicable to the petroleum industry. The principal provisions affecting the Company are those that permit the Company, subject to certain limitations, to deduct as incurred, rather than to capitalize and amortize, its domestic "intangible drilling and development costs" and to claim depletion on a portion of its domestic oil and gas properties based on 15% of its oil and gas gross income from such properties (up to an aggregate of 1,000 Bbls per day of domestic crude oil and/or equivalent units of domestic natural gas) even though the Company has little or no basis in such properties. Under certain circumstances, however, a portion of such intangible drilling and development costs and the percentage depletion allowed in excess of basis will be tax preference items that will be taken into account in computing the Company's alternative minimum tax. Environmental Matters Domestic oil and gas operations are subject to extensive federal regulation and, with respect to federal leases, to interruption or termination by governmental authorities on account of environmental and other considerations including the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") also known as the "Superfund Law." The recent trend towards stricter standards in environmental legislation and regulation may continue, and this could increase costs to the Company and others in the industry. Oil and gas lessees are subject to liability for the costs of clean-up of pollution resulting from a lessee's operations, and may also be subject to liability for pollution damages. The Company maintains insurance against costs of clean-up operations, but is not fully insured against all such risks. A serious incident of pollution may, as it has in the past, 61 63 also result in the Department of the Interior requiring lessees under federal leases to suspend or cease operation in the affected area. The operators of the Company's properties have numerous applications pending before the Environmental Protection Agency (the "EPA") for National Pollution Discharge Elimination System water discharge permits with respect to offshore drilling and production operations. The issue generally involved is whether effluent discharges from each facility or installation comply with the applicable federal regulations. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for 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 an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or cooperate fully in the cleanup, liability limits likewise do not apply. Few defenses exist to the liability imposed by the OPA. The OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to cover at least some costs in a potential spill. For tank vessels, including mobile offshore drilling rigs, the OPA imposes on owners, operators and charterers of the vessels, an obligation to maintain evidence of financial responsibility of up to $10,000,000 depending on gross tonnage. With respect to offshore facilities, proof of greater levels of financial responsibility may be applicable. For offshore facilities that have a worst case oil spill potential of more than 1,000 Bbls (which includes many of the Company's offshore producing facilities), certain amendments to the OPA that were enacted in 1996 provide that the amount of financial responsibility that must be demonstrated for most facilities ranges from $10,000,000 to $35,000,000, depending upon location, with higher amounts, up to $150,000,000 in certain limited circumstances. The Company believes that it currently has established adequate proof of financial responsibility for its offshore facilities at no significant increase in expense over recent prior years. However, the Company cannot predict whether these financial responsibility requirements under the OPA amendments will result in the imposition of substantial additional annual costs to the Company in the future or otherwise materially adversely effect the Company. The impact, however, should not be any more adverse to the Company than it will be to other similarly situated or less capitalized owners or operators in the Gulf of Mexico. The Company's onshore operations are subject to numerous United States federal, state, and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment including CERCLA. Such laws and regulations, among other things, impose absolute liability on the lessee under a lease for the cost of clean-up of pollution resulting from a lessee's operations, subject the lessee to liability for pollution damages, may require suspension or cessation of operations in affected areas, and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater. Such laws could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Federal, state and local initiatives to further regulate the disposal of oil and gas wastes are also pending in certain states, and these initiatives could have a similar impact on the Company. The Company is asked to comment on the costs it incurred during the prior year on capital expenditures for environmental control facilities and the amount it anticipates incurring during the coming year. The Company believes that, in the course of conducting its oil and gas operations, many of the costs attributable to environmental control facilities would have been incurred absent environmental regulations as prudent, safe oilfield practice. During 1997, the Company incurred capital expenditures of approximately $610,000 for environmental control facilities, primarily relating to the installation of certain environmental control facilities on two platforms installed in the Gulf of Thailand. The Company budgeted approximately $1,630,000 for expenditures involving environmental control facilities during 1998, including, among other things, two salt water disposal facilities in New Mexico and 62 64 environmental control equipment for three platforms in the Gulf of Thailand and two platforms in the Gulf of Mexico. Other Laws and Regulations Various laws and regulations often require permits for drilling wells and also cover spacing of wells, the prevention of waste of oil and gas including maintenance of certain gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other regulations that could be promulgated by the jurisdictions in which the Company has production, could be to limit the number of wells that could be drilled on the Company's properties and to limit the allowable production from the successful wells completed on the Company's properties, thereby limiting the Company's revenues. The Minerals Management Service of the Department of the Interior (the "MMS") administers the oil and gas leases held by the Company on federal onshore lands and offshore tracts in the Outer Continental Shelf. The MMS holds a royalty interest in these federal leases on behalf of the federal government. While the royalty interest percentage is fixed at the time that the lease is entered into, from time to time the MMS changes or reinterprets the applicable regulations governing its royalty interests, and such action can indirectly affect the actual royalty obligation that the Company is required to pay. In a letter dated May 3, 1993, the MMS announced a reinterpretation of its right to collect royalty payments from producers on certain settlements in which such producers and pipeline companies were involved a number of years ago. The MMS reinterpretation has been challenged in court by various producers and trade groups representing them. On August 27, 1996, in Independent Petroleum Association of America, et al. v. Babbit et al., Nos. 95-5210 etc., the United States Court of Appeals for the District of Columbia Circuit held that the May 3, 1993, reinterpretation was invalid and unenforceable. Unless and until this or other similar cases are resolved in favor of the MMS' reinterpretation of its regulations, it is unlikely that the Company or other producers will be legally required to pay royalties on such settlement agreements. The Company was involved in several settlement agreements with pipelines that could be subject to the MMS' new reinterpretation. The MMS has reviewed the Company's and other producers' settlement agreements, to determine whether it believes any additional royalty payments may be due and has asserted that additional royalties may be due in connection with two of the Company's settlement agreements. Based upon existing case law, the Company has asserted through the administrative appeals process, and continues to believe, that it does not owe any additional royalties beyond what it has previously paid. However, in the event that the MMS is able to successfully assert that additional royalty is due from the Company in connection with settlement agreements to which the Company is a party, the Company does not currently believe that such additional assessment will have a material adverse impact on the financial position or results of operations of the Company. Recently the MMS and various state and municipal authorities have attempted to collect alleged underpayment of royalties from various integrated oil companies in connection with sale transactions between exploration and production affiliates and pipeline affiliates of the same company. The Company has not been named in any of these collection efforts, a fact that the Company believes is primarily due to its never having sold any oil or gas production from one of its affiliates to another. The Company does not believe that it has any material liability for underpayment of royalty in connection with affiliate transactions, including those described above. The FERC has recently embarked on regulatory initiatives relating to its jurisdiction over rates for natural gas gathering services provided by interstate pipelines and to the availability of market-based and other alternative rate mechanisms to such pipelines for transmission and storage services. Among the FERC initiatives is the creation of a pilot program to determine the effect on rates of lifting price caps on the rates for interruptible transportation, short-term firm transportation, and for transportation using capacity released by the firm transportation customers of interstate pipelines. In addition, the FERC has announced and implemented a policy allowing pipelines and transportation customers to negotiate rates above the otherwise applicable maximum lawful cost-based rates on the condition that the pipelines alternatively offer so-called recourse rates equal to the maximum lawful cost-based rates. This negotiated/recourse rate policy has been challenged in the United States Court of Appeals for the District of Columbia, and the appeal remains pending. With respect to gathering services, the FERC has issued orders declaring that certain facilities owned by interstate pipelines primarily perform a gathering function, and may be transferred to 63 65 affiliated and non-affiliated entities that are not subject to the FERC's rate jurisdiction. These orders have been generally upheld on appeal to the courts. The Company cannot predict the ultimate outcome of these developments, nor the effect of these developments on transportation rates. Inasmuch as the rates for these pipeline services can affect the gas prices received by the Company for the sale of its production, the FERC's actions may have an impact on the Company. However, the impact should not be substantially different on the Company than it will on other similarly situated gas producers and sellers. EMPLOYEES As of December 31, 1998, the Company and its subsidiaries had 185 full-time employees, including 24 in its Bangkok, Thailand office and seven in its Calgary, Canada office. None of the Company's employees are presently represented by a union for collective bargaining purposes. The Company considers its relations with its employees to be excellent. ARCH AND ITS SUBSIDIARIES Overview Arch and its subsidiaries primarily engage in oil and natural gas exploration, development, production, transportation and marketing in the Southwestern United States and Western Canada. Arch and its subsidiaries are also active in the acquisition of interests in both producing and non-producing oil and gas leases. Arch was acquired by the Company in a stock-for-stock tax-free merger accounted for as a purchase. In connection with the merger, the Company paid off $36,500,000 of Arch's existing bank debt and a $15,246,000 production payment obligation (the "VPP") utilizing funds under its Credit Agreement. The Company also exchanged $5,000,000 of Arch's existing convertible subordinated notes, 777,273 shares of Arch preferred stock (having a liquidation preference of $20,000,000) and 17,321,804 shares of Arch common stock for approximately 2,540,000 shares of Common Stock. As of January 1, 1999, Pogo Canada Ltd. (formerly known as Arch Petroleum Ltd. ("APL")), Saginaw Pipeline Company, L.C. ("Saginaw") and its subsidiary Industrial Natural Gas, L.C. ("ING") were the only subsidiaries of Arch. All of the Company's and Arch's operations in Canada are conducted by Pogo Canada Ltd. Saginaw owns a six inch pipeline that extends approximately 100 miles from Wichita Falls, Texas to Saginaw, Texas. ING, a subsidiary of Saginaw, markets the sale and transmission of natural gas through the Saginaw pipeline. Oil and Gas Reserves The following table sets forth a summary of Arch's oil and gas reserve quantities and present value of future net cash flows associated therewith at the dates indicated. All domestic oil and gas reserves were estimated by Ryder Scott, independent petroleum engineers, and are detailed in a report prepared for the exclusive use of Arch. Oil and gas reserves for APL were estimated by Ryder Scott and Sproule Associates Limited, both independent petroleum engineers in Canada in 1997 and 1996, respectively. All such estimations were made in accordance with regulations promulgated by the SEC. Such reserve reports are available for examination at Arch's corporate headquarters in Houston, Texas.
UNITED STATES CANADA TOTAL -------------- ------------ ------------- Present value of discounted future net cash flows before income taxes: December 31, 1997............................... $ 60,289,500 $ 8,422,300 $ 68,711,800 December 31, 1996............................... 101,701,100 11,775,700 113,476,800 December 31, 1995............................... 64,296,200 -- 64,296,200 Proved developed and undeveloped reserves: Oil (Bbls) December 31, 1997............................... 5,060,500 812,900 5,873,400 December 31, 1996............................... 3,861,000 856,900 4,717,900
64 66
December 31, 1995............................... 4,030,200 -- 4,030,200 Gas (Mcf) December 31, 1997............................... 68,430,700 6,575,000 75,005,700 December 31, 1996............................... 59,120,900 1,136,000 60,256,900 December 31, 1995............................... 61,286,300 -- 61,286,300 Proved developed reserves: Oil (Bbls) December 31, 1997............................... 4,475,600 693,800 5,169,400 December 31, 1996............................... 3,128,400 809,900 3,938,300 December 31, 1995............................... 2,993,600 -- 2,993,600 Gas (Mcf) December 31, 1997............................... 65,324,800 6,489,000 71,813,800 December 31, 1996............................... 54,981,200 504,000 55,485,200 December 31, 1995............................... 55,628,500 -- 55,628,500
The United States figures above exclude 1.9 Bcf, 8.7 Bcf and 11.9 Bcf of proved gas reserves and $436,400, $2,960,600 and $11,672,700 of discounted future net cash flows (after operating expenses and severance taxes) at December 31, 1997, 1996 and 1995, respectively, which were sold to Enron Corp. in the VPP. See "-- Exploration and Production Data; Reserves" for key factors and additional information related to Arch's reserve estimates. Leases and Wells Owned At December 31, 1997, Arch owned interests in the following acreage.
UNITED STATES CANADA TOTAL ------------- ------- ------- Developed acres: Gross........................................... 67,017 35,223 102,240 Net............................................. 16,950 3,810 20,760 Undeveloped acres: Gross........................................... 74,435 106,705 181,140 Net............................................. 23,452 51,777 75,229
As of December 31, 1997, Arch's interests in wells owned were as follows:
TOTAL UNITED STATES CANADA ----------------- ----------------- ----------------- Gross Net Gross Net Gross Net TYPE Wells Wells Wells Wells Wells Wells - ------ ----- ----- ----- ----- ----- ----- Oil ...... 1,209 363.7 1,076 344.8 133 18.9 Gas ...... 134 62.8 131 62.2 3 0.6 ----- ----- ----- ----- --- ---- 1,343 426.5 1,207 407.0 136 19.5 ===== ===== ===== ===== === ====
65 67 MANAGEMENT AND BOARD OF DIRECTORS EXECUTIVE OFFICERS Executive officers of the Company are appointed annually to serve for the ensuing year or until their successors have been elected or appointed. The executive officers of the Company, their age as of December 31, 1998, and the year each was elected to his present position are as follows:
YEAR EXECUTIVE OFFICER EXECUTIVE OFFICE AGE ELECTED - ------------------------ ----------------------------------------------- --- ------- Paul G. Van Wagenen Chairman of the Board, President and Chief 52 1991 Executive Officer Stuart P. Burbach Executive Vice President-- Exploration 46 1998 Kenneth R. Good Executive Vice President 61 1998 Jerry A. Cooper Senior Vice President and Western Division 50 1998 Manager R. Phillip Laney Senior Vice President and Manager of Worldwide 58 1998 New Ventures John O. McCoy, Jr. Senior Vice President and Chief Administrative 47 1998 Officer J. D. McGregor Senior Vice President-- Sales 54 1998 Bruce E. Archinal Vice President and Onshore Division Manager 46 1997 David R. Beathard Vice President-- Engineering 40 1997 Stephen R. Brunner Vice President-- Operations 40 1997 Frank Davis III Vice President-- Land 52 1997 John W. Elsenhans Vice President and Chief Financial Officer 46 1998 Thomas E. Hart Vice President and Controller 56 1988 Ronald B. Manning Vice President and General Counsel 45 1995 Gerald A. Morton Vice President-- Law and Corporate 40 1997 Secretary
Prior to assuming their present positions with the Company, the business experience of each executive officer for more than the last five years was as follows: Mr. Van Wagenen, who joined the Company in 1979, served as President and Chief Operating Officer of the Company since 1990; Mr. Burbach served as Vice President and Offshore Division Manager since rejoining the Company in 1991; Mr. Good, who joined the Company in 1977, served as Corporate Senior Vice President of the Company since 1996 and prior thereto served as the Company's Senior Vice President -- Land and Budgets since 1991; Mr. Cooper, who joined the Company in 1979, served as Vice President and Western Division Manager for the Company since 1991; Mr. Laney, who joined the Company in 1977, served as Vice President and International Exploration Manager for the Company since 1991; Mr. McCoy, who joined the Company in 1978, served as Vice President and Chief Administrative Officer of the Company since 1989; Mr. McGregor, who joined the Company in 1981, served as Vice President -- Sales since 1988; Mr. Archinal, who joined the Company in 1982, served as the Company's Onshore Division Manager since 1994 and prior thereto served as Offshore Division Exploration Manager for the Company since 1991; Mr. Beathard, who joined the Company in 1982, served as Manager of Petroleum Engineering for the Company since 1991; Mr. Brunner served as Resident Manager of the Company's Thailand operations since 1995, prior to which he was an Operations Manager for the Company since joining in 1994 and prior thereto held various positions in the energy industry, the most recent of which was as Operations Manager for Zilkha Energy since 1991; Mr. Davis, who joined the Company in 1978, served as Land Manager for the Company since 1991; Mr. Elsenhans, who joined the Company in 1991, served as Vice President -- Finance and Treasurer for the Company since 1995, and prior thereto was Director, Corporate Finance for the Company since 1991; Mr. Hart was Controller for the Company since joining the Company in 1977; Mr. Manning, who joined the Company in 1987, was Corporate Secretary and an Associate General Counsel for the Company since 1990; and Mr. Morton was an Associate General Counsel for the Company since 1993. 66 68 BOARD OF DIRECTORS The following is a list of the members of the Company's Board of Directors and their principal occupations.
NAME PRINCIPAL OCCUPATION - ---- -------------------- Paul G. Van Wagenen.............................. Chairman of the Board, President and Chief Executive Officer of the Company Jerry M. Armstrong*.............................. Rancher Tobin Armstrong*................................. Rancher Jack S. Blanton.................................. President, Eddy Refining Company; Chairman, Houston Endowment, Inc. W. M. Brumley, Jr................................ Personal Investments John B. Carter, Jr............................... Director, Sterling Bancshares William L. Fisher................................ Barrow Chair and Geological Sciences Professor University of Texas at Austin Gerrit W. Gong................................... Freeman Chair and Director of Asian Studies, Center for Strategic and International Studies J. Stuart Hunt................................... Personal Investments Frederick A. Klingenstein........................ Chairman of the Board, Klingenstein, Fields & Co., L.P. Jack A. Vickers.................................. Chairman of the Board, The Vickers Companies
- ---------- * Jerry M. Armstrong and Tobin Armstrong are not related to each other. 67 69 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Company entered into a Registration Rights Agreement with the initial purchasers of the outstanding notes in which the Company agreed to file a registration statement relating to an offer to exchange the outstanding notes for new notes. The Company also agreed to use its reasonable best efforts to complete that offer within 180 days after January 15, 1999. The Company is offering the new notes under this prospectus to satisfy those obligations under the Registration Rights Agreement. Under limited circumstances, the Company will use its reasonable best efforts to cause the SEC to declare effective a shelf registration statement with respect to the resale of the outstanding notes and keep the shelf registration statement effective for up to two years after the effective date of the shelf registration statement. These circumstances include: o if any changes in law or applicable interpretations by the staff of the SEC do not permit the Company to effect the exchange offer as contemplated by the Registration Rights Agreement o if the exchange offer is not consummated within 180 days after January 15, 1999 o if any initial purchaser of the outstanding notes so requests, in certain circumstances If the Company fails to comply with deadlines for registering the issuance of the new notes and completion of the exchange offer, it will be required to pay additional interest to holders of the outstanding notes. Please read the section captioned "Outstanding Notes Registration Rights Agreement" for more details regarding the Registration Rights Agreement. To exchange an outstanding note for transferable new notes in the exchange offer, the holder of that outstanding note will be required to make the following representations: o any new note the holder receives will be acquired in the ordinary course of its business o the holder has no arrangement with any person to participate in the distribution of the new notes o if the holder is not a broker-dealer, that holder is not engaged in and does not intend to engage in the distribution of the new notes o if the holder is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities, that holder will deliver a prospectus, as required by law, in connection with any resale of such new notes o the holder is not the Company's "affiliate," as defined in Rule 405 of the Securities Act, nor a broker-dealer tendering outstanding notes acquired directly from the Company for its own account RESALE OF NEW NOTES Based on interpretations of the SEC staff in no action letters issued to third parties, the Company believes that each new note issued under the exchange offer may be offered for resale, resold and otherwise transferred by the holder of that new note without compliance with the registration and prospectus delivery provisions of the Securities Act if: o the holder is not the Company's "affiliate" within the meaning of Rule 405 under the Securities Act 68 70 o such new note is acquired in the ordinary course of the holder's business o the holder does not intend to participate in the distribution of new notes If a holder of outstanding notes tenders in the exchange offer with the intention of participating in any manner in a distribution of the new notes, that holder o cannot rely on such interpretations by the SEC staff o must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction Unless an exemption from registration is otherwise available, any security holder intending to distribute new notes should be covered by an effective registration statement under the Securities Act containing the selling securityholder's information required by Item 507 of Regulation S-K under the Securities Act. This prospectus may be used for an offer to resell, resale or other retransfer of new notes only as specifically described in this prospectus. Only broker-dealers that acquired the outstanding notes as a result of market-making activities or other trading activities may participate in the exchange offer. Please read the section captioned "Plan of Distribution" for more details regarding the transfer of new notes. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, the Company will accept for exchange any outstanding notes properly tendered and not withdrawn prior to the expiration date. The Company will issue $1,000 principal amount of new notes in exchange for each $1,000 principal amount of outstanding notes surrendered under the exchange offer. Outstanding notes may be tendered only in integral multiples of $1,000. The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered for exchange. As of the date of this prospectus, $150 million aggregate principal amount of the outstanding notes are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of outstanding notes. There will be no fixed record date for determining registered holders of outstanding notes entitled to participate in the exchange offer. The Company intends to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations of the SEC. Outstanding notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the indenture relating to the notes and the Registration Rights Agreement. The Company will be deemed to have accepted for exchange properly tendered outstanding notes when it has given oral or written notice of the acceptance to the exchange agent and complied with the applicable provisions of the Registration Rights Agreement. The exchange agent will act as agent for the tendering holders for the purposes of receiving the new notes from the Company. Holders tendering outstanding notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of outstanding notes. The Company will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. It is important for noteholders to read the section labeled "--Fees and Expenses" for more details regarding fees and expenses incurred in the exchange offer. 69 71 The Company will return any outstanding notes that it does not accept for exchange for any reason without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer. EXPIRATION DATE The exchange offer will expire at 5:00 p.m., New York City time on , 1999, unless in the Company's sole discretion, the Company extends it. EXTENSIONS, DELAY IN ACCEPTANCE, TERMINATION OR AMENDMENT The Company expressly reserves the right, at any time or at various times, to extend the period of time during which the exchange offer is open. During any such extensions, all outstanding notes previously tendered will remain subject to the exchange offer, and the Company may accept them for exchange. In order to extend the exchange offer, the Company will notify the exchange agent orally or in writing of any extension. The Company will also make a public announcement of the extension no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. If any of the conditions described below under "--Conditions to the Exchange Offer" have not been satisfied, the Company reserves the right, in its sole discretion to delay accepting for exchange any outstanding notes or to extend the exchange offer or to terminate the exchange offer by giving oral or written notice of such delay, extension or termination to the exchange agent. Subject to the terms of the Registration Rights Agreement, the Company also reserves the right to amend the terms of the exchange offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders of outstanding notes. If the Company amends the exchange offer in a manner that it determines to constitute a material change, it will promptly disclose such amendment by means of a prospectus supplement. The supplement will be distributed to the registered holders of the outstanding notes. Depending upon the significance of the amendment and the manner of disclosure to the registered holders, the Company will extend the exchange offer if the exchange offer would otherwise expire during such period. Without limiting the manner in which the Company may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, the Company will have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. CONDITIONS TO THE EXCHANGE OFFER Despite any other term of the exchange offer, the Company will not be required to accept for exchange, or exchange any new notes for, any outstanding notes, and the Company may terminate the exchange offer as provided in this prospectus before accepting any outstanding notes for exchange, if in the Company's reasonable judgment the exchange offer, or the making of any exchange by a holder of outstanding notes, would violate applicable law or any applicable interpretation of the staff of the SEC. In addition, the Company will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us (1) the representations described under "--Purpose and Effect of the Exchange Offer," "--Procedures for Tendering" and "Plan of Distribution" and (2) such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to the Company an appropriate form for registration of the new notes under the Securities Act. The Company expressly reserves the right to amend or terminate the exchange offer, and to reject for exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of the conditions 70 72 to the exchange offer specified above. The Company will give oral or written notice of any extension, amendment, non-acceptance or termination to the holders of the outstanding notes as promptly as practicable. These conditions are for the Company's sole benefit and the Company may assert them or waive them in whole or in part at any time or at various times in our sole discretion. If the Company fails at any time to exercise any of these rights, this failure will not mean that the Company has waived its rights. Each such right will be deemed an ongoing right that the Company may assert at any time or at various times. In addition, the Company will not accept for exchange any outstanding notes tendered, and will not issue new notes in exchange for any such outstanding notes, if at such time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture relating to the notes under the Trust Indenture Act of 1939. PROCEDURES FOR TENDERING How to Tender Generally Only a holder of outstanding notes may tender such outstanding notes in the exchange offer. To tender in the exchange offer, a holder must: o complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and mail or deliver such letter of transmittal or facsimile to the exchange agent prior to the expiration date o comply with the automated tender offer program procedures of The Depository Trust Company, or DTC, described below In addition, either: o the exchange agent must receive outstanding notes along with the letter of transmittal o the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such outstanding notes into the exchange agent's account at DTC according to the procedure for book-entry transfer described below or a properly transmitted agent's message, or o the holder must comply with the guaranteed delivery procedures described below To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at its address provided above under "Prospectus Summary--The Exchange Agent" prior to the expiration date. The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between the holder and the Company in accordance with the terms and subject to the conditions described in this prospectus and in the letter of transmittal. THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE HOLDER'S ELECTION AND RISK. RATHER THAN MAIL THESE ITEMS, THE COMPANY RECOMMENDS THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, HOLDERS SHOULD ALLOW SUFFICIENT TIME TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. HOLDERS SHOULD NOT SEND THE LETTER OF TRANSMITTAL OR OUTSTANDING NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR YOU. 71 73 How to Tender--Beneficial Owners Beneficial owners of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee wishing to tender those notes should contact the registered holder promptly and instruct it to tender on the beneficial owner's behalf. Beneficial owners who wish to tender on their own behalf must, prior to completing and executing the letter of transmittal and delivering their outstanding notes, either: o make appropriate arrangements to register ownership of the outstanding notes in their name, or o obtain a properly completed bond power from the registered holder of outstanding notes The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date. Signatures and Signature Guarantees Holders of outstanding notes must have signatures on a letter of transmittal or a notice of withdrawal described below guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., 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 Securities Exchange Act of 1934, that is a member of one of the recognized signature guarantee programs identified in the letter of transmittal, unless the outstanding notes are tendered: o by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal and the new notes are being issued directly to the registered holder of the outstanding notes tendered in the exchange for those new notes o for the account of a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution When Endorsements or Bond Powers are Needed If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes, the outstanding notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder's name appears on the outstanding notes and a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution must guarantee the signature on the bond power. If the letter of transmittal or any outstanding notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or other acting in a fiduciary or representative capacity, those persons should so indicate when signing. Unless waived by the Company, they should also submit evidence satisfactory to the Company of their authority to deliver the letter of transmittal. Tendering Through DTC's Automated Tender Offer Program The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may use DTC's automated tender offer program to tender. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the outstanding notes to 72 74 the exchange agent in accordance with its procedures for transfer. DTC will then send 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, to the effect that: o DTC has received an express acknowledgment from a participant in its automated tender offer program that is tendering outstanding notes that are the subject of such book-entry confirmation o such participant has received and agrees to be bound by the terms of the letter of transmittal or, in the case of an agent's message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable notice of guaranteed delivery o the agreement may be enforced against such participant Determinations Under the Exchange Offer The Company will determine in its sole discretion all questions as to the validity, form, eligibility, time of receipt, acceptance of tendered outstanding notes and withdrawal of tendered outstanding notes. The Company's determination will be final and binding. The Company reserves the absolute right to reject any outstanding notes not properly tendered or any outstanding notes the Company's acceptance of which would, in the opinion of its counsel, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular outstanding notes. The Company's 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 outstanding notes must be cured within such time as the Company shall determine. Neither the Company, the exchange agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of outstanding notes, and they will incur no liability for failure to give such notification. Tenders of outstanding notes will not be deemed made until such defects or irregularities have been cured or waived. Any outstanding 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 to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. When the Company Will Issue New Notes In all cases, the Company will issue new notes for outstanding notes that it has accepted for exchange under the exchange offer only after the exchange agent timely receives: o outstanding notes or a timely book-entry confirmation of such outstanding notes into the exchange agent's account at DTC o a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent's message Return of Outstanding Notes Not Accepted or Exchanged If the Company does not accept any tendered outstanding notes for exchange for any reason described in the terms and conditions of the exchange offer or if outstanding notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or non-exchanged outstanding notes will be returned without expense to their tendering holder. In the case of outstanding notes tendered by book-entry transfer into the exchange agent's account at DTC according to the procedures described below, such non-exchanged outstanding notes will be credited to an account maintained with DTC. These actions will occur as promptly as practicable after the expiration or termination of the exchange offer. 73 75 Representations to the Company Each holder, by signing or agreeing to be bound by the letter of transmittal, will represent to the Company that, among other things: o any new notes that the holder receives will be acquired in the ordinary course of its business o that holder has no arrangement or understanding with any person or entity to participate in the distribution of the new notes o if the holder is not a broker-dealer, that the holder is not engaged in and does not intend to engage in the distribution of the new notes o if the holder is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities, that the holder will deliver a prospectus, as required by law, in connection with any resale of such new notes o that holder is not the Company's "affiliate," as defined in Rule 405 of the Securities Act, or, if the holder is an affiliate of the Company, that holder will comply with any applicable registration and prospectus delivery requirements of the Securities Act BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the outstanding notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution participating in DTC's system may make book-entry delivery of outstanding notes by causing DTC to transfer such outstanding notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. Holders of outstanding notes who are unable to deliver confirmation of the book-entry tender of their outstanding notes into the exchange agent's account at DTC or all other documents required by the letter of transmittal to the exchange agent on or prior to the expiration date must tender their outstanding notes according to the guaranteed delivery procedures described below. GUARANTEED DELIVERY PROCEDURES Any holder wishing to tender its outstanding notes but whose outstanding notes are not immediately available or who cannot deliver its outstanding notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC's automated tender offer program prior to the expiration date may tender if: o the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution o prior to the expiration date, the exchange agent receives from such member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., commercial bank or trust company having an office or correspondent in the United States, or eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery or a properly transmitted agent's message and notice of guaranteed delivery: o setting forth the holder's name and address, the registered number(s) of the holder's outstanding notes and the principal amount of outstanding notes tendered 74 76 o stating that the tender is being made thereby o guaranteeing that, within five business days after the expiration date, the letter of transmittal or facsimile thereof, together with the outstanding notes or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent o the exchange agent receives such properly completed and executed letter of transmittal or facsimile thereof, as well as all tendered outstanding notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within five business days after the expiration date Upon request to the exchange agent, a notice of guaranteed delivery will be sent to a holder if it wishes to tender its outstanding notes according to the guaranteed delivery procedures described above. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, any holder may withdraw its tender at any time prior to 5:00 p.m., New York City time, on the expiration date (unless previously accepted for exchange). For a withdrawal to be effective: o the exchange agent must receive a written notice of withdrawal at one of the addresses listed above under "Prospectus Summary--The Exchange Agent" or o the withdrawing holder must comply with the appropriate procedures of DTC's automated tender offer program system Any notice of withdrawal must: o specify the name of the person who tendered the outstanding notes to be withdrawn (the "Depositor") o identify the outstanding notes to be withdrawn, including the registration number or numbers and the principal amount of such outstanding notes o be signed by the Depositor in the same manner as the original signature on the letter of transmittal used to deposit those outstanding notes (or be accompanied by documents of transfer sufficient to permit the trustee for the outstanding notes to register the transfer into the name of the Depositor withdrawing the tender) o specify the name in which such outstanding notes are to be registered, if different from that of the Depositor If outstanding notes have been tendered under the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of DTC. The Company will determine all questions as to the validity, form, eligibility and time of receipt of notice of withdrawal, and the Company's determination shall be final and binding on all parties. The Company will deem any outstanding notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer. 75 77 Any outstanding notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder without cost to the holder or, in the case of outstanding notes tendered by book-entry transfer into the exchange agent's account at DTC according to the procedures described above, such outstanding notes will be credited to an account maintained with DTC for the outstanding notes. This return or crediting will take place as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Holders may retender properly withdrawn outstanding notes by following one of the procedures described under "--Procedures for Tendering" above at any time on or prior to the expiration date. FEES AND EXPENSES The Company will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, the Company may make additional solicitation by telegraph, telephone or in person by our officers and regular employees and those of our affiliates. The Company has not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. The Company will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the outstanding notes and in handling or forwarding tenders for exchange. The Company will pay the cash expenses to be incurred in connection with the exchange offer. They include: o SEC registration fees o fees and expenses of the exchange agent and trustee o accounting and legal fees and printing costs o related fees and expenses The Company will pay all transfer taxes, if any, applicable to the exchange of outstanding notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if: o certificates representing outstanding notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of outstanding notes tendered o tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal o a transfer tax is imposed for any reason other than the exchange of outstanding notes under the exchange offer If satisfactory evidence of payment of any transfer taxes payable by a note holder is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to that tendering holder. 76 78 TRANSFER TAXES If a holder tenders its outstanding notes for exchange, it will not be required to pay any transfer taxes. However, if a holder instructs the Company to register new notes in the name of, or request that outstanding notes not tendered or not accepted in the exchange offer be returned to, a person other than that holder, in that holder's capacity as the registered tendering holder, that holder will be required to pay any applicable transfer tax. CONSEQUENCES OF FAILURE TO EXCHANGE Holders who do not exchange their outstanding notes for new notes under the exchange offer will remain subject to the existing restrictions on transfer of the outstanding notes. In general, such a holder may not offer or sell the outstanding notes unless they are registered under the Securities Act, or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the Registration Rights Agreement, the Company does not intend to register resales of the outstanding notes under the Securities Act. Based on interpretations of the SEC staff, holders may offer for resale, resell or otherwise transfer new notes issued in the exchange offer without compliance with the registration and prospectus delivery provisions of the Securities Act, if (1) they are not the Company's "affiliate" within the meaning of Rule 405 under the Securities Act, (2) they acquired the new notes in the ordinary course of their business and (3) they have no arrangement or understanding with respect to the distribution of the new notes to be acquired in the exchange offer. If a holder tenders in the exchange offer for the purpose of participating in a distribution of the new notes, it: o cannot rely on the applicable interpretations of the SEC o must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction ACCOUNTING TREATMENT No gain or loss for accounting purposes will be recognized by the Company upon the consummation of the exchange offer. The expenses of the exchange offer will be amortized by the Company over the term of the new notes under generally accepted accounting principles. OTHER Participation in the exchange offer is voluntary, and holders of outstanding notes should carefully consider whether to accept. Those holders are urged to consult their financial and tax advisors in making their own decision on what action to take. The Company may in the future seek to acquire untendered outstanding notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present plans to acquire any outstanding notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered outstanding notes. 77 79 DESCRIPTION OF THE NOTES The new notes will be issued, and the outstanding notes were issued, pursuant to an indenture (the "Indenture") between the Company, as issuer, and State Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the notes include those stated in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The definitions of certain capitalized terms used in the following summary are set forth below under "-- Certain Definitions." The following description is a summary of the material provisions of the Indenture. It does not restate that agreement in its entirety. The Company urges Holders to read the Indenture because it, and not this description, defines the rights of Holders of these notes. The Company has filed the Indenture as an exhibit to the registration statement which includes this Prospectus. If the exchange offer contemplated by this prospectus (the "Exchange Offer") is consummated, Holders of outstanding notes who do not exchange those notes for new notes in the Exchange Offer will vote together with Holders of new notes for all relevant purposes under the Indenture. In that regard, the Indenture requires that certain actions by the Holders thereunder, including acceleration following an Event of Default, must be taken, and certain rights must be exercised, by specified minimum percentages of the aggregate principal amount of the outstanding securities issued under the Indenture. In determining whether Holders of the requisite percentage in principal amount have given any notice, consent or waiver or taken any other action permitted under the Indenture, any outstanding notes that remain outstanding after the Exchange Offer will be aggregated with the new notes, and the Holders of such outstanding notes and the new notes will vote together as a single series for all such purposes. Accordingly, all references herein to specified percentages in aggregate principal amount of the notes outstanding shall be deemed to mean, at any time after the Exchange Offer is consummated, such percentages in aggregate principal amount of the outstanding notes and the new notes then outstanding. BRIEF DESCRIPTION OF THE NOTES The notes: o are unsecured obligations of the Company; o are limited to $150,000,000 aggregate principal amount; o are subordinated in right of payment to all existing and future Senior Indebtedness of the Company; o are senior in right of payment to all existing and future Subordinated Indebtedness of the Company; and o rank equally with all Pari Passu Indebtedness. The new notes will be issued, and the outstanding notes were issued, only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. Principal of, premium, if any, on and interest on the notes is payable, and the notes are transferable, at the office or agency of the Company in the City of New York maintained for such purposes, which initially will be the corporate trust office or agency of the Trustee maintained at New York, New York. In addition, interest may be paid, at the option of the Company, by check mailed to the registered Holders of the notes at their respective addresses as shown on the Note Register or, upon application to the Trustee by any Holder of an aggregate principal amount of notes in excess of $500,000 not later than the applicable Regular Record Date, by transfer to an account (such transfer to be made only to a Holder of an aggregate principal amount of notes in excess of $500,000) maintained by such Holder with a bank in New York City. No transfer will be made to any such account unless the Trustee has received written wire instructions not less than 15 days prior to the relevant payment date. No service charge will be made for any transfer, exchange or 78 80 redemption of notes, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be payable in connection therewith. For a discussion of the circumstances in which the interest rate on the outstanding notes may be temporarily increased, see "Outstanding Notes Registration Rights Agreement." Any outstanding notes that remain outstanding after the completion of the Exchange Offer, together with the new notes issued in connection with the Exchange Offer, will be treated as a single class of securities under the Indenture. MATURITY, INTEREST AND PRINCIPAL PAYMENTS The notes will mature on February 15, 2009. Interest on the notes will accrue at the rate of 10 3/8% per annum and will be payable semiannually on February 15 and August 15 of each year (each an "Interest Payment Date"), commencing August 15, 1999, to the Person in whose name the note is registered in the Note Register at the close of business on the February 1, or August 1 next preceding such interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. REDEMPTION Optional Redemption. The notes will be redeemable at the option of the Company, in whole or in part, at any time on or after February 15, 2004, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if any, to the redemption date, subject to the right of Holders of record on the relevant record date to receive interest due on an interest payment date that is on or prior to the redemption date, if redeemed during the 12-month period beginning on February 15 of the years indicated below:
REDEMPTION YEAR PRICE - ---- ------------ 2004................................................................................. 105.188% 2005................................................................................. 103.458% 2006................................................................................. 101.729% 2007 and thereafter.................................................................. 100.000%
Selection and Notice In the event that less than all of the notes are to be redeemed at any time, selection of such notes, or any portion thereof that is an integral multiple of $1,000, for redemption will be made by the Trustee from the notes outstanding not previously called for redemption, or otherwise purchased by the Company, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no note with a principal amount of $1,000 or less shall be redeemed in part. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of notes to be redeemed at its registered address. If any note is to be redeemed in part only, the notice of redemption that relates to such note shall state the portion of the principal amount thereof to be redeemed. Another note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original note. On and after the redemption date, interest will cease to accrue on the notes or portions thereof called for redemption and accepted for payment. Offers to Purchase As described below: 79 81 (1) upon the occurrence of a Change of Control, the Company is obligated to make an offer to purchase all of the notes then outstanding at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase and (2) upon the occurrence of an Asset Sale, the Company may be obligated to make offers to purchase notes with a portion of the Net Cash Proceeds of such Asset Sale at a purchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. See "-- Certain Covenants; Change of Control" and "-- Limitation on Disposition of Proceeds of Asset Sales." SUBORDINATION Payments of and distributions on or with respect to the Note Obligations are subordinated, to the extent set forth in the Indenture, in right of payment to the prior payment in full in cash or Cash Equivalents of all existing and future Senior Indebtedness, which includes, without limitation, all Credit Agreement Obligations of the Company. The notes rank prior in right of payment only to other Indebtedness of the Company which is, by its terms, subordinated in right of payment to the notes. In addition, the Note Obligations are effectively subordinated to all creditors of the Company's Subsidiaries, including trade creditors. See "Risk Factors -- The right to receive payments on the notes is junior to our senior debt; The notes are structurally subordinated to obligations of our subsidiaries." In the event of: (1) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relating to the Company (or its creditors, as such) or its properties and assets, or (2) any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary, or (3) any assignment for the benefit of creditors or other marshaling of assets or liabilities of the Company all Senior Indebtedness of the Company must be paid in full in cash or Cash Equivalents before any direct or indirect payment or distribution, whether in cash, property or securities (excluding certain permitted equity and subordinated debt securities referred to in the Indenture as "Permitted Junior Securities"), is made on account of the Note Obligations. In the event that, notwithstanding the foregoing, the Trustee or the Holder of any note receives any payment or distribution of properties or assets of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, in respect of Note Obligations before all Senior Indebtedness is paid or provided for in full in cash or Cash Equivalents, then the Trustee or the Holders of notes receiving any such payment or distribution, other than a payment or distribution in the form of Permitted Junior Securities, will be required to pay or deliver such payment or distribution forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full. During the continuance of any default in the payment when due, whether at Stated Maturity, upon scheduled repayment, upon acceleration or otherwise, of principal of or premium, if any, or interest on, or of unreimbursed amounts under drawn letters of credit or fees relating to letters of credit constituting, any Designated Senior Indebtedness (a "Payment Default"), no direct or indirect payment or distribution by or on behalf of the Company of any kind or character shall be made on account of the Note Obligations or any obligation under any Subsidiary Guarantee unless and until such default has been cured or waived or has ceased to exist or such Designated Senior Indebtedness shall have been discharged or paid in full in cash or Cash Equivalents. 80 82 In addition, during the continuance of any default other than a Payment Default with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may then be accelerated (a "Non-payment Default"), after receipt by the Trustee from the holders, or their representative, of such Designated Senior Indebtedness of a written notice of such Non-payment Default, no payment or distribution of any kind or character may be made by the Company on account of the Note Obligations for the period specified below (the "Payment Blockage Period"). The Payment Blockage Period shall commence upon the receipt of notice of a Non-payment Default by the Trustee from the holders (or their representative) of Designated Senior Indebtedness stating that such notice is a payment blockage notice pursuant to the Indenture and shall end on the earliest to occur of the following events: (1) 179 days shall have elapsed since the receipt by the Trustee of such notice; (2) the date, as set forth in a written notice to the Company or the Trustee from the holders, or their representative, of the Designated Senior Indebtedness initiating such Payment Blockage Period, on which such default is cured or waived or ceases to exist (provided, that no other Payment Default or Non-payment Default has occurred or is then continuing after giving effect to such cure or waiver); (3) the date on which such Designated Senior Indebtedness is discharged or paid in full in cash or Cash Equivalents; and (4) the date, as set forth in a written notice to the Company or the Trustee from the holders, or their representative, of the Designated Senior Indebtedness initiating such Payment Blockage Period, on which such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from the holders, or their representative, of Designated Senior Indebtedness initiating such Payment Blockage Period, after which the Company, subject to the subordination provisions set forth above and the existence of another Payment Default, shall promptly resume making any and all required payments in respect of the notes, including any missed payments. Only one Payment Blockage Period with respect to the notes may be commenced within any 360 consecutive day period. No Non-payment Default with respect to Designated Senior Indebtedness that existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period will be, or can be, made the basis for the commencement of a second Payment Blockage Period, whether or not within a period of 360 consecutive days, unless such default has been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action, or any breach of any financial covenant for a period commencing after the date of commencement of such Payment Blockage Period, that, in either case, would give rise to a Non-payment Default pursuant to any provision under which a Non-payment Default previously existed or was continuing shall constitute a new Non-payment Default for this purpose; provided, however, that, in the case of a breach of a particular financial covenant, the Company shall have been in compliance for at least one full 90 consecutive day period commencing after the date of commencement of such Payment Blockage Period). In no event will a Payment Blockage Period extend beyond 179 days from the date of the receipt by the Trustee of the notice, and there must be a 181 consecutive day period in any 360-day period during which no Payment Blockage Period is in effect. In the event that, notwithstanding the foregoing, the Company makes any payment or distribution to the Trustee or the Holder of any note prohibited by the subordination provision of the Indenture, then such payment or distribution will be required to be paid over and delivered forthwith to the holders, or their representative, of Designated Senior Indebtedness. If the Company fails to make any payment on the notes when due or within any applicable grace period, whether or not on account of the payment blockage provisions referred to above, such failure will constitute an Event of Default under the Indenture and will enable the Holders of the notes to accelerate the maturity thereof. See "-- Events of Default." 81 83 By reason of such subordination, in the event of liquidation, receivership, reorganization or insolvency, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the Holders of the notes, and funds which would be otherwise payable to the Holders of the notes will be paid to the holders of the Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in full, and the Company may be unable to meet its obligations in full with respect to the notes. As of September 30, 1998, after giving effect pro forma to the sale of the outstanding notes and the application of the net proceeds therefrom as if that sale had occurred on that date, the aggregate amount of outstanding Senior Indebtedness would have been approximately $23,179,000. See "Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Although the Indenture contains limitations on the amount of additional Indebtedness that the Company and the Restricted Subsidiaries may incur, the amounts of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness or Indebtedness of Subsidiaries to which the notes are subordinated. The Indenture prohibits the incurrence by the Company of Indebtedness that is contractually subordinated in right of payment to any Senior Indebtedness of the Company and senior in right of payment to the notes. Currently, the aggregate amount of outstanding Indebtedness of the Company that is: (1) contractually subordinated in right of payment to the notes is $115,000,000 and (2) pari passu in right of payment with the notes is $100,000,000. POSSIBLE SUBSIDIARY GUARANTEES OF THE NOTES If the Company's existing or future Restricted Subsidiaries guarantee any other Indebtedness of the Company, they will be required by the terms of the Indenture to jointly and severally guarantee the notes on a senior subordinated basis. See "-- Certain Covenants; Limitations on Non-Guarantor Restricted Subsidiaries." At the date hereof, no Subsidiary of the Company has an outstanding guarantee of any Indebtedness of the Company, and the Company does not intend to cause any Subsidiary to guarantee any such Indebtedness in the future, thus requiring it to issue a Subsidiary Guarantee. Any Subsidiary that issues a Subsidiary Guarantee is herein called a Subsidiary Guarantor. Each Subsidiary Guarantor will guarantee, jointly and severally, to each Holder of Notes and the Trustee, the full and prompt performance of the Company's obligations under the Indenture and the notes, including the payment of principal of (or premium, if any, on) and interest on the notes pursuant to its Subsidiary Guarantee. The Subsidiary Guarantees will be subordinated to Guarantor Senior Indebtedness of the Subsidiary Guarantors to the same extent and in the same manner as the notes are subordinated to Senior Indebtedness. 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, 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 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, if any, in a pro rata amount based on the Adjusted Net Assets (as defined in the Indenture) of each Subsidiary Guarantor. Each Subsidiary Guarantor may consolidate with or merge into or sell, assign, convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety (or any portion thereof) to the Company or another Subsidiary Guarantor without limitation, except to the extent any such transaction is subject to the covenants described below under the caption "-- Merger, Consolidation and Sale of Assets." Each Subsidiary Guarantor may consolidate with or merge into or sell, assign, convey, transfer, lease or otherwise dispose of its properties and assets 82 84 substantially as an entirety in one transaction or series of related transactions to a Person other than the Company or another Subsidiary Guarantor, whether or not affiliated with the Subsidiary Guarantor; provided, that: (1) in the case of a merger or consolidation, if the surviving Person is not the Subsidiary Guarantor, such surviving Person or, in the case of a sale, assignment, conveyance, transfer, lease or other disposition, the transferee Person agrees to assume such Subsidiary Guarantor's Subsidiary Guarantee and all its obligations pursuant to the Indenture, except to the extent that the following paragraph would result in the release of such Subsidiary Guarantee and (2) such transaction does not: (a) violate any of the covenants described below under the caption "-- Certain Covenants" or in the Indenture or (b) result in a Default or Event of Default immediately thereafter. The Subsidiary Guarantee of any Restricted Subsidiary may be released upon the terms and subject to the conditions described under paragraph (2) of the caption "-- Certain Covenants -- Limitation on Non-Guarantor Restricted Subsidiaries." Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the Indenture shall be released from its Subsidiary Guarantee and related obligations set forth in the Indenture for so long as it remains an Unrestricted Subsidiary. CERTAIN COVENANTS The Indenture contains, among others, the covenants described below: Limitation on Indebtedness. Neither the Company nor any Restricted Subsidiary will create, incur, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of (collectively "incur") any Indebtedness, including any Acquired Indebtedness, other than Permitted Indebtedness and Permitted Subsidiary Indebtedness, as the case may be; provided, however, that the Company and its Restricted Subsidiaries that are Subsidiary Guarantors may incur additional Indebtedness if: (1) the Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding the incurrence of such Indebtedness (and for which financial statements are available), taken as one period (at the time of such incurrence, after giving pro forma effect to: (a) the incurrence of such Indebtedness and, if applicable, the application of the net proceeds therefrom as if such Indebtedness had been incurred and the application of such proceeds had occurred at the beginning of such four-quarter period; (b) the incurrence, repayment or retirement of any other Indebtedness, including Permitted Indebtedness and Permitted Subsidiary Indebtedness, by the Company or its Restricted Subsidiaries since the first day of such four-quarter period (including any other Indebtedness to be incurred concurrent with the incurrence of such Indebtedness) as if such Indebtedness had been incurred, repaid or retired at the beginning of such four-quarter period; and (c) notwithstanding clause (4) of the definition of Consolidated Net Income, the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any Person acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, as if such acquisition or disposition had occurred at the beginning of such four-quarter period), would have been equal to at least 2.5 to 1.0 and (2) no Default or Event of Default would occur or be continuing. 83 85 Limitation on Restricted Payments. (1) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions (unless such action constitutes a Permitted Investment): (a) declare or pay any dividend on, or make any distribution to holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Company, options, warrants or other rights to purchase Qualified Capital Stock of the Company); (b) 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 of the Company) or any options, warrants or other rights to acquire such Capital Stock; provided, however, that the Company may make any payment of the applicable redemption price in connection with a Qualified Redemption Transaction; (c) 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 Pari Passu Indebtedness or Subordinated Indebtedness, except in any case out of a Pari Passu Offer or a Net Proceeds Deficiency (each as defined in "-- Limitation on Disposition of Proceeds of Asset Sales") pursuant to the provisions of the Indenture described under the caption "-- Limitation on Disposition of Proceeds of Asset Sales" and except upon a Change of Control or similar event required by the indenture or other agreement or instrument pursuant to which such Pari Passu Indebtedness or Subordinated Indebtedness was issued, provided the Company is then obligated to make a Change of Control Offer in compliance with the covenant described below under "-- Change of Control;" provided, however, that the Company may make any payment of the applicable redemption price in connection with a Qualified Redemption Transaction; (d) declare or pay any dividend on, or make any distribution to the holders of, any shares of Capital Stock of any Restricted Subsidiary of the Company (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 (other than a Wholly Owned 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); (e) make any Investment; or (f) in connection with the acquisition of any property or asset by the Company or its Restricted Subsidiaries after the date of the Indenture, which property or asset would secure or be subject to any Production Payment obligations of the Company or its Restricted Subsidiaries, make any investment (of cash, property or other assets) in such property or asset so acquired in addition to the amount of Indebtedness, including Production Payment obligations, incurred by the Company or its Restricted Subsidiaries in connection with such acquisition; (such payments or other actions described in, but not excluded from, clauses (a) through (f) are collectively referred to as "Restricted Payments"), unless at the time of and after giving effect to the proposed Restricted Payment (with the amount of any such Restricted Payment, if other than cash, being the amount determined by the Board of Directors, whose determination shall be conclusive and evidenced by a resolution), (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) in accordance with the covenant described above under the caption "-- Limitation on Indebtedness" and (iii) the aggregate amount of all Restricted Payments declared or made after the date of the Indenture shall not exceed the sum (without duplication) of the following: 84 86 (A) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the first day of the first month after the date of the Indenture 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 cumulative Consolidated Net Income shall be a loss, minus 100% of such loss), plus (B) the aggregate net cash proceeds received after the date of the Indenture by the Company as capital contributions to the Company (other than from any Restricted Subsidiary), plus (C) the aggregate net cash proceeds received after the date of the Indenture by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of shares of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such shares of Qualified Capital Stock of the Company, plus (D) the aggregate net cash proceeds received after the date of the Indenture by the Company (other than from any of its Restricted Subsidiaries) upon the exercise of any options, warrants or rights to purchase shares of Qualified Capital Stock of the Company, plus (E) the aggregate net cash proceeds received after the date of the Indenture 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 to the extent such debt securities were originally sold for cash, together with the aggregate cash received by the Company at the time of such conversion or exchange, plus (F) to the extent not otherwise included in the Company's Consolidated Net Income, the net reduction in Investments in Affiliates and Unrestricted Subsidiaries resulting from the payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or a Restricted Subsidiary after the date of the Indenture from any Affiliate or Unrestricted Subsidiary or from the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as provided in the definition of "Investment"), not to exceed in the case of any Affiliate or Unrestricted Subsidiary the total amount of Investments (other than Permitted Investments) in such Affiliate or Unrestricted Subsidiary made by the Company and its Restricted Subsidiaries in such Affiliate or Unrestricted Subsidiary after the date of the Indenture, plus (G) $15,000,000. (2) Notwithstanding paragraph (1) above, the Company and its Restricted Subsidiaries may take the following actions so long as (in the case of clauses (b), (c) and (d) below) no Default or Event of Default shall have occurred and be continuing: (a) the payment of any dividend within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of paragraph (1) 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 (1) above); (b) 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 shares of Qualified Capital Stock of the Company; (c) the purchase, 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 85 87 the aggregate net cash proceeds of a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of shares of Qualified Capital Stock of the Company; (d) the purchase, redemption, repayment, defeasance or other acquisition or retirement for value of Subordinated Indebtedness (other than Redeemable Capital Stock) 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 of the Company so long as (i) 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 Subordinated 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 Subordinated Indebtedness refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing, plus the amount of fees and expenses of the Company incurred in connection with such refinancing, (ii) such new Subordinated Indebtedness is subordinated to the notes at least to the same extent as such Subordinated Indebtedness so purchased, redeemed, repaid, defeased, acquired or retired, (iii) such new Subordinated Indebtedness has an Average Life to Stated Maturity that is longer than the Average Life to Stated Maturity of the notes and such new Subordinated 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 notes; and (e) repurchases, acquisitions or retirements of shares of Qualified Capital Stock of the Company deemed to occur upon the exercise of stock options or similar rights issued under employee benefit plans of the Company if such shares represent all or a portion of the exercise price or are surrendered in connection with satisfying any Federal income tax obligation. The actions described in clauses (a), (b) and (c) of this paragraph (2) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph (2) but shall reduce the amount that would otherwise be available for Restricted Payments under clause (c) of paragraph (1) (provided, that any dividend paid pursuant to clause (a) of this paragraph (2) shall reduce the amount that would otherwise be available under clause (c) of paragraph (1) when declared, but not also when subsequently paid pursuant to such clause (a)), and the actions described in clauses (d) and (e) of this paragraph (2) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (c) of paragraph (1). (3) In computing Consolidated Net Income of the Company under paragraph (1) above: (a) 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 (b) 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 the Indenture, such Restricted Payment shall be deemed to have been made in compliance with the 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. 86 88 Limitation on Issuances and Sales of Restricted Subsidiary Capital Stock. The Company: (1) will not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (2) will not permit any Person (other than the Company and/or one or more Wholly Owned Restricted Subsidiaries) to own any Capital Stock of any Restricted Subsidiary; provided, however, that this covenant shall not prohibit: (1) the issuance and sale of all, but not less than all, of the issued and outstanding Capital Stock of any Restricted Subsidiary owned by the Company or any of its Restricted Subsidiaries in compliance with the other provisions of the Indenture, (2) the ownership by directors of directors' qualifying shares, (3) the ownership by any Person of Capital Stock of a Restricted Subsidiary that was owned by a Person at the time such Restricted Subsidiary became a Restricted Subsidiary or acquired by a Person in connection with the formation of the Restricted Subsidiary (including, in each case, any Capital Stock issued as a result of a stock split, a dividend of shares of Capital Stock to holders of such Capital Stock, a recapitalization affecting such Capital Stock or similar event) and (4) the ownership by any Person of Capital Stock of any Foreign Subsidiary so long as none of the Capital Stock of that Subsidiary has been issued in a public offering. Limitation on Transactions with Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or the rendering of any services) with, or for the benefit of, any Affiliate of the Company other than a Restricted Subsidiary (each, other than a Restricted Subsidiary, being an "Interested Person"), unless: (1) such transaction or series of transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that would be available in a comparable arm's length transaction with unrelated third parties who are not Interested Persons, or, in the event no comparable transaction with an unrelated third party who is not an Interested Person is available, on terms that are fair from a financial point of view to the Company or such Restricted Subsidiary, as the case may be, (2) with respect to any one transaction or series of related transactions involving aggregate payments in excess of $10,000,000, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction or series of transactions complies with clause (1) above and such transaction or series of transactions has been approved by the Board of Directors and (3) with respect to any one transaction or series of related transactions involving aggregate payments in excess of $20,000,000, the Officers' Certificate referred to in clause (2) above also includes a certification that such transaction or series of transactions has been approved by a majority of the Disinterested Directors (either of the full Board of Directors or, in the case of action by a committee thereof, of such committee) or, in the event there are no such Disinterested Directors, that the Company has obtained a written opinion from an independent nationally recognized investment banking firm or appraisal firm, in either case specializing or having a specialty in the type and subject matter of the transaction or series of related transactions at issue, which opinion shall be to the effect set forth in clause (1) above; 87 89 provided, however, that this covenant will not restrict the Company from: (1) paying reasonable and customary regular compensation and fees to directors of the Company who are not employees of the Company or any Restricted Subsidiary, (2) paying dividends on, or making distributions with respect to, shares of Capital Stock of the Company on a pro rata basis to the extent permitted by the covenant described above under the caption "-- Limitation on Restricted Payments," (3) making Restricted Payments that are permitted by the provisions of the Indenture described above under the caption "-- Limitation on Restricted Payments," (4) making loans or advances to officers, directors and employees of the Company or any Restricted Subsidiary in the ordinary course of business and consistent with customary practices in the Oil and Gas Business in an aggregate amount not to exceed $1,000,000 outstanding at any one time, (5) making any indemnification or similar payment to any director or officer (a) in accordance with the corporate charter or bylaws of the Company or any Restricted Subsidiary, (b) under any agreement or (c) under applicable law and (6) fulfilling obligations of the Company or any Restricted Subsidiary under employee compensation and other benefit arrangements entered into or provided for in the ordinary course of business. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm or suffer to exist or become effective any Lien of any kind, except for Permitted Liens, on or with respect to any of its property or assets (including any intercompany notes), whether owned at the date of the Indenture or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless: (1) in the case of any Lien securing Subordinated Indebtedness, the notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (2) in the case of any other Lien, the notes are directly secured equally and ratably with the obligation or liability secured by such Lien. The incurrence of additional secured Indebtedness by the Company or any Restricted Subsidiary is subject to further limitations on the incurrence of Indebtedness as described above under the caption "-- Limitation on Indebtedness." Change of Control. Upon the occurrence of a Change of Control, the Company shall be obligated to make an offer to purchase all of the notes then outstanding (a "Change of Control Offer"), and shall purchase, on a business day (the "Change of Control Purchase Date") not more than 75 nor less than 30 days following the Change of Control, all of the notes then outstanding that are validly tendered pursuant to such Change of Control Offer at a purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the Change of Control Purchase Date. The Change of Control Offer is required to remain open for at least 20 Business Days and until the close of business on the Change of Control Purchase Date. In order to effect such Change of Control Offer, the Company shall, not later than the 30th day after the Change of Control, mail to each Holder of a note a notice of the Change of Control Offer, which notice shall govern 88 90 the terms of the Change of Control Offer and shall state, among other things, the procedures that Holders of the notes must follow to accept the Change of Control Offer. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control Purchase Price for all of the notes delivered by Holders of the notes seeking to accept the Change of Control Offer. If on a Change of Control Purchase Date the Company does not have available funds sufficient to pay the Change of Control Purchase Price or is prohibited from purchasing the notes, an Event of Default will occur under the Indenture. Moreover, the definition of Change of Control includes a phrase relating to the sale or other disposition of the Company's properties and assets "substantially as an entirety." Although there is a developing body of case law interpreting phrases such as "substantially as an entirety," there is no precise established definition of such phrases under applicable law. Accordingly, the ability of a Holder of the notes to require the Company to repurchase such notes as a result of a sale or other disposition of less than all of the properties and assets of the Company on a consolidated basis to another Person or related group of Persons may be uncertain. 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 notes validly tendered and not withdrawn under such Change of Control Offer. The Company intends to comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, if applicable, in the event that a Change of Control occurs and the Company is required to purchase notes as described above. The existence of a Holder's right to require, subject to certain conditions, the Company to repurchase its notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes, or results in, a Change of Control. Limitation on Disposition of Proceeds of Asset Sales. (1) The Company will not, and will not permit any Restricted Subsidiary to, engage in any Asset Sale unless (a) 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 assets and properties sold or otherwise disposed of pursuant to the Asset Sale (as determined by the Board of Directors, whose determination shall be conclusive and evidenced by a resolution) and (b) at least 75% 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 and/or the assumption by the purchaser of liabilities of the Company (other than liabilities of the Company that are by their terms subordinated to the notes) or any Restricted Subsidiary as a result of which the Company and its remaining Restricted Subsidiaries are no longer liable. (2) If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may either: (a) apply the Net Cash Proceeds thereof to reduce Senior Indebtedness, to reduce Guarantor Senior Indebtedness or to reduce Indebtedness of any Restricted Subsidiary incurred pursuant to clause (13) of the definition of Permitted Subsidiary Indebtedness, provided, if any such Senior Indebtedness, Guarantor Senior Indebtedness or Permitted Subsidiary Indebtedness has been incurred under any revolving credit facility, that the related commitment to lend or the amount available to be reborrowed under such facility is also reduced, or (b) invest all or any part of the Net Cash Proceeds thereof, within 365 days after such Asset Sale, in properties and assets which replace the properties and assets that were the subject of the Asset Sale or in properties and assets that will be used in the business of the Company or its Restricted Subsidiaries, as the case may be ("Replacement Assets"). The amount of such Net Cash Proceeds not applied or invested as provided in this paragraph constitutes "Excess Proceeds." (3) When the aggregate amount of Excess Proceeds equals or exceeds $15,000,000, the Company shall make an offer to purchase, from all Holders of the notes and any then outstanding Pari Passu Indebtedness 89 91 required to be repurchased or repaid on a permanent basis in connection with an Asset Sale, an aggregate principal amount of notes and any then outstanding Pari Passu Indebtedness equal to such Excess Proceeds as follows: (a) (i) the Company shall make an offer to purchase (a "Net Proceeds Offer") from all Holders of the notes in accordance with the procedures set forth in the Indenture the maximum principal amount (expressed as a multiple of $1,000) of notes 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 notes and the denominator of which is the sum of the outstanding principal amount of the notes and such Pari Passu Indebtedness, if any (subject to proration in the event such amount is less than the aggregate Offered Price (as defined below) of all notes tendered), and (ii) to the extent required by such 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 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. (b) The offer price for the notes shall be payable in cash in an amount equal to 100% of the principal amount of the notes 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 the procedures set forth in the Indenture. To the extent that the aggregate Offered Price of the notes 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 for general corporate purposes, subject to the limitations described above under the caption "-- Limitation on Restricted Payments." (c) If the aggregate Offered Price of notes validly tendered and not withdrawn by Holders thereof exceeds the Payment Amount, notes to be purchased will be selected on a pro rata basis. Upon completion of such Net Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be reset to zero. The Company intends to 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 notes as described above. The Credit Agreement may prohibit the Company from purchasing any notes from Excess Proceeds. Any future credit agreements or other agreements relating to Senior Indebtedness to which the Company becomes a party may contain similar restrictions. In the event a Net Proceeds Offer occurs at a time when the Company is prohibited by the terms of any Senior Indebtedness from purchasing the notes, the Company could seek the consent of the holders of such Senior Indebtedness to the purchase or could attempt to refinance such Senior Indebtedness. If the Company does not obtain such a consent or repay such Senior Indebtedness, the Company may remain prohibited from purchasing the notes. In such case, the Company's failure to purchase tendered notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the Credit Agreement and possibly a default under other agreements relating to Senior Indebtedness. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the Holders of the notes. Limitation on Non-Guarantor Restricted Subsidiaries. (1) The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor to guarantee the payment of any Indebtedness of the Company unless (a)(i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Subsidiary Guarantee of the notes by such Restricted Subsidiary which Subsidiary Guarantee will be subordinated to Guarantor Senior Indebtedness (but no other Indebtedness) to the same extent that the notes are subordinated to Senior Indebtedness and (ii), with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee shall be subordinated 90 92 to such Restricted Subsidiary's Subsidiary Guarantee at least to the same extent as such Subordinated Indebtedness is subordinated to the notes; (b) such Restricted Subsidiary waives, and agrees not in any manner whatsoever to claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee until such time as the obligations guaranteed thereby are paid in full; and (c) such Restricted Subsidiary shall deliver to the Trustee an Opinion of Counsel to the effect that such Subsidiary Guarantee has been duly executed and authorized and constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof (i) may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers and fraudulent conveyances), (ii) is subject to general principles of equity and (iii) any implied covenant of good faith or fair dealing. (2) Notwithstanding the foregoing and the other provisions of the Indenture, each Subsidiary Guarantee shall provide by its terms that it shall be automatically and unconditionally released and discharged upon (a) (i) any sale, exchange or transfer of all the Capital Stock in the applicable Subsidiary Guarantor owned by the Company and any Restricted Subsidiary or (ii) any sale, assignment, conveyance, transfer, lease or other disposition of the properties and assets of such Subsidiary Guarantor substantially as an entirety, in each case, in a single transaction or series of related transactions to any Person that is not a Restricted Subsidiary (provided, that such transaction or series of transactions is not prohibited by the Indenture), (b) the merger or consolidation of such Subsidiary Guarantor with or into the Company or a Restricted Subsidiary (provided, that, in the case of a merger into or consolidation with a Restricted Subsidiary that is not then a Subsidiary Guarantor, the surviving Restricted Subsidiary assumes the Subsidiary Guarantee and that transaction or series of transactions is not prohibited by the Indenture) or (c) the release or discharge of all guarantees by such Subsidiary Guarantor of Indebtedness other than the Note Obligations, except a discharge or release by or as a result of the payment of such Indebtedness by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company will not, and will 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: (1) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock to the Company or any Restricted Subsidiary, (2) pay any Indebtedness owed to the Company or any Restricted Subsidiary, (3) make an Investment in the Company or any Restricted Subsidiary or (4) transfer any of its properties or assets to the Company or any Restricted Subsidiary; except for such encumbrances or restrictions: (a) pursuant to any agreement in effect or entered into on the date of the Indenture, (b) pursuant to 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 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, (c) by reason of customary non-assignment provisions in leases and licenses entered into in the ordinary course of business, 91 93 (d) pursuant to capital leases and purchase money obligations for property leased or acquired in the ordinary course of business that impose restrictions of the nature described in clause (4) above on the property so leased or acquired, (e) pursuant to any merger agreements, stock purchase agreements, asset sale agreements and similar agreements limiting the transfer of properties and assets pending consummation of the subject transaction, (f) pursuant to Permitted Liens which are customary limitations on the transfer of collateral, (g) pursuant to applicable law, (h) pursuant to agreements among holders of Capital Stock of any Restricted Subsidiary of the Company requiring distributions in respect of such Capital Stock to be made pro rata based on the percentage of ownership in and/or contribution to such Restricted Subsidiary or (i) existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the preceding clauses (a) and (b), provided, that the terms and conditions of any such restrictions are not materially less favorable to the Holders of the notes than those under or pursuant to the agreement evidencing the Indebtedness so extended, renewed, refinanced or replaced. Limitation on Other Senior Subordinated Indebtedness. The Company will not incur, directly or indirectly, any Indebtedness which is expressly subordinate or junior in right of payment in any respect to Senior Indebtedness unless such Indebtedness ranks pari passu in right of payment with the notes, or is expressly subordinated in right of payment to the notes. Reports. The Company (and the Subsidiary Guarantors, if applicable) must file on a timely basis with the SEC, to the extent such filings are accepted by the SEC 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(d) of the Exchange Act. The Company is (and any future Subsidiary Guarantors will be) also required: (1) to file with the Trustee, and provide to each Holder of notes, without cost to such Holder, copies of such reports and documents within 15 days after the date on which the Company files such reports and documents with the SEC or the date on which the Company (and the Subsidiary Guarantors, if applicable) would be required to file such reports and documents if the Company (and the Subsidiary Guarantors, if applicable) were so required and (2) if filing such reports and documents with the SEC is not accepted by the SEC or is prohibited under the Exchange Act, to furnish at the Company's cost copies of such reports and documents to any Holder of notes promptly upon written request. The Company is obligated to make available, upon request, to any Holder of notes or prospective purchaser the information required by Rule 144A(d)(4) under the Securities Act, during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act and for so long as the transfer of any note is restricted under the Securities Act. Future Designation of Restricted and Unrestricted Subsidiaries. The preceding covenants, including calculation of financial ratios and the determination of limitations on the incurrence of Indebtedness and Liens, may be affected by the designation by the Company of any existing or 92 94 future Subsidiary of the Company as an Unrestricted Subsidiary. Generally, a Restricted Subsidiary includes any Subsidiary of the Company, whether existing on or after the date of the Indenture, unless the Subsidiary of the Company is designated as an Unrestricted Subsidiary pursuant to the terms of the Indenture. The definition of "Unrestricted Subsidiary" set forth below under the caption "-- Certain Definitions" describes the circumstances under which a Subsidiary of the Company may be designated as an Unrestricted Subsidiary by the Board of Directors. CONSOLIDATION, MERGER, ETC. The Company will 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 the properties and assets of the Company and its Restricted Subsidiaries substantially as an entirety on a consolidated basis to any Person, and the Company will not permit any Restricted Subsidiary to enter into any transaction or series of related transactions if such transaction or series of transactions would result in a sale, assignment, conveyance, transfer, lease or other disposition of the properties and assets of the Company and its Restricted Subsidiaries substantially as an entirety on a consolidated basis to any Person, unless at the time and after giving effect thereto: (1) either (a) if the transaction or series of related transactions is a merger or consolidation, the Company shall be the surviving Person of such merger or consolidation, or (b) the Person, if other than the Company, formed by such consolidation or into which the Company or such Restricted Subsidiary is merged or to which the properties and assets of the Company or such Restricted Subsidiary, as the case may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed of (any such surviving Person or transferee Person being 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 the Indenture executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the notes and the Indenture, and, in each case, the Indenture shall remain in full force and effect; (2) immediately before and 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 Company or any of its Restricted Subsidiaries in connection with or as a result of such transaction or series of transactions as having been incurred at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; (3) 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 series of 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 the Indenture) is at least equal to the Consolidated Net Worth of the Company immediately before such transaction or series of transactions; (4) except in the case of the consolidation or merger of (a) any Restricted Subsidiary with or into the Company or any Wholly Owned Restricted Subsidiary or (b) the Company with or into any Person that has no Indebtedness outstanding, immediately before and immediately after giving effect to such transaction or series of transactions on a pro forma basis (on the assumption that the transaction or series of transactions occurred on the first day of the period of four fiscal quarters ending immediately prior to the consummation of such transaction or series of transactions, with the appropriate adjustments with respect to such transaction or series transactions being included in such pro forma calculation), the Company, or the Surviving Entity if the Company is not the continuing obligor under the Indenture, could incur $1.00 of additional Indebtedness, other than Permitted Indebtedness, pursuant to the covenant described above under the caption "--Limitation on Indebtedness;" 93 95 (5) each Subsidiary Guarantor, unless it is the other party to the transactions or series of transactions described above, shall have by supplemental indenture to the Indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations under the Indenture and the notes; and (6) if any of the properties or assets of the Company or any Restricted Subsidiary would upon such transaction or series of transactions become subject to any Lien, other than a Permitted Lien, the creation and imposition of such Lien shall have been in compliance with the covenant described above under the caption "-- Limitation on Liens." In connection with any consolidation, merger, transfer, lease or other disposition contemplated hereby, the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate stating that such consolidation, merger, transfer, lease or other disposition and the supplemental indenture in respect thereto comply with the requirements under the Indenture and an Opinion of Counsel stating that the requirements of clause (1) of the preceding paragraph have been complied with. Upon any such consolidation or merger or any such sale, assignment, transfer, lease or other disposition substantially as an entirety on a consolidated basis of the properties and assets of the Company in accordance with the foregoing in which the Company is not the continuing Person, the Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if the Surviving Entity had been named as the Company therein, and thereafter the Company, except in the case of a lease, will be discharged from all obligations and covenants under the Indenture and the notes. EVENTS OF DEFAULT The following are "Events of Default" under the Indenture: (1) default in the payment of the principal of or premium, if any, on any of the notes, whether such payment is due at maturity, upon redemption, upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, upon acceleration or otherwise; or (2) default in the payment of any installment of interest on any of the notes, when it becomes due and payable, and the continuance of such default for a period of 30 days; or (3) default in the performance or breach of the provisions of the "Consolidation, Merger, Etc." section of the Indenture, the failure to make or consummate a Change of Control Offer in accordance with the provisions of the Indenture described under the caption "-- Change of Control" or the failure to make or consummate a Net Proceeds Offer in accordance with the provisions of the Indenture described under the caption "-- Limitation on Disposition of Proceeds of Asset Sales;" or (4) the Company or any Subsidiary Guarantor shall fail to perform or observe any other term, covenant or agreement contained in the notes, any Subsidiary Guarantee or the Indenture (other than a default specified in (1), (2) or (3) above) for a period of 45 days after written notice of such failure requiring the Company to remedy the same shall have been given (a) to the Company by the Trustee or (b) to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the notes then outstanding; or (5) 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 notes or any Non-Recourse Indebtedness) or any Restricted Subsidiary for money borrowed when due, or any other default causing acceleration of any Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Restricted Subsidiary for money borrowed, provided that the aggregate principal amount of such Indebtedness shall exceed $12,000,000; 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 94 96 consequential acceleration of the notes shall be automatically rescinded, so long as such rescission does not conflict with any judgment or decree; or (6) the commencement of proceedings, or the taking of any enforcement action, including by way of set-off, by any holder of at least $12,000,000 in aggregate principal amount of Indebtedness, other than Non- Recourse Indebtedness, of the Company or any Restricted Subsidiary, after a default under such Indebtedness, to retain in satisfaction of such Indebtedness or to collect or seize, dispose of or apply in satisfaction of such Indebtedness, property or assets of the Company or any Restricted Subsidiary having a fair market value (as determined by the Board of Directors) in excess of $12,000,000 individually or in the aggregate, provided, that if any such proceedings or actions are terminated or rescinded, or such Indebtedness is repaid, such Event of Default under the Indenture and any consequential acceleration of the notes shall be automatically rescinded, so long as (a) such rescission does not conflict with any judgment or decree and (b) the holder of such Indebtedness shall not have applied any such property or assets in satisfaction of such Indebtedness; or (7) 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 of any such Subsidiary Guarantee in accordance with the Indenture); or (8) certain events giving rise to ERISA liability; or (9) 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 $12,000,000 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 (10) 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 Restricted Subsidiary in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (b) adjudging the Company or any Material Restricted Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of the Company or a Material Restricted 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 the Company or any Material Restricted Subsidiary or of a substantial part of their consolidated assets, or ordering the winding up or liquidation of their 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 (11) the commencement by the Company or any Material Restricted 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 the Company or any Material Restricted Subsidiary to the entry of a decree or order for relief in respect thereof 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 it, or the filing by the Company or any Material Restricted 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 any of the Company or any Material Restricted Subsidiary or of any substantial part of their consolidated assets, or the making by it of an assignment for the benefit of creditors under any such law. If an Event of Default (other than as specified in clause (10) or (11) above) shall occur and be continuing, the Trustee, by written notice to the Company, or the holders of at least 25% in aggregate principal amount of the notes then outstanding, by notice to the Trustee and the Company, may declare the principal of, premium, if any, and accrued interest on all of the notes then outstanding due and payable immediately, upon which declaration all 95 97 amounts payable in respect of the notes shall be immediately due and payable. If an Event of Default specified in clause (10) or (11) above occurs and is continuing, then the principal of, premium, if any, and accrued interest on all of the notes then outstanding shall ipso facto become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder of 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 notes then outstanding, by written notice to the Company and the Trustee, may rescind such declaration if: (1) the Company or any Subsidiary Guarantor has paid or deposited with the Trustee a sum sufficient to pay: (a) 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, (b) all overdue interest on all notes then outstanding, (c) the unpaid principal of and premium, if any, on any notes which have become due otherwise than by such declaration of acceleration, including any securities required to have been purchased pursuant to a Change of Control Offer or a Net Proceeds Offer, as applicable, and interest thereon at the rate borne by the notes, and (d) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the notes which has become due otherwise than by such declaration of acceleration; (2) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (3) all Events of Default, other than the nonpayment of principal of, premium, if any, and interest on the notes that has become due solely by such declaration of acceleration, have been cured or waived. The Holders of not less than a majority in aggregate principal amount of the notes then outstanding may on behalf of the Holders of all the notes waive any past defaults under the Indenture, except a default in the payment of the principal of (or premium, if any, on) or interest on any note or a default in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the Holder of each note then outstanding affected thereby. No Holder of any of the notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless such Holder has previously given written notice to the Trustee of a continuing Event of Default, the Holders of at least 25% in aggregate principal amount of the notes then outstanding have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee under the notes and the Indenture, the Trustee has failed to institute such proceeding within 60 days after receipt of such notice and offer of indemnity and 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 notes then outstanding. Such limitations do not apply, however, to a suit instituted by a Holder of a note for the enforcement of the payment of the principal of, premium, if any, or interest on such note on or after the respective due dates expressed in such note. During the existence of an Event of Default, the Trustee is required to exercise such of the rights and powers vested in it under the Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use 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, the Trustee under the Indenture is not under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any Holders of the notes unless such Holders shall have offered to the Trustee reasonable security or indemnity. Subject to certain provisions in the Indenture relating to the rights of the Trustee, the Holders of a majority in aggregate principal amount of the notes 96 98 then outstanding 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. If a Default or an Event of Default occurs and is known to the Trustee, the Trustee shall mail to each Holder of notes notice of the Default or Event of Default within 60 days after the occurrence thereof in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act. Except in the case of a Default or an Event of Default in payment of principal of, premium, if any, or interest on any notes, the Trustee may withhold the notice to the Holders of such notes 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 determine that the withholding of such notice is in the interest of the Holders of the notes. The Company is required to furnish to the Trustee annual and quarterly statements as to the performance by the Company of its obligations under the Indenture and as to any default in such performance. The Company is also required to notify the Trustee within ten days after any Default. LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE The Company may, at its option and at any time, terminate the obligations of the Company and the Subsidiary Guarantors with respect to the notes then outstanding ("legal defeasance"). Such legal defeasance means that the Company and the Subsidiary Guarantors shall be deemed to have paid and discharged the entire Indebtedness represented by the notes then outstanding, except for: (1) the rights of Holders of notes then outstanding to receive payment in respect of the principal of, premium, if any, on and interest on such notes when such payments are due, (2) the Company's obligations to issue temporary notes, register the transfer or exchange of any notes, replace mutilated, destroyed, lost or stolen notes and maintain an office or agency for payments in respect of the notes, (3) the rights, powers, trusts, duties and immunities of the Trustee, and (4) the defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to terminate the obligations of the Company and any Subsidiary Guarantor with respect to certain covenants that are set forth in the Indenture, some of which are described above under the caption "-- Certain Covenants," and any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the notes ("covenant defeasance"). In order to exercise either legal defeasance or covenant defeasance: (1) the Company or any Subsidiary Guarantor must irrevocably deposit, with the Trustee, in trust, for the benefit of the holders of the notes, cash in United States dollars, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, on and interest on the notes then outstanding to redemption or maturity; (2) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the notes then outstanding will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance or 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 legal defeasance or covenant defeasance had not occurred (in the case of legal defeasance, such opinion must refer to and be based upon a published ruling of the Internal Revenue Service or a change in applicable federal income tax laws); 97 99 (3) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; (4) such legal defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest under the Indenture or the Trust Indenture Act with respect to any securities of the Company or any Subsidiary Guarantor; (5) such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; and (6) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee, which, taken together, state that all conditions precedent under the Indenture to either legal defeasance or covenant defeasance, as the case may be, have been complied with and that no violations under agreements governing any other outstanding Indebtedness would result therefrom. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the notes, as expressly provided for in the Indenture) as to all notes then outstanding when: (1) either (a) all the notes theretofore authenticated and delivered (except lost, stolen or destroyed notes which have been replaced or paid and notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all notes not theretofore delivered to the Trustee for cancellation have become due and payable or will become due and payable at their Stated Maturity within one year, or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the serving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire indebtedness on the notes not theretofore delivered to the Trustee for cancellation, for principal of (and premium, if any, on) and interest on the notes to the date of deposit (in the case of notes 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; (2) the Company has paid all other sums payable under the Indenture by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee, which, taken together, state that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with and that no violations under agreements governing any other outstanding Indebtedness would result therefrom. AMENDMENTS From time to time, the Company and the Trustee may, without the consent of the Holders of the notes, modify, amend or supplement the Indenture or the notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, qualifying, or maintaining the qualification of, the Indenture under the Trust Indenture Act, provided that such change does not adversely affect the rights of any Holder of the notes. Other modifications and amendments of the Indenture or the notes may be made by the Company, the Subsidiary Guarantors and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the notes then outstanding; provided, however, that no such modification or amendment may, without the consent of the Holder of each note then outstanding affected thereby: 98 100 (1) change the Stated Maturity of the principal of, or any installment of interest on any note, (2) reduce the principal amount of (or the premium, if any, on) or interest on any note, (3) change the place, coin or currency of payment of principal of (or the premium, if any, on) or interest on, any note, (4) impair the right to institute suit for the enforcement of any payment on or with respect to any note, (5) reduce the above-stated percentage of aggregate principal amount of notes then outstanding necessary to modify or amend the Indenture, (6) reduce the percentage of aggregate principal amount of notes then outstanding necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults under the Indenture, (7) modify or amend any provisions of the Indenture relating to the modification and amendment of the Indenture or relating to the waiver of past defaults or covenants, except as otherwise specified, (8) modify or amend any provision of the Indenture relating to Subsidiary Guarantees in a manner adverse to the Holders or (9) modify or amend the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or to make and consummate the Net Proceeds Offer with respect to any Asset Sale or modify any of the provisions or definitions with respect thereto. THE TRUSTEE Prior to a Default, the Trustee shall not be liable except for the performance of such duties as are specifically set out in the Indenture. If an Event of Default has occurred and is continuing, the Trustee will exercise such rights and powers vested in it under the Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. The Indenture and the Trust Indenture Act contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest (as defined in the Trust Indenture Act) it must eliminate such conflict or resign. State Street Bank and Trust Company is also trustee under indentures for the 2007 Notes and the 2006 Notes. Pursuant to the Trust Indenture Act, should a default occur with respect to either the notes or the 2006 Notes, State Street Bank and Trust Company would be required to resign as trustee under either the Indenture and the indenture for the 2007 Notes or the indenture for the 2006 Notes within 90 days of such default unless such default were cured, duly waived or otherwise eliminated. GOVERNING LAW The Indenture, the notes and the Subsidiary Guarantees provide that they will be governed by the laws of the State of New York. CERTAIN DEFINITIONS "Acquired Indebtedness" means Indebtedness of a Person: 99 101 (1) assumed in connection with an Asset Acquisition from such Person, (2) 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 Asset Acquisition or such Person becoming such a Subsidiary) or (3) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company of any Indebtedness described in clause (1) or (2) of this definition, including any successive refinancings, 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 as necessary to accomplish such refinancing, plus the amount of expenses of the Company incurred in connection with such refinancing, (b) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the notes at least to the same extent as the Indebtedness being refinanced and (c) such new Indebtedness has an Average Life longer than the Average Life of the notes and a final Stated Maturity later than the final Stated Maturity of the notes. "Adjusted Consolidated Net Tangible Assets" means, without duplication, as of the date of determination: (1) the sum of: (a) discounted future net revenues from proved oil and gas reserves of the Company and its Restricted Subsidiaries calculated in accordance with SEC guidelines 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 revenues from (i) estimated proved oil and gas reserves acquired since the date of such year-end reserve report, and (ii) estimated oil and gas reserves attributable to upward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to exploration, development or exploitation activities, in each case calculated in accordance with SEC guidelines (using the prices utilized in such year-end reserve report), and decreased by, as of the date of determination, the estimated discounted future net revenues from (iii) estimated proved oil and gas reserves produced or disposed of since the date of such year-end reserve report and (iv) estimated oil and gas reserves attributable to downward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to changes in geological conditions or other factors which would, in accordance with standard industry practice, cause such revisions, in each case calculated in accordance with SEC guidelines (using the prices utilized in such year-end reserve report); provided, that in the case of each of the determinations made pursuant to clauses (i) through (iv), 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 revenues used for purposes of this clause (1) (a) shall be confirmed in writing by a nationally recognized firm of independent petroleum engineers, (b) 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 100 102 books and records as of a date no earlier than the date of the Company's latest annual or quarterly financial statements, (c) the Net Working Capital on a date no earlier than the date of the Company's latest annual or quarterly financial statements and (d) the greater of (i) the net book value on a date no earlier than the date of the Company's latest annual or quarterly financial statements or (ii) the appraised value, as estimated by independent appraisers, of other tangible assets (including, without duplication, Investments in unconsolidated Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of the date no earlier than the date of the Company's latest audited financial statements, (2) minus the sum of (a) minority interests (other than a minority interest in a Subsidiary that is a business trust or similar entity formed for the primary purpose of issuing preferred securities the proceeds of which are loaned to the Company or a Restricted Subsidiary), (b) any net gas balancing liabilities of the Company and its Restricted Subsidiaries reflected in the Company's latest audited financial statements, (c) to the extent included in (1) (a) above, the discounted future net revenues, calculated in accordance with SEC guidelines (using 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 (d) the discounted future net revenues, calculated in accordance with SEC guidelines, attributable to reserves subject to Dollar-Denominated Production Payments which, based on the estimates of production and price assumptions included in determining the discounted future net revenues specified in (1) (a) above, would be necessary to fully satisfy the payment obligations of the Company and its Restricted Subsidiaries with respect to Dollar-Denominated Production Payments on the schedules specified with respect thereto. If the Company changes its method of accounting from the successful efforts method to the full cost method or a similar method of accounting, "Adjusted Consolidated Net Tangible Assets" will continue to be calculated as if the Company were still using the successful efforts method of accounting. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of this definition, beneficial ownership of 10% or more of the voting common equity (on a fully diluted basis) or options or warrants to purchase such equity (but only if exercisable at the date of determination or within 60 days thereof) of a Person shall be deemed to constitute control of such Person. No Person shall be deemed an Affiliate of an oil and gas royalty trust solely by virtue of ownership of units of beneficial interest in such trust. "Asset Acquisition" means: (1) an Investment by the Company or any Restricted Subsidiary in any other Person pursuant to which such Person shall become a Restricted Subsidiary or any Restricted Subsidiary shall be merged with or into the Company or any Restricted Subsidiary or 101 103 (2) the acquisition by the Company or any Restricted Subsidiary of the properties and assets of any Person which constitute all or substantially all of the properties and assets of such Person or any division or line of business of such Person. "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 by means of a Sale/Leaseback Transaction or 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: (1) any Capital Stock of any Restricted Subsidiary held by the Company or any Restricted Subsidiary; (2) the properties and assets of any division or line of business of the Company or any of its Restricted Subsidiaries substantially as an entirety; or (3) any other properties or assets of the Company or any of its Restricted Subsidiaries other than a disposition of hydrocarbons or other mineral products in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include: (1) any transfer of properties or assets that is governed by, and made in accordance with, the provisions described under the caption "-- Consolidation, Merger, etc." (2) any transfer of properties or assets to any Person, if permitted under the provisions described under the caption "-- Limitation on Restricted Payments;" (3) any trade or exchange of properties and assets used in the Oil and Gas Business of the Company or any Restricted Subsidiary or shares of Capital Stock in any Person in the Oil and Gas Business owned by the Company or any Restricted Subsidiary for properties and assets used in the Oil and Gas Business of any Person or shares of Capital Stock in any Person owned or held by another Person, provided, that: (a) the fair market value of the properties, assets and shares traded or exchanged by the Company or such Restricted Subsidiary (including any cash or Cash Equivalents, not to exceed 15% of such fair market value, to be delivered by the Company or such Restricted Subsidiary) is reasonably equivalent to the fair market value of the properties, assets and shares of Capital Stock (together with any cash or Cash Equivalents, not to exceed 15% of such fair market value) to be received by the Company or such Restricted Subsidiary as determined in good faith by (i) any officer of the Company if such fair market value is less than $5,000,000 and (ii) the Board of Directors of the Company as certified by a certified resolution delivered to the Trustee if such fair market value is equal to or in excess of $5,000,000; provided, that if such fair market value is equal to or in excess of $10,000,000 the Company shall deliver a written appraisal by a nationally recognized investment banking firm or appraisal firm, in each case specializing or having a speciality in oil and gas properties, and (b) such exchange is approved by a majority of the Disinterested Directors; or (4) any transfer of properties or assets in a single transaction or series of related transactions having a fair market value of less than $5,000,000. "Attributable Indebtedness" means, with respect to any particular lease under which any Person is at the time liable and at any date as of which the amount thereof is to be determined, the present value of the total net amount of rent required to be paid by such Person under the lease during the primary term thereof, without giving effect to any renewals at the option of the lessee, discounted from the respective due dates thereof to such date of determination at the rate of interest per annum implicit in the terms of the lease. As used in the preceding sentence, 102 104 the "net amount of rent" under any lease for any such period shall mean the sum of rental and other payments required to be paid with respect to such period by the lessee thereunder, excluding any amounts required to be paid by such lessee on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges. In the case of any lease which is terminable by the lessee upon payment of a penalty, such net amount of rent shall also include the amount of such penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. "Average Life" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing: (1) the sum of the products of (a) 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 (b) the amount of each such principal payment by (2) the sum of all such principal payments. "Board of Directors" means: (1) with respect to the Company, either the board of directors of the Company or any properly constituted committee thereof that is (a) authorized to take the action in question and (b) comprised of members, a majority of whom are not officers or employees of the Company or any Subsidiary of the Company, and (2) with respect to any Restricted Subsidiary, the board of directors of that Restricted Subsidiary or any properly constituted committee thereof that is authorized to take the action in question. "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. "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: (1) any evidence of Indebtedness with a maturity of 365 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), (2) demand and time deposits and certificates of deposit or acceptances with a maturity of 365 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 $100,000,000 or any commercial bank organized under the laws of any country other than the United States of America that is a member of the Organization for Economic Cooperation and Development ("OECD") and has total assets in excess of $100,000,000, (3) commercial paper with a maturity of 365 days or less issued by a Person that is not an Affiliate of the Company and is organized under the laws of any state of the United States of America or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody's (or, if at any time neither S&P nor 103 105 Moody's shall be rating such obligations, then from such other rating service as may be acceptable to the Trustee), (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (1) above entered into with any commercial bank meeting the specifications of clause (2) above, (5) overnight bank deposits and bankers' acceptances at any commercial bank meeting the qualifications specified in clause (2) above, and (6) investments in money market mutual or similar funds which have assets in excess of $500,000,000. "Change of Control" means the occurrence of any of the following events: (1) the Company's properties and assets are sold or otherwise disposed of substantially as an entirety on a consolidated basis to any Person or related group of Persons in any one transaction or a series of related transactions; (2) there shall be consummated any consolidation or merger of the Company (a) in which the Company is not the continuing or surviving Person (other than a consolidation or merger with a wholly owned Subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same number of shares of Common Stock of such Subsidiary) or (b) pursuant to which the Common Stock would be converted into cash, securities or other property, in each case, other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the Common Stock of the continuing or surviving Person immediately after such consolidation or merger; or (3) any Person or any Persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act (other than the Company, any Subsidiary of the Company, any employee stock purchase plan, stock option plan or other stock incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of the Company or any Subsidiary of the Company or any Person holding securities of the Company for or pursuant to the terms of any such employee benefit plan), together with any Affiliates thereof, shall acquire beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of at least 50% of the Voting Stock of the Company. "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 Fixed Charge Coverage Ratio" means, for any period, the ratio of: (1) the sum of Consolidated Net Income, Consolidated Interest Expense, 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 (a) the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments and (b) amounts recorded in accordance with GAAP as repayments of principal and interest pursuant to Dollar-Denominated Production Payments, to 104 106 (2) the sum of such Consolidated Interest Expense for such period; provided, that: (a) 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 clause (1) of the covenant described under the caption "-- Limitation on Indebtedness" and 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, (b) 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 clause (1) of the covenant described under the caption "--Limitation on 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, (c) notwithstanding clauses (a) and (b) 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 and (d) in making such calculation, Consolidated Interest Expense shall exclude interest attributable to Dollar-Denominated Production Payments. "Consolidated Income Tax Expense" means, for any period, the provision for federal, state, local and foreign income taxes 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, the sum of: (1) 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 Rate Protection Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (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, (2) 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 or accrued by such other Person during such period attributable to any such Indebtedness, in each case to the extent attributable to that period, (3) the aggregate amount of the interest component of Capitalized Lease Obligations paid, accrued and/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 105 107 (4) the aggregate amount of dividends paid or accrued on Redeemable Capital Stock or Preferred Stock of the Company and its Restricted Subsidiaries, to the extent such Redeemable Capital Stock or Preferred Stock is owned by Persons other than Restricted Subsidiaries. "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: (1) net after-tax extraordinary gains or losses (less all fees and expenses relating thereto), (2) net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (3) 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, interest on indebtedness or other distributions actually paid to the Company or its Restricted Subsidiaries in cash by such other Person during such period (regardless of whether such cash dividends, interest on indebtedness or other distributions is attributable to net income (or net loss) of such Person during such period or during any prior period), (4) 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, (5) 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, (6) income resulting from transfers of assets received by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary and (7) any write-downs of non-current assets; provided, however, that any ceiling limitation write-downs under SEC guidelines shall be treated as capitalized costs, as if such write-downs had not occurred. "Consolidated Net Worth" means, at any date, the consolidated stockholders' equity of the Company 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, impairment 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 which requires an accrual of or reserve for cash charges for any future period). "Credit Agreement" means the Amended and Restated Credit Agreement dated August 1, 1997, among the Company and Bank of Montreal and Banque Paribas, as co-agents, and the other banks specified therein, including any notes and guarantees executed in connection therewith, as such agreement has been and may be amended, modified, supplemented, extended, restated, replaced (including replacement after the termination of such agreement), restructured, increased, renewed or refinanced from time to time in one or more credit agreements, loan agreements, instruments or similar agreements, whether or not with the same lenders or agents, as such may be further amended, modified, supplemented, extended, restated, replaced (including replacement after the termination of such agreement), restructured, increased, renewed or refinanced from time to time. "Credit Agreement Obligations" means all monetary obligations of every nature of the Company or a Restricted Subsidiary, including without limitation, obligations to pay principal and interest, reimbursement 106 108 obligations under letters of credit, fees, expenses and indemnities, from time to time owed to the lenders or any agent under or in respect of the Credit Agreement. "Default" means any event, act or condition that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means: (1) all Senior Indebtedness constituting Credit Agreement Obligations and (2) any other Senior Indebtedness which (a) at the time of incurrence equals or exceeds $10,000,000 in aggregate principal amount and (b) is specifically designated by the Company in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" for purpose of the Indenture. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors is required to deliver its resolution under the Indenture, a member of the 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 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. "Event of Default" has the meaning set forth above under the caption "Events of Default." "Foreign Subsidiary" means: (1) any Restricted Subsidiary engaged in the Oil and Gas Business having the majority of its operations outside the United States of America, irrespective of its jurisdiction of organization, and (2) any other Restricted Subsidiary whose assets (excluding any cash and Cash Equivalents) consist exclusively of Capital Stock or Indebtedness of one or more Restricted Subsidiaries described in clause (1) of this definition. "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 applicable as of the date of the Indenture. "guarantee" means, as applied to any obligation: (1) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (2) 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 nonperformance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. When used as a verb, "guarantee" shall have a corresponding meaning. 107 109 "Guarantor Senior Indebtedness" means all Indebtedness of a Subsidiary Guarantor created, incurred, assumed or guaranteed by such Subsidiary Guarantor (and all renewals, substitutions, refinancings or replacements thereof) (including the principal of, interest on and fees, premiums, expenses (including costs of collection), indemnities and other amounts payable in connection with such Indebtedness) (and including, in the case of the Credit Agreement, interest accruing after the filing of a petition by or against such Subsidiary Guarantor under any bankruptcy law, in accordance with and at the rate, including any default rate, specified with respect to such Indebtedness, whether or not a claim for such interest is allowed as a claim after such filing in any proceeding under such bankruptcy law), unless the instrument governing such Indebtedness expressly provides that such Indebtedness is not senior in right of payment to its Subsidiary Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness of a Subsidiary Guarantor will not include: (1) Indebtedness of such Subsidiary Guarantor evidenced by its Subsidiary Guarantee, (2) Indebtedness of such Subsidiary Guarantor that is expressly subordinated or junior in right of payment to any Guarantor Senior Indebtedness of such Subsidiary Guarantor or its Subsidiary Guarantee, (3) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is by its terms without recourse to such Subsidiary Guarantor or Non-Recourse Indebtedness, (4) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock of such Subsidiary Guarantor, (5) to the extent it might constitute Indebtedness, any liability for federal, state, local or other taxes owed or owing by such Subsidiary Guarantor, (6) Indebtedness of such Subsidiary Guarantor to the Company or any of the Company's other Subsidiaries or any other Affiliate of the Company or any of such Affiliate's Subsidiaries and (7) that portion of any Indebtedness of such Subsidiary Guarantor which at the time of issuance is issued in violation of the Indenture (but, as to any such Indebtedness, no such violation shall be deemed to exist for purposes of this clause (7) if the holder(s) of such Indebtedness or their representative or such Subsidiary Guarantor shall have furnished to the Trustee an Opinion of Counsel, addressed to the Trustee (which counsel may, as to matters of fact, rely upon a certificate of such Subsidiary Guarantor) to the effect that the incurrence of such Indebtedness does not violate the provisions of such Indenture); provided, that the foregoing exclusions shall not affect the priorities of any Indebtedness arising solely by operation of law in any case or proceeding or similar event described in clause (1), (2) or (3) of the second paragraph under the caption "-- Subordination." "Hedging Obligations" means obligations of any Person arising out of hedging transactions entered into in the ordinary course of business, including, without limitation, swaps, options, forward sales and futures contracts entered into in connection with interest rates, currencies and energy-related commodities. "Holder" means a Person in whose name a note is registered in the Note Register. "Indebtedness" means, with respect to any Person, without duplication: (1) 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, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit, bankers' acceptance or other similar credit transaction and in connection with any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any 108 110 Capital Stock of such Person, or any warrants, rights or options to acquire such Capital Stock, now or hereafter outstanding, 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, (2) 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, (3) 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, (4) all Capitalized Lease Obligations of such Person, (5) the Attributable Indebtedness (in excess of any related Capitalized Lease Obligations) related to any Sale/Leaseback Transaction of such Person, (6) 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, contingent or otherwise, 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), (7) all guarantees by such Person of Indebtedness referred to in this definition (including, with respect to any Production Payment, any warranties or guarantees 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), (8) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends, (9) all obligations of such Person under or in respect of currency exchange contracts and Interest Rate Protection Obligations and (10) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of such Person of the types referred to in clauses (1) through (9) above. 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. Subject to clause (7) of the first sentence of this definition, neither Dollar-Denominated Production Payments nor Volumetric Production Payments shall be deemed to be Indebtedness. "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 109 111 notional amount and includes, 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 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 the Company in such Unrestricted Subsidiary at such time. "Investments" shall exclude: (1) extensions of trade credit on commercially reasonable terms in accordance with normal trade practices and (2) Interest Rate Protection Obligations entered into in the ordinary course of business or as required by any Permitted Indebtedness, Permitted Subsidiary Indebtedness or any Indebtedness incurred in compliance with the covenant described above under the caption "-- Limitation on Indebtedness," but only to the extent that the notional principal amount of such Interest Rate Protection Obligations does not exceed 105% of the principal amount of such Indebtedness to which such Interest Rate Protection Obligations relate and (3) bonds, notes, debentures or other securities received in compliance with the covenant described under the caption "-- Limitation on Disposition of Proceeds of Asset Sales." "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; provided, however, "Lien" shall not include rights created in a third Person in connection with the creation by the Company or a Subsidiary of a Production Payment. 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. "Material Change" means an increase or decrease (excluding changes that result solely from changes in prices) of more than 50% 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 (1) (a) of the definition of Adjusted Consolidated Net Tangible Assets; provided, however, that the following will be excluded from the calculation of Material Change: (1) 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 (2) 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 "-- Limitation on Disposition of Proceeds of Asset Sales." "Material Restricted Subsidiary" means, at any particular time: (1) any Subsidiary Guarantor and 110 112 (2) any other 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. "Maturity" means, with respect to any note, the date on which any principal of such 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 received by the Company or any Restricted Subsidiary 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: (1) brokerage commissions and other fees and expenses (including fees and expenses of engineers, legal counsel, accountants and investment banks) related to such Asset Sale, (2) provisions for all taxes payable as a result of such Asset Sale, (3) amounts required to be paid (a) to any minority interest holder or other Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale or (b) in respect of any Indebtedness (other than Indebtedness under the Credit Agreement) secured by a Lien on any of the properties or assets that were the subject of such Asset Sale and (4) 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: (1) all current assets of the Company and its Restricted Subsidiaries, minus (2) all current liabilities of the Company and its Restricted Subsidiaries, except current liabilities included in Indebtedness, in each case as set forth in financial statements of the Company prepared in accordance with GAAP. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness of the Company or a Restricted Subsidiary incurred in connection with the acquisition by the Company or a Restricted Subsidiary of any property or assets and as to which: 111 113 (1) the holders of such Indebtedness agree that they will look solely to the property or assets so acquired and securing such Indebtedness for payment on or in respect of such Indebtedness and (2) no default with respect to such Indebtedness would permit (after notice or passage of time or both), according to the terms of any other Indebtedness of the Company or a Restricted Subsidiary, any holder of such other Indebtedness to declare a default under such other Indebtedness or cause the payment of such other Indebtedness to be accelerated or payable prior to its stated maturity. "Note Obligations" means any principal of, premium, if any, and interest on, and any other amounts (including, without limitation, any payment obligations with respect to the notes as a result of any Asset Sale, Change of Control or redemption) owing in respect of, the notes payable pursuant to the terms of the notes or the Indenture or upon acceleration of the notes. "Note Register" means the register maintained by or for the Company in which the Company shall provide for the registration of the notes and of transfer of the notes. "Officers' Certificate" means a certificate delivered to the Trustee signed by the Chairman, the President, a Vice President or the Chief Financial Officer, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company. "Oil and Gas Business" means: (1) the acquisition, exploration, exploitation, development, operation and disposition of interests in oil, gas and other hydrocarbon properties, (2) the gathering, marketing, treating, processing, storage, refining, selling and transporting of any production from such interests or properties, (3) any business relating to or arising from exploration for or exploitation, development, production, treatment, processing, storage, refining, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (4) any power generation and electrical transmission business in a jurisdiction outside North America where fuel required by such business is supplied, directly or indirectly, from hydrocarbons produced substantially from properties in which the Company or its Restricted Subsidiaries, directly or indirectly, participates and (5) any activity necessary, appropriate or incidental to the activities described in the preceding clauses (1) through (4) of this definition. "Opinion of Counsel" means a written opinion of legal counsel for the Company (or any Subsidiary Guarantor, if applicable) including an employee of the Company (or any Subsidiary Guarantor, if applicable), who is reasonably acceptable to the Trustee. "Pari Passu Indebtedness" means: (1) the Company's 8 3/4% Senior Subordinated Notes due 2007 issued under the Indenture dated as of May 15, 1997 between the Company and Fleet National Bank (now State Street Bank and Trust Company), as Trustee, and (2) any other Indebtedness of the Company that is pari passu in right of payment to the notes. "Permitted Indebtedness" means any of the following: 112 114 (1) Indebtedness of the Company under one or more bank credit or revolving credit facilities in an aggregate principal amount at any one time outstanding not to exceed: (a) the greater of: (i) $270,000,000 and (ii) an amount equal to the sum of (A) $170,000,000 and (B) 10% of Adjusted Consolidated Net Tangible Assets determined as of the date of the most recent quarterly consolidated financial statements of the Company and its Restricted Subsidiaries, less (b) the amount of Net Cash Proceeds applied to reduce Indebtedness pursuant to the covenant of the Indenture described under the caption "-- Limitation on Disposition of Proceeds of Asset Sales" (together with interest and fees under such facilities, the "Maximum Credit Amount," with the Maximum Credit Amount being an aggregate maximum amount for the Company and all Guarantor Subsidiaries, pursuant to clause (1) of the definition of "Permitted Subsidiary Indebtedness"), and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings or replacements (each, for purposes of this clause, a "refinancing") thereof by the Company, including any successive refinancings thereof by the Company, so long as the aggregate principal amount of any such new Indebtedness, together with the aggregate principal amount of all other Indebtedness outstanding pursuant to this clause (1) (and clause (1) of the definition of "Permitted Subsidiary Indebtedness"), shall not at any one time exceed the Maximum Credit Amount; (2) Indebtedness of the Company under the notes; (3) Indebtedness of the Company outstanding on the date of the Indenture (and not repaid or defeased with the proceeds of the Company's sale of the outstanding notes); (4) obligations of the Company pursuant to Interest Rate Protection Obligations, but only to the extent 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 Obligations; (5) Indebtedness of the Company to any Restricted Subsidiaries; (6) in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; (7) Indebtedness in respect of bid, performance or surety bonds issued or other reimbursement obligations for the account of the Company in the ordinary course of business, including guarantees and letters of credit supporting such bid, performance, surety bonds or other reimbursement obligations (in each case other than for an obligation for money borrowed); (8) Non-Recourse Indebtedness; (9) Indebtedness incurred in respect of any letters of credit in the ordinary course of business of the Company or reimbursement obligations in respect thereof; (10) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company of any Indebtedness of the Company described in clauses (2) or (3) above, including any successive refinancings by the Company, 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 as necessary to accomplish such refinancing, plus the amount of expenses of the Company incurred in connection with such refinancing, and (b) in the case of any refinancing of 113 115 Subordinated Indebtedness, such new Indebtedness is made subordinate to the notes at least to the same extent as the Indebtedness being refinanced and (c) 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; (11) other Indebtedness of the Company in an aggregate principal amount not in excess of $25,000,000 at any one time outstanding. "Permitted Investments" means any of the following: (1) Investments in Cash Equivalents; (2) Investments in the Company or any of its Restricted Subsidiaries; (3) 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 of the Company or (b) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its properties and assets to, the Company or a Restricted Subsidiary; (4) entry into operating agreements, joint ventures, partnership agreements, working interests, royalty interests, mineral leases, processing agreements, farm-out agreements, contracts for the sale, transportation or exchange of oil and natural gas, unitization agreements, pooling arrangements, area of mutual interest agreements, development agreements, joint ownership arrangements and other similar or customary agreements, transactions, properties, interests and arrangements, whether or not any such Investment involves or results in the creation of a legal entity, and Investments and expenditures in connection therewith or pursuant thereto, in each case made or entered into in the ordinary course of the Company or its Restricted Subsidiaries' Oil and Gas Business; (5) entry into any arrangement pursuant to which the Company or any of its Restricted Subsidiaries may incur Hedging Obligations; and (6) other Investments having an aggregate fair market value (measured on the date each such Investment was made without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (6) that are at the time outstanding (net of repayments, dividends and distributions received with respect to such Investments), not to exceed $25,000,000 at any one time outstanding. "Permitted Liens" means the following types of Liens: (1) Liens existing as of the date the notes are first issued; (2) Liens securing the notes; (3) Liens in favor of the Company or a Subsidiary Guarantor; (4) Liens securing Senior Indebtedness or Guarantor Senior Indebtedness; (5) Liens for taxes, assessments and governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (6) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; 114 116 (7) Liens incurred and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, and Liens incurred and deposits made to secure the payment or performance of tenders, statutory or regulatory obligations, surety and appeal bonds, bids, leases, government contracts and leases, trade contracts (other than to secure an obligation for borrowed money), performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money but including lessee and operator obligations under statutes, governmental regulations or instruments related to the ownership, exploration and production of oil, gas and minerals on state, federal or foreign lands or waters); (8) pre-judgment Liens and judgment Liens not giving rise to an Event of Default so long as any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired; (9) any interest or title of a lessor under any Capitalized Lease Obligation or operating lease; (10) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of defeasing Indebtedness of the Company or any of the Subsidiaries; customary Liens for the fees, costs and expenses of trustees and escrow agents pursuant to the indenture, escrow agreement or other similar agreement establishing such trust or escrow arrangement; and Liens pursuant to merger agreements, stock purchase agreements, asset sale agreements and similar agreements (a) limiting the transfer of properties and assets pending consummation of the subject transaction or (b) in respect of earnest money deposits, good faith deposits, purchase price adjustment escrows or similar deposits or escrow arrangements made or established thereunder; (11) Liens securing any Hedging Obligations of the Company or any Restricted Subsidiary; (12) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (13) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (14) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets and Liens to secure Indebtedness used to finance all or a part of the construction of property or assets used by the Company or any of its Restricted Subsidiaries in the Oil and Gas Business, provided, that such Liens do not extend to any other property or assets owned by the Company or its Restricted Subsidiaries; (15) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (16) Liens securing Interest Rate Protection Obligations which Interest Rate Protection Obligations relate to Indebtedness that is secured by Liens otherwise permitted under this Indenture; (17) Liens on, or related to, properties or assets to secure all or part of the costs incurred in the ordinary course of business for the exploration, drilling, development or operation thereof; (18) Liens on pipeline or pipeline facilities which arise out of operation of law; (19) Liens arising under operating agreements, joint venture agreements, partnership agreements, oil and gas leases, farm-out agreements, division orders, contracts for the sale, purchase, transportation, processing or exchange of oil, gas or other hydrocarbons, unitization and pooling declarations and agreements, area of mutual 115 117 interest agreements, development agreements, joint ownership arrangements and other agreements which are customary in the Oil and Gas Business; (20) Liens reserved in oil and gas mineral leases for bonus or rental payments and for compliance with the terms of such leases; (21) Liens constituting survey exceptions, encumbrances, easements, or reservations of, or rights to others for, rights-of-way, zoning restrictions and other similar charges and encumbrances as to the use of real properties, and minor defects of title which, in the case of any of the foregoing, were not incurred or created to secure the payment of borrowed money or the deferred purchase price of property, assets or services, and in the aggregate do not interfere in any material respect with the ordinary conduct of the business of the Company or its Restricted Subsidiaries; (22) rights reserved to or vested in any municipality or governmental, statutory or public authority by the terms of any right, power, franchise, grant, license or permit, or by any provision of law, to terminate such right, power, franchise, grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any of the property of such Person; rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any property of such Person, or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by such Person; any obligation or duties affecting the property of such Person to any municipality or governmental, statutory or public authority with respect to any franchise, grant, license or permit; (23) Liens securing Non-Recourse Indebtedness; provided, however, that the related Non-Recourse Indebtedness shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets acquired by the Company with the proceeds of such Non-Recourse Indebtedness; and (24) Liens securing Acquired Indebtedness; provided, however, that any such lien extends only to the properties or assets 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. Notwithstanding anything in clauses (1) through (24) of this definition, the term "Permitted Liens" does not include any Liens resulting from the creation, incurrence, issuance, assumption or guarantee of any Production Payments other than Production Payments that are created, incurred, issued, assumed or guaranteed in connection with the financing of, and within 30 days after, the acquisition of the properties or assets that are subject thereto. "Permitted Subsidiary Indebtedness" means any of the following: (1) Indebtedness of any Guarantor Subsidiary under one or more bank credit or revolving credit facilities (and "refinancings" thereof) in an amount at any one time outstanding not to exceed the Maximum Credit Amount (in the aggregate for all Guarantor Subsidiaries and the Company, pursuant to clause (1) of the definition of "Permitted Indebtedness"); (2) Indebtedness of any Restricted Subsidiary outstanding on the date of the Indenture; (3) obligations of any Restricted Subsidiary pursuant to Interest Rate Protection Obligations, but only to the extent such obligations do not exceed 105% of the aggregate principal amount of the Indebtedness covered by such Interest Rate Protection Obligations; and Hedging Obligations of any Restricted Subsidiary; (4) the Subsidiary Guarantees (and any assumption of the obligations guaranteed thereby); (5) Indebtedness of any Restricted Subsidiary relating to guarantees by such Restricted Subsidiary of Permitted Indebtedness; 116 118 (6) in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; (7) Indebtedness in respect of bid, performance or surety bonds or other reimbursement obligations issued for the account of any Restricted Subsidiary in the ordinary course of business, including guarantees and letters of credit supporting such bid, performance, surety bonds or other reimbursement obligations (in each case other than for an obligation for money borrowed); (8) Indebtedness of any Restricted Subsidiary to any other Restricted Subsidiary or to the Company; (9) Indebtedness relating to guarantees by any Restricted Subsidiary permitted to be incurred pursuant to paragraph (a) of the provisions of the Indenture described under the caption "-- Limitation on Non-Guarantor Restricted Subsidiaries"; (10) Indebtedness incurred in respect of letters of credit in the ordinary course of business of any Restricted Subsidiary or reimbursement obligation in respect thereof; (11) Non-Recourse Indebtedness; (12) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by any Restricted Subsidiary of any Indebtedness of such Restricted Subsidiary including any successive refinancings by 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 such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of such Subsidiary incurred in connection with such refinancing and (b) 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 (13) other Indebtedness incurred by one or more Restricted Subsidiaries that are not Guarantor Subsidiaries in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. "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 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. "Public Market" exists at any time with respect to the Qualified Capital Stock of the Company if such Qualified Capital Stock of the Company is then: (1) registered with the SEC pursuant to Section 12(b) or 12(g) of the Exchange Act and (2) traded either on a national securities exchange or on the NASDAQ Stock Market. 117 119 "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Qualified Redemption Transaction" means a call for redemption of any Capital Stock or Subordinated Indebtedness (including any Subordinated Indebtedness accounted for as a minority interest of the Company that is held by a Subsidiary that is a business trust or similar entity formed for the primary purpose of issuing preferred securities the proceeds of which are loaned to the Company or a Restricted Subsidiary) that by its terms is convertible into Common Stock of the Company if on the date of notice of such call for redemption: (1) a Public Market exists in the shares of Common Stock of the Company and (2) the average closing price on the Public Market for shares of Common Stock of the Company for the twenty trading days immediately preceding the date of such notice exceeds 120% of the conversion price per share (determined by reference to the redemption price) of Common Stock of the Company issuable upon conversion of the Capital Stock or Subordinated Indebtedness called for redemption. "Redeemable Capital Stock" means any class or series of 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 91 days after the final Stated Maturity of the notes or is redeemable at the option of the holder thereof at any time prior to 91 days after such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to 91 days after such final Stated Maturity. "Regular Record Date" for the interest payable on any Interest Payment Date means February 1 or August 1 (whether or not a business day, as the case may be) next preceding each such Interest Payment Date. "Restricted Subsidiary" means any Subsidiary of the Company, whether existing on or after the date of the Indenture, unless such Subsidiary of the Company 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. "Sale/Leaseback Transaction" means, with respect to any Person, any direct or indirect arrangement pursuant to which properties or assets are sold or transferred by such Person or a Subsidiary of such Person and are thereafter leased back from the purchaser or transferee thereof by such Person or one of its Subsidiaries; provided, however, Sale/Leaseback Transactions shall not include transactions whereby property or assets are sold or transferred by the Company or any of its Restricted Subsidiaries to any Affiliate of the Company or pursuant to any Permitted Investment constituting a joint ownership arrangement, which property or assets are leased back, directly or indirectly, to the Company, any Affiliate of the Company or to the constituent parties to any such joint venture arrangement. "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company (including, in the case of the Credit Agreement, interest accruing after the filing of a petition by or against the Company under any bankruptcy law, in accordance with and at the rate, including any default rate, specified with respect to such indebtedness, whether or not a claim for such interest is allowed as a claim after such filing in any proceeding under such bankruptcy law), 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 shall not be senior in right of payment to the notes. Notwithstanding the foregoing, "Senior Indebtedness" shall not include: (1) Indebtedness evidenced by the notes, 118 120 (2) Indebtedness that is expressly subordinate or junior in right of payment to any Senior Indebtedness of the Company, (3) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is by its terms without recourse to the Company or which is Non-Recourse Indebtedness, (4) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock of the Company, (5) to the extent it might constitute Indebtedness, any liability for federal, state, local or other taxes owed or owing by the Company, (6) Indebtedness of the Company to a Subsidiary of the Company or any other Affiliate of the Company or any of such Affiliate's Subsidiaries and (7) that portion of any Indebtedness of the Company which at the time of issuance is issued in violation of the Indenture (but, as to any such Indebtedness, no such violation shall be deemed to exist for purposes of this clause (7) if the holder(s) of such Indebtedness or their representative or the Company shall have furnished to the Trustee an Opinion of Counsel addressed to the Trustee (which counsel may, as to matters of fact, rely upon a certificate of the Company) to the effect that the incurrence of such Indebtedness does not violate the provisions of such Indenture); provided, that the preceding exclusions shall not affect the priorities of any Indebtedness arising solely by operation of law in any case or proceeding or similar event described in clause (1), (2) or (3) of the second paragraph under the caption "-- Subordination." "Stated Maturity" means, when used with respect to any note or any installment of interest thereon, the date specified in such note as the fixed date on which the principal of such 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: (1) the Company's 5 1/2% Convertible Subordinated Notes due 2006 issued under the Indenture dated as of June 15, 1996, between the Company and Fleet National Bank (now State Street Bank and Trust Company), as Trustee and (2) other Indebtedness of the Company which, by its terms, is subordinated in right of payment to the notes. "Subsidiary" means, with respect to any Person, a corporation, partnership, limited liability company, association or other business entity 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. For purposes of the foregoing definition, an arrangement by which a Person who owns an interest in an oil and gas property is subject to a joint operating agreement, processing agreement, net profits, interest, overriding royalty interest, farmout agreement, development agreement, area of mutual interest agreement, joint bidding agreement, unitization agreement, pooling arrangement or other similar agreement or arrangement shall not, in and of itself, be considered a Subsidiary. "Subsidiary Guarantee" means any guarantee of the notes by any Restricted Subsidiary in accordance with the provisions set forth in the covenant described under the caption "-- Limitation on Non-Guarantor Restricted Subsidiaries." 119 121 "Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries that becomes a guarantor of the notes in compliance with the provisions described under the caption "-- Limitation on Non-Guarantor Restricted Subsidiaries" or otherwise executes a supplemental indenture in which such Subsidiary agrees to be bound by the terms of the Indenture and to guarantee the payment of the notes pursuant to the provisions described under the caption "-- Possible Subsidiary Guarantees of the Notes." "Unrestricted Subsidiary" means: (1) 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 (2) 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, the covenant described under the caption "-- Limitation on Restricted Payments" (other than Investments of the type described in clause (4) 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 the covenant described under the caption "-- Limitation on Liens"); provided, however, that with respect to clause (a) of this sentence, the Company or a Restricted Subsidiary may be liable for Indebtedness of an Unrestricted Subsidiary if: (i) such liability constituted a Permitted Investment or a Restricted Payment permitted by the provisions of the Indenture described under the caption "-- Limitation on Restricted Payments," in each case at the time of incurrence, or (ii) the 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 shall be evidenced to the Trustee by filing a resolution with the Trustee giving effect to such designation. The Board of Directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation: (1) no Default or Event of Default shall have occurred and be continuing, (2) the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the first paragraph of the covenant described above under the caption "-- Limitation on Indebtedness" and 120 122 (3) 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 the covenant described under the caption "-- Limitations on Liens." "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 vote in the election of the directors, managers or trustees of any Person (irrespective of whether or not, at the time, Capital 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: (1) all of the Capital Stock in such Restricted Subsidiary, other than any directors qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (2) 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. OUTSTANDING NOTES REGISTRATION RIGHTS AGREEMENT In connection with the sale of the outstanding notes, the Company entered into a Registration Rights Agreement. Under that agreement, the Company agreed to use its reasonable best efforts to: o file a registration statement with the SEC with respect to an offer to exchange the outstanding notes for new notes having substantially identical terms as the outstanding notes (except that the new notes will not contain terms with respect to transfer restrictions or interest rate increases) o cause that registration statement to be declared effective under the Securities Act within 135 days of the date of original issuance of the outstanding notes o keep that registration statement effective until the closing of the exchange offer o cause the exchange offer to be consummated within 180 days following the original issuance of the outstanding notes Promptly after the exchange offer registration statement has been declared effective, the Company will offer the outstanding notes in exchange for surrender of the new notes. Under the following circumstances, the Company will file with the SEC a shelf registration statement to cover resales of the outstanding notes by those holders who provide required information in connection with the shelf registration statement: o if any changes in law or the applicable interpretations of the staff of the SEC do not permit the Company to effect the exchange offer as contemplated by the Registration Rights Agreement 121 123 o if for any reason the exchange offer registration statement is not declared effective within 135 days after the date of original issuance of the outstanding notes o if the exchange offer is not consummated within 180 days after the date of original issuance of the outstanding notes o if the initial purchasers of outstanding notes request in certain circumstances A "Registration Default" will occur if, among other things: o the exchange offer registration statement is not declared effective on or prior to the 135th day following the date of original issuance of the outstanding notes o the exchange offer is not consummated or a shelf registration statement with respect to the notes is not declared effective on or prior to the 180th day following the date of original issuance of the outstanding notes o the Company files the exchange offer registration statement or shelf registration statement and the SEC declares it effective, but afterward the Company withdraws it, or it becomes subject to an effective stop order suspending the effectiveness of such registration statement (except as specifically permitted in the Registration Rights Agreement) without being succeeded immediately by an additional registration statement filed and declared effective o the Company effects a suspension of offers and sales under the shelf registration statement for more than 60 days, whether or not consecutive, within any period of 12 consecutive months If any Registration Default occurs, the Company will be obligated to pay additional interest to each holder of outstanding notes at a rate equal to 0.50% per annum. This rate will continue until all registration defaults have been cured (and, if applicable, the suspension of offers and sales of notes under the shelf registration statement ceases). Holders who desire to tender their outstanding notes will be required to make to the Company the representations described under "The Exchange Offer - -- Purpose and Effect of the Exchange Offer" and "-- Procedures for Tendering" in order to participate in the exchange offer. In addition, the Company may require holders to deliver information to be used in connection with the shelf registration statement in order to have their notes included in the shelf registration statement and benefit from the provisions regarding additional interest described in the preceding paragraphs. A holder who sells outstanding notes under the shelf registration statement generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers. Such a holder will also be subject to the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement that are applicable to such holder, including indemnification obligations. The description of the Registration Rights Agreement contained in this section is a summary only. For more information, you may review the provisions of the Registration Rights Agreement that the Company filed with the SEC as an exhibit to the registration statement of which this prospectus is a part. BOOK ENTRY; DELIVERY AND FORM The new notes will initially be represented by one or more permanent global notes in definitive, fully registered book-entry form (the "Global Securities") that will be registered in the name of Cede & Co., as nominee of DTC. The Global Securities will be deposited on behalf of the acquirors of the new notes represented thereby with a custodian for DTC for credit to the respective accounts of the acquirors or to such other accounts as they may direct at DTC. See "The Exchange Offer -- Book-Entry Transfer." 122 124 THE GLOBAL SECURITIES The Company expects that under procedures established by DTC o upon deposit of the Global Securities with DTC or its custodian, DTC will credit on its internal system portions of the Global Securities that shall be comprised of the corresponding respective amounts of the Global Securities to the respective accounts of persons who have accounts with such depositary o ownership of the notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC or its nominee, with respect to interests of persons who have accounts with DTC ("participants"), and the records of participants, with respect to interests of persons other than participants. So long as DTC or its nominee is the registered owner or holder of any of the notes, DTC or such nominee will be considered the sole owner or holder of such notes represented by the Global Securities for all purposes under the Indenture and under the notes represented thereby. No beneficial owner of an interest in the Global Securities will be able to transfer such interest except in accordance with the applicable procedures of DTC in addition to those provided for under the indenture. Payments on the notes represented by the Global Securities will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the trustee or any paying agent under the Indenture will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. The Company expects that DTC or its nominee, upon receipt of any payment on the notes represented by the Global Securities, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the Global Securities as shown in the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in the Global Securities held through such participants will be governed by standing instructions and customary practice as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payment will be the responsibility of such participants. Transfers between participants in DTC will be effected in accordance with DTC rules and will be settled in immediately available funds. If a holder requires physical delivery of a certificated security for any reason, including to sell notes to persons in states that require physical delivery of such security or to pledge such securities, such holder must transfer its interest in the Global Securities in accordance with the normal procedures of DTC and the procedures in the indenture. DTC has advised the Company that DTC will take any action permitted to be taken by a holder of notes, including the presentation of notes for exchange as described below, only at the direction of one or more participants to whose account the DTC interests in the Global Securities are credited and only in respect of the aggregate principal amount as to which such participant or participants has or have given such direction. However, if there is an event of default under the Indenture, DTC will exchange the Global Securities for certificated securities that it will distribute to its participants. DTC has advised the Company as follows: o DTC is a limited-purpose company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code 123 125 and a "clearing agency" registered under the provisions of Section 17A of the Securities Exchange Act of 1934 o DTC holds securities that its participants deposit with DTC and facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates o Direct participants include securities brokers and dealers, banks, trust companies, clearing corporations and other organizations o DTC is owned by a number of its participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. o Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly o The rules applicable to DTC and its participants are on file with the SEC Although DTC is expected to follow these procedures in order to facilitate transfers of interests in the Global Securities among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the trustee will have any responsibility for the performance by DTC or its direct or indirect participants on their respective obligations under the rules and procedures governing their operations. CERTIFICATED SECURITIES Interests in the Global Securities will be exchanged for certificated securities if: o DTC or any successor depositary (the "'Depositary") notifies the Company that it is unwilling or unable to continue as depositary for the Global Securities, or DTC ceases to be a "clearing agency" registered under the Securities Exchange Act of 1934, and a successor depositary is not appointed by the Company within 90 days o the Company determines not to have the notes represented by Global Securities Upon the occurrence of either of the events described in the preceding sentence, the Company will cause the appropriate certificated securities to be delivered. Neither the Company nor the trustee will be liable for any delay by the Depositary or its nominee in identifying the beneficial owners of the related notes. Each such person may conclusively rely on, and will be protected in relying on, instructions from such Depositary or nominee for all purposes, including the registration and delivery, and the respective principal amounts, of the notes to be issued. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion is based on the current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the Internal Revenue Service (the "Service") will not take a contrary view, and no ruling from the Service has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conditions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. Certain holders 124 126 (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. The Company recommends that each holder consult such holder's own tax advisor as to the particular tax consequences of exchanging such holder's outstanding notes for new notes, including the applicability and effect of any state, local or foreign tax laws. The Company believes that the exchange of outstanding notes for new notes pursuant to the exchange offer will not be treated as an "exchange" for federal income tax purposes because the new notes will not be considered to differ materially in kind or extent from the outstanding notes. Rather, the new notes received by a holder will be treated as a continuation of the outstanding notes in the hands of such holder. As a result, there will be no federal income tax consequences to holders exchanging outstanding notes for new notes pursuant to the exchange offer. PLAN OF DISTRIBUTION Based on interpretations by the staff of the SEC in no action letters issued to third parties, the Company believes that any holder may transfer new notes issued under the exchange offer in exchange for the outstanding notes if: o the holder acquires the new notes in the ordinary course of its business o the holder is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of such new notes Broker-dealers receiving new notes in the exchange offer will be subject to a prospectus delivery requirement with respect to resales of the new notes. The Company believes that a holder may not transfer new notes issued under the exchange offer in exchange for the outstanding notes if that holder is: o an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act o a broker-dealer that acquired outstanding notes directly from the Company o a broker-dealer that acquired outstanding notes as a result of market-making or other trading activities without compliance with the registration and prospectus delivery provisions of the Securities Act To date, the staff of the SEC has taken the position that participating broker-dealers may fulfill their prospectus deliver requirements with respect to transactions involving an exchange of securities such as this exchange offer, other than a resale of an unsold allotment from the original sale of the outstanding notes, with the prospectus contained in the exchange offer registration statement. In the Registration Rights Agreement, the Company has agreed to permit participating broker-dealers to use this prospectus in connection with the resale of new notes. The Company has agreed that, for a period of up to 180 days after the expiration of the exchange offer, the Company will make this prospectus, and any amendment or supplement to this prospectus, available to any broker-dealer that requests such documents in the letter of transmittal. If a holder wishes to exchange its outstanding notes for new notes in the exchange offer, the holder will be required to make representations to us as described in "The Exchange Offer -- Purpose and Effect of the Exchange Offer" and "-- Procedures for Tendering -- Representations to the Company" of this prospectus and in the letter of transmittal. In addition, if a broker-dealer receives new notes for its own account in exchange for outstanding notes that were acquired by it as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver a prospectus in connection with any resale by it of such new notes. 125 127 The Company will not receive any proceeds from any sale of new notes by broker-dealers. Broker-dealers who receive new notes for their own account in the exchange offer may sell them from time to time in one or more transactions in the over-the-counter market: o in negotiated transactions o through the writing of options on the new notes or a combination of such methods of resale o at market prices prevailing at the time of resale o at prices related to such prevailing market prices or 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 new notes. Any broker-dealer that resells new notes it received for its own account in the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act. Any profit on any resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed to pay all expenses incidental to the exchange offer other than commissions and concessions of any brokers or dealers. The Company will indemnify holders of the outstanding notes, including any broker-dealers, against certain liabilities, including liabilities under the Securities Act, as provided in the Registration Rights Agreement. TRANSFER RESTRICTIONS ON OUTSTANDING NOTES The outstanding notes were not registered under the Securities Act. Those outstanding notes may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons except in accordance with an exemption from the Securities Act registration requirements. Accordingly, the outstanding notes were offered and sold only in the United States to "qualified institutional buyers" under Rule 144A under the Securities Act in a private sale exempt from the registration requirements of the Securities Act. LEGAL MATTERS The validity of the issuance of the new notes is being passed upon for the Company by Gerald A. Morton, Vice President-Law and Corporate Secretary of the Company. Mr. Morton owns approximately 3,961 shares of the Company's Common Stock directly and through the Company's tax advantaged savings plan and options to purchase an aggregate of 29,000 shares of the Company's common stock, which are or become exercisable in periodic installments through August 1, 2001. EXPERTS The consolidated financial statements of Pogo Producing Company as of December 31, 1997 and 1996, and for the three years in the period ended December 31, 1997, incorporated by reference in this prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are incorporated by reference herein in reliance upon the authority of that firm as experts in accounting and auditing in giving that report. 126 128 The estimates of oil and gas reserves set forth herein and in the Annual Report, and the related estimates set forth herein and therein of discounted present values of estimated future net revenues therefrom, are extracted from the report of Ryder Scott attached as an exhibit to the Annual Report. Such information is incorporated by reference herein in reliance on the authority of that firm as experts with respect to matters contained in that report. 127 129 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Consolidated Financial Statements of Pogo Producing Company ---- Report of Independent Public Accountants................................................................ F-2 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995................................................................................................. F-3 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................ F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............................................................................................. F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996, and 1995................................................................................. F-6 Notes to Consolidated Financial Statements.............................................................. F-7
F-1 130 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Pogo Producing Company: We have audited the accompanying consolidated balance sheets of Pogo Producing Company (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pogo Producing Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 13, 1998 F-2 131 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Oil and gas..................... $ 285,200 $ 204,142 $ 157,459 Gains (losses) on sales......... 1,100 (165) 100 ---------- ---------- ---------- Total...................... 286,300 203,977 157,559 ---------- ---------- ---------- Operating Costs and Expenses: Lease operating................. 63,501 37,628 35,071 General and administrative...... 21,412 18,028 16,400 Exploration..................... 10,530 16,777 7,468 Dry hole and impairment......... 9,631 8,579 6,703 Depreciation, depletion and amortization.................. 103,157 61,857 68,489 ---------- ---------- ---------- Total...................... 208,231 142,869 134,131 ---------- ---------- ---------- Operating Income..................... 78,069 61,108 23,428 Interest: Charges......................... (21,886) (13,203) (11,167) Income.......................... 453 232 26 Capitalized..................... 6,175 4,244 1,834 Foreign Currency Transaction Loss.... (7,604) -- -- ---------- ---------- ---------- Income Before Taxes and Extraordinary Item............................... 55,207 52,381 14,121 ---------- ---------- ---------- Income Tax Expense................... (18,091) (18,800) (4,891) ---------- ---------- ---------- Income Before Extraordinary Item..... 37,116 33,581 9,230 Extraordinary Loss on Early Extinguishment of Debt, net of taxes.............................. -- (821) -- ---------- ---------- ---------- Net Income........................... $ 37,116 $ 32,760 $ 9,230 ========== ========== ========== Earnings per Share (restated for 1996 and 1995): Basic Before extraordinary item.................... $ 1.11 $ 1.01 $ 0.28 Extraordinary item......... -- (0.02) -- ---------- ---------- ---------- Net income................. $ 1.11 $ 0.99 $ 0.28 ========== ========== ========== Diluted Before extraordinary item.................... $ 1.06 $ 0.97 $ 0.28 Extraordinary item......... -- (0.02) -- ---------- ---------- ---------- Net income................. $ 1.06 $ 0.95 $ 0.28 ========== ========== ========== Dividends per Common Share........... $ 0.12 $ 0.12 $ 0.12 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part hereof. F-3 132 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1997 1996 ----------- ----------- (EXPRESSED IN THOUSANDS) ASSETS Current Assets: Cash and cash investments ......... $ 19,646 $ 3,054 Accounts receivable ............... 39,540 30,031 Other receivables ................. 46,951 35,027 Inventory -- product .............. 713 -- Inventories -- tubulars ........... 8,334 6,165 Other ............................. 4,087 641 ----------- ----------- Total current assets ......... 119,271 74,918 ----------- ----------- Property and Equipment: Oil and gas, on the basis of successful efforts accounting Proved properties being amortized ................ 1,321,817 1,079,523 Unevaluated properties and properties under development, not being amortized ................ 110,231 111,192 Other, at cost .................... 12,619 8,773 ----------- ----------- 1,444,667 1,199,488 Less -- accumulated depreciation, depletion, and amortization, including $6,004 and $4,822 respectively, applicable to other property ..... 917,363 814,623 ----------- ----------- 527,304 384,865 ----------- ----------- Other .................................. 30,042 19,459 ----------- ----------- $ 676,617 $ 479,242 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable -- operating activities ....................... $ 13,639 $ 7,676 Accounts payable -- investing activities ....................... 90,833 56,961 Accrued interest payable .......... 3,130 1,957 Accrued payroll and related benefits ......................... 1,938 1,490 Other ............................. 632 163 ----------- ----------- Total current liabilities .............. 110,172 68,247 Long-Term Debt ......................... 348,179 246,230 Deferred Federal Income Tax ............ 57,502 46,321 Deferred Credits ....................... 14,658 11,162 ----------- ----------- Total liabilities ............ 530,511 371,960 ----------- ----------- Shareholders' Equity: Preferred stock, $1 par; 2,000,000 shares authorized ...... -- -- Common stock, $1 par; 100,000,000 shares authorized, and 33,552,702 and 33,321,381 shares issued, respectively ...... 33,553 33,321 Additional capital ................ 144,848 139,337 Retained earnings (deficit) ....... (31,971) (65,075) Treasury stock and other, at cost ............................. (324) (301) ----------- ----------- Total shareholders' equity ................... 146,106 107,282 ----------- ----------- $ 676,617 $ 479,242 =========== ===========
The accompanying notes to consolidated financial statements are an integral part hereof. F-4 133 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 --------- --------- --------- (EXPRESSED IN THOUSANDS) Cash flows from operating activities: Cash received from customers ......................................................... $ 272,004 $ 195,931 $ 164,065 Federal income taxes received ........................................................ 7,037 -- 6,000 Operating, exploration, and general and administrative expenses paid ................. (86,445) (74,512) (56,997) Interest paid ........................................................................ (20,713) (12,960) (11,036) Federal income taxes paid ............................................................ (19,500) 12,500) (6,000) Other ................................................................................ (1,651) (3,061) 301 --------- --------- --------- Net cash provided by operating activities ....................................... 150,732 92,898 96,333 --------- --------- --------- Cash flows from investing activities: Capital expenditures ................................................................. (197,326) (172,032) (96,403) Purchase of proved reserves .......................................................... (31,234) -- (11,921) Proceeds from the sale of property and tubular stock ................................. 387 100 100 --------- --------- --------- Net cash used in investing activities ........................................... (228,173) (171,932) (108,224) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of new debt ................................................... 100,000 115,000 -- Borrowings under senior debt agreements .............................................. 502,000 208,000 199,000 Payments under senior debt agreements ................................................ (500,000) (201,000) (182,000) Proceeds from exercise of stock options .............................................. 3,874 3,378 1,717 Payment of cash dividends on common stock ............................................ (4,012) (3,979) (3,946) Debt issue expenses paid ............................................................. (3,165) (3,116) -- Purchase of 8% debentures due 2005 ................................................... -- (40,699) (450) Principal payments of other long-term debt obligations ............................... -- -- (871) --------- --------- --------- Net cash provided by financing activities ....................................... 98,697 77,584 13,450 --------- --------- --------- Effect of exchange rate changes on cash .................................................. (4,664) 23 -- --------- --------- --------- Net increase (decrease) in cash and cash investments ..................................... 16,592 (1,427) 1,559 Cash and cash investments at the beginning of the year ................................... 3,054 4,481 2,922 --------- --------- --------- Cash and cash investments at the end of the year ......................................... $ 19,646 $ 3,054 $ 4,481 ========= ========= ========= Reconciliation of net income to net cash provided by operating activities: Net income ........................................................................... $ 37,116 $ 32,760 $ 9,230 Adjustments to reconcile net income to net cash provided by operating activities Extraordinary losses on early extinguishments of debt, net of taxes ............. -- 821 -- Foreign currency transaction loss ............................................... 7,604 -- -- (Gains) losses on sales ......................................................... (1,100) 165 (100) Depreciation, depletion and amortization ........................................ 103,157 61,857 68,489 Dry hole and impairment ......................................................... 9,631 8,579 6,703 Interest capitalized ............................................................ (6,175) (4,244) (1,834) Increase in deferred income tax ................................................. 12,999 7,175 5,592 Change in assets and liabilities: (Increase) decrease in accounts receivable .................................. (12,483) (8,211) 7,095 Increase in inventory -- product ............................................ (713) -- -- (Increase) decrease in other current assets ................................. (6,470) 81 23 Increase in other assets .................................................... (7,418) (5,228) (1,187) Increase (decrease) in accounts payable ..................................... 8,998 (2,079) 1,942 Increase in accrued interest payable ........................................ 1,173 243 131 Increase in accrued payroll and related benefits ............................ 448 251 2 Increase in other current liability ......................................... 469 60 63 Increase in deferred credits ................................................ 3,496 668 184 --------- --------- --------- Net cash provided by operating activities ................................................ $ 150,732 $ 92,898 $ 96,333 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part hereof. F-5 134 POGO PRODUCING COMPANY & SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TREASURY RETAINED STOCK SHARE- SHARES COMMON ADDITIONAL EARNINGS AND HOLDERS' OUTSTANDING STOCK CAPITAL (DEFICIT) OTHER EQUITY ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS EXPRESSED IN THOUSANDS) BALANCE AT DECEMBER 31, 1994 ........... 32,810,261 $ 32,826 $ 130,675 $ (99,140) $ (324) $ 64,037 Net income ............................. -- -- -- 9,230 -- 9,230 Exercise of stock options .............. 181,136 181 2,206 -- -- 2,387 Dividends ($0.12 per common share) ..... -- -- -- (3,946) -- (3,946) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1995 ........... 32,991,397 33,007 132,881 (93,856) (324) 71,708 Net income ............................. -- -- -- 32,760 -- 32,760 Foreign currency translation gain ...... -- -- -- -- 23 23 Exercise of stock options .............. 274,714 274 4,924 -- -- 5,198 Shares issued in connection with the Long-Term Incentive Plan ............. 5,896 6 246 -- -- 252 Shares issued in connection with the conversion of -- 8% Debentures ..................... 32,898 33 1,267 -- -- 1,300 2004 Notes ........................ 901 1 19 -- -- 20 Dividends ($0.12 per common share) ..... -- -- -- (3,979) -- (3,979) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1996 ........... 33,305,806 33,321 139,337 (65,075) (301) 107,282 Net income ............................. -- -- -- 37,116 -- 37,116 Foreign currency translation loss ...... -- -- -- -- (23) (23) Exercise of stock options .............. 229,024 230 5,461 -- -- 5,691 Shares issued in connection with the conversion of 2004 Notes ............. 2,297 2 50 -- -- 52 Dividends ($0.12 per common share) ..... -- -- -- (4,012) -- (4,012) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1997 ........... 33,537,127 $ 33,553 $ 144,848 $ (31,971) $ (324) $ 146,106 ========== ========== ========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part hereof. F-6 135 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations -- Pogo Producing Company was incorporated in 1970. Pogo Producing Company and its subsidiaries (the "Company") are engaged in oil and gas exploration, development and production activities on its properties located offshore in the Gulf of Mexico and onshore in the United States and internationally in the Gulf of Thailand. The Company has interests in 101 lease blocks offshore Louisiana and Texas, approximately 237,000 gross acres onshore in the United States and approximately 734,000 gross acres offshore in the Kingdom of Thailand. Use of Estimates -- The preparation of these financial statements require the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of proved oil and gas reserves. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Oil and gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. Proved reserves of crude oil, condensate, natural gas and natural gas liquids are estimated quantities that geological and engineering data demonstrate with reasonable certainty to be recoverable in the future from known reservoirs under existing conditions. Principles of Consolidation -- The consolidated financial statements include the accounts of Pogo Producing Company and its subsidiary and affiliated companies, after elimination of all significant intercompany transactions. Majority owned subsidiaries are fully consolidated. Minority owned subsidiaries or affiliates are pro rata consolidated in the same manner as the Company, and the oil and gas industry generally, accounts for its operating or working interest in oil and gas joint ventures. Prior-Year Reclassifications -- Certain prior-year amounts have been reclassified to conform with the current year presentation. Foreign Currency -- The U. S. Dollar is the functional currency for all areas of operations of the Company. Accordingly, monetary assets and liabilities and items of income and expense denominated in a foreign currency are remeasured to U. S. dollars at the rate of exchange in effect at the end of each month and the resulting gains or losses on foreign currency transactions are included in the consolidated statements of income for the period. Inventory -- Product Crude oil and condensate from the Company's Tantawan field located in the Kingdom of Thailand is produced into a floating production, storage and off loading ("FPSO") system and sold periodically as an economic barge quantity is accumulated. The product inventory at December 31, 1997 consists of approximately 43,000 barrels of crude oil and condensate, net to the Company's interest, and is carried at its estimated net realizable value of $16.67 per barrel. Inventory -- Tubulars Tubular Inventories consist primarily of goods used in the Company's operations and are stated at the lower of average cost or market value. F-7 136 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest Capitalized -- Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until production commences if the projects are evaluated as successful. Earnings per Share -- In 1997, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Prior years have been restated in conformity with the provisions of SFAS 128. Earnings per common share (basic earnings per share) are based on the weighted average number of shares of common stock outstanding during the periods. Earnings per common share and potential common share (diluted earnings per share) consider the effect of dilutive securities as set out below in thousands, except per share amounts.
FOR THE YEAR ENDED DECEMBER 31, 1997 ----------------------------- INCOME SHARES PER SHARE ------- ------- ------- BASIC EARNINGS PER SHARE ........................................ $37,116 33,421 $ 1.11 Effect of potential dilutive securities: Shares assumed issued from the exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period .............................. -- 758 -- Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes ........................................... 3,082 3,885 ------- ------- ------- DILUTED EARNINGS PER SHARE ...................................... $40,198 38,064 $ 1.06 ======= ======= ======= Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period ...................... -- 471 $ 40.82 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes ...................... $ 4,111 2,726 $ 1.51
F-8 137 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 ----------------------------- INCOME(a) SHARES PER SHARE ------- ------- ------- BASIC EARNINGS PER SHARE ........................................ $33,581 33,203 $ 1.01 Effect of potential dilutive securities: Shares issued from the assumed exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period .............................. -- 831 -- Interest expense avoided, net of taxes, and shares issued from the assumed conversion at $22.188 per share of the 2004 Notes ........................................... 3,083 3,886 ------- ------- ------- DILUTED EARNINGS PER SHARE ...................................... $36,664 37,920 $ 0.97 ======= ======= ======= (a) Computed on income before extraordinary item Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period ...................... -- 20 $ 40.94 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $39.50 per share of the 8% Debentures, retired on June 28, 1996 ............................................ $ 1,179 521 $ 2.26 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $42.185 per share of the 2006 Notes ............................................. $ 2,238 1,472 $ 1.52
FOR THE YEAR ENDED DECEMBER 31, 1995 -------------------------- INCOME SHARES PER SHARE ------ ------ ------ BASIC EARNINGS PER SHARE ........................................ $9,230 32,893 $ 0.28 Effect of potential dilutive securities: Shares issued from the assumed exercise of options to purchase common shares, net of treasury shares assumed purchased from the proceeds, at the average market price for the period .............................. -- 597 -- ------ ------ ------ DILUTED EARNINGS PER SHARE ...................................... $9,230 33,490 $ 0.28 ====== ====== ====== Antidilutive securities: Shares assumed not issued from options to purchase common shares as the exercise prices are above the average market price for the period ...................... -- 598 $22.13 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $39.50 per share of the 8% Debentures ........................... $2,229 1,085 $ 2.05 Interest expense incurred, net of taxes, and shares not issued related to the assumed non-conversion at $22.188 per share of the 2004 Notes .............................. $3,083 3,887 $ 0.79
F-9 138 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Production Imbalances -- Owners of an oil and gas property often take more or less production from a property than entitled to based on their ownership percentages in the property. This results in a condition known in the industry as a production imbalance. The Company follows the "take" (cash) method of accounting for production imbalances. Under this method, the Company recognizes revenues on production as it is taken and delivered to its purchasers. The Company's crude oil imbalances are not significant. At December 31, 1997, the Company had taken approximately 3,751 MMcf of natural gas less than it was entitled to based on its interest in those properties, and approximately 1,757 MMcf more than its entitlement on other properties placing the Company at year end in a net under-delivered position of approximately 1,994 MMcf of natural gas based on its working interest ownership in the properties. Oil and Gas Activities and Depreciation, Depletion and Amortization -- The Company follows the successful efforts method of accounting for its oil and gas activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Proved properties are reviewed whenever events or changes in circumstances indicate that the value of such property on the Company's books may not be recoverable. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above, plus future costs to abandon offshore wells and platforms, and is on a cost center by cost center basis using the units of production method. The Company generally creates cost centers on a field by field basis for oil and gas activities in the Gulf of Mexico and the Gulf of Thailand. Generally, the Company establishes cost centers on the basis of an oil or gas trend or play for its oil and gas activities onshore in the United States. Other properties are depreciated using a straight-line method in amounts which in the opinion of management are adequate to allocate the cost of the properties over their estimated useful lives. Consolidated Statements of Cash Flows -- For the purpose of cash flows, the Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. Significant transactions may occur which do not directly affect cash balances and as such will not be disclosed in the Consolidated Statements of Cash Flows. Certain such noncash transactions are disclosed in the Consolidated Statements of Shareholders' Equity relating to shares issued in connection with the Long-Term Incentive Plan and the conversion of debentures into Common Stock in 1996 and 1997. Commitments and Contingencies -- The Company has commitments for operating leases for office space in Houston, Midland and Bangkok and commitments for an operating lease and operating expenses related to a floating production, storage and off-loading vessel (FPSO) in the Gulf of Thailand. Rental expense for office space was $1,440,000 in 1997, $1,054,000 in 1996, and $861,000 in 1995. Expenses for the FPSO lease and related F-10 139 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operating costs were $14,809,000 in 1997. Future minimum office and FPSO lease expenses and related FPSO operating expense payments (in thousands of dollars) at December 31, 1997 are as follows:
1998................................. $ 17,826 1999................................. 17,830 2000................................. 17,758 2001................................. 17,758 2002................................. 16,611 Thereafter........................... 91,352
(2) INCOME TAXES The components of income (loss) before income taxes for each of the three years in the period ended December 31, 1997, are as follows (expressed in thousands):
1997 1996 1995 --------- --------- --------- United States........................ $ 62,953 $ 56,380 $ 16,899 Foreign.............................. (7,746) (3,999) (2,778) --------- --------- --------- Total........................... $ 55,207 $ 52,381 $ 14,121 ========= ========= =========
The components of federal income tax expense (benefit) for each of the three years in the period ended December 31, 1997, are as follows (expressed in thousands):
1997 1996 1995 --------- --------- --------- United States, current............... $ 16,000 $ 12,500 $ -- United States, deferred(a)........... 5,964 7,162 5,602 Foreign, deferred.................... (3,873) (862) (711) --------- --------- --------- Total........................... $ 18,091 $ 18,800 $ 4,891 ========= ========= =========
- ------------ (a) Excludes $443,000 of deferred tax benefit on extraordinary loss of $1,264,000 in 1996. Total federal income tax expense (benefit) for each of the three years in the period ended December 31, 1997, differs from the amounts computed by applying the statutory federal income tax rate to income before taxes as follows (expressed as a percent of pretax income):
1997 1996 1995 --------- --------- --------- Federal statutory income tax rate.... 35.0% 35.0% 35.0% Increases (reductions) resulting from: Statutory depletion in excess of tax basis....................... (0.2) (0.2) (2.2) Foreign taxes................... (2.1) 1.1 1.6 Other........................... 0.1 -- 0.2 --------- --------- --------- 32.8% 35.9% 34.6% ========= ========= =========
Deferred income taxes are determined based upon the differences between the financial statement and tax basis of the Company's assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets are recognized if it is more likely than not that the F-11 140 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) future tax benefit will be realized. The principal components of the Company's deferred income tax assets and liabilities include the following at December 31, 1997 and 1996 (expressed in thousands):
DECEMBER 31, ----------------------- 1997 1996 --------- --------- Deferred tax liabilities: Intangible drilling costs, capitalized and amortized for financial statement purposes and deducted for income tax purposes ............................................... $ 204,218 $ 184,981 Charges to property and equipment, expensed for financial statement purposes, and capitalized and amortized for income tax purposes ........................................ 12,203 8,089 Interest charges, capitalized and amortized for financial statement purposes and deducted for income tax purposes .... 19,762 21,046 --------- --------- 236,183 214,116 Deferred tax asset: Differences in depletion and depreciation rates used for tangible assets for financial and income tax purposes ...... (178,681) (167,795) --------- --------- Net deferred tax liability ........................................ $ 57,502 $ 46,321 ========= =========
(3) LONG-TERM DEBT Long-term debt and the amount due within one year at December 31, 1997 and 1996, consists of the following (dollars expressed in thousands):
DECEMBER 31, -------------------- 1997 1996 -------- -------- Senior debt -- Bank revolving credit agreement debt: LIBO Rate based loans, borrowings at December 31, 1997 and 1996 at average interest rates of 6.52% and 6.59%, respectively ............................................ $ 47,000 $ 22,000 Prime rate based loans, borrowing at December 31, 1996 at an interest rate of 8.25% ............................ -- 13,000 -------- -------- Total bank revolving credit agreement debt ............ 47,000 35,000 Uncommitted credit lines with banks, borrowing at December 31, 1996 at an average interest rate of 7.0% ... -- 10,000 -------- -------- Total senior debt .................................................... 47,000 45,000 -------- -------- Subordinated debt -- 8 3/4% Senior subordinated notes, due 2007 (issued May 22, 1997) ................................................. 100,000 -- 5 1/2% Convertible subordinated notes, due 2004 ................. 86,179 86,230 5 1/2% Convertible subordinated notes, due 2006 ................. 115,000 115,000 -------- -------- Total subordinated debt .............................................. 301,179 201,230 -------- -------- Total debt ........................................................... 348,179 246,230 -------- -------- Amount due within one year -- ........................................ -- -- -------- -------- Long-term debt ....................................................... $348,179 $246,230 ======== ========
F-12 141 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Effective August 1, 1997, the Company entered into an amended and restated credit agreement (as so amended and restated, the "Credit Agreement"). The Credit Agreement provides for an unsecured $250,000,000 revolving/term credit facility which will be fully revolving until July 1, 2000, after which the balance will be due in eight quarterly term loan installments, commencing October 31, 2000. The amount that may be borrowed under the Credit Agreement may not exceed a borrowing base which is composed of both domestic and Thai properties less, in certain circumstances, the present value of interest payments on the 2007 Notes. The domestic borrowing base is determined semiannually by the lenders in accordance with the Credit Agreement, based primarily on the discounted present value of future net revenues from the Company's domestic oil and gas reserves. The portion of the borrowing base which composed of properties located in the Kingdom of Thailand is also determined semiannually, but may, at the lenders' discretion, be redetermined once more during each semiannual period. The value of this portion of the borrowing base is determined by the lenders applying their usual and customary criteria for oil and gas evaluation. As of January 1, 1998, the Company's total borrowing base, including both domestic and Thai properties, exceeded $250,000,000. The Credit Agreement is governed by various financial and other covenants, including requirements to maintain positive working capital (excluding current maturities of debt) and fixed charge coverage ratio, and limitations on indebtedness, creation of liens, the prepayment of subordinated debt, the payment of dividends, mergers and consolidation, investments and asset dispositions. In addition, the Company is prohibited from pledging borrowing base properties as security for other debt. Borrowings under the Credit Agreement currently bear interest at a base (prime) rate or LIBOR plus 5/8%, at the Company's option. A commitment fee on the unborrowed amount under the Credit Agreement is also charged. The commitment fee is currently 0.25% per annum on the unborrowed amount under the Credit Agreement that is designated as "active" and 0.10% per annum on the unborrowed amount under the Credit Agreement that is designated as "inactive." Of the $250,000,000 that is currently available under the Credit Agreement (subject to borrowing base limitations), $125,000,000 is designated as "active" and $125,000,000 is designated as "inactive". The Company has also entered into separate letter agreements with two banks under which one of the banks may provide a $10,000,000 uncommitted money market line of credit and the other bank may provide a $20,000,000 uncommitted money market line of credit. Each line of credit is on an as available or offered basis and neither bank has an obligation to make any advances under its respective line of credit. Although loans made under these letter agreements are for a maximum term of 30 days, they will be reflected as long-term on the Company's balance sheet because the Company has the ability and intent to reborrow such amounts under its Credit Agreement. Both letter agreements permit either party to terminate such letter agreement at any time. On May 22, 1997, the Company issued $100,000,000 of 8 3/4% Senior Subordinated Notes due 2007 (the "2007 Notes"). The proceeds from the issuance of the 2007 Notes were used to repay amounts outstanding under the Company's bank revolving credit agreement, and to purchase short-term cash investments. The 2007 Notes bear interest at a rate of 8 3/4%, payable semiannually in arrears on May 15 and November 15 of each year, commencing November 15, 1997. The 2007 Notes are general unsecured senior subordinated obligations of the Company and are subordinated in right of payment to the Company's senior indebtedness, which currently includes the Company's obligations under its bank revolving credit agreement and its unsecured credit lines, but are senior in right of payment to its subordinated indebtedness, which currently includes the 2006 Notes and the 2004 Notes. The Company, at its option, may redeem the 2007 Notes in whole or in part, at any time on or after May 15, 2002, at a redemption price of 104.375% of their principal value and decreasing percentages thereafter. No sinking fund payments are required on the 2007 Notes. The 2007 Notes are redeemable at the option of any holder, upon the occurrence of a change of control (as defined in the indenture governing the 2007 Notes), at 101% of their principal amount. The indenture governing the 2007 Notes also imposes certain covenants on the Company that are customary for senior subordinated indebtedness generally, including covenants limiting: incurrence of indebtedness F-13 142 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) including senior indebtedness; restricted payments; the issuance and sales of restricted subsidiary capital stock; transactions with affiliates; liens; disposition of proceeds of asset sales; non-guarantor restricted subsidiaries; dividends and other payment restrictions affecting restricted subsidiaries; and mergers, consolidations and the sale of assets. As of December 31, 1997, $28,657,000 was available for dividends under this limitation, which is currently the Company's most restrictive such covenant. The 5 1/2% Convertible Subordinated Notes, due 2004 (the "2004 Notes") are convertible into Common Stock at $22.188 per share subject to adjustment upon the occurrence of certain events. The 2004 Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 1998, at a redemption price of 103.3% and decreasing percentages thereafter. No sinking fund is provided. The 2004 Notes are redeemable at the option of the holder, upon the occurrence of a repurchase event (a change in control and other circumstances, as defined), at 100% of the principal amount. On February 12, 1998, the Company announced its intent to redeem the 2004 Notes on March 16, 1998 at an amount equal to 103.3% of their principal amount plus accrued interest. Holders may elect to convert the principal or any integral multiple of a 2004 Note into common stock at $22.188 per share until close of business on March 13, 1998. The 5 1/2% Convertible Subordinated Notes, due 2006 (the "2006 Notes") are convertible into Common Stock at $42.185 per share subject to adjustment upon the occurrence of certain events. The 2006 Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 1999, at a redemption price of 103.85% and decreasing percentages thereafter. No sinking fund is provided. The 2006 Notes are redeemable at the option of the holder, upon the occurrence of a repurchase event (a change in control and other circumstances, as defined), at 100% of the principal amount. Current maturities and sinking fund requirements during the next five years in connection with the above long-term debt are none in 1998 and 1999, $7,050,000 in 2000, $25,850,000 in 2001 and $14,100,000 in 2002. All of the current maturities reflected above are related to the retirement of the Company's bank debt. The Company has established a history of refinancing its bank debt before scheduled maturity payments commence and expects to do so again before the amortization of bank debt commences in 2000. F-14 143 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) GEOGRAPHIC SEGMENT REPORTING During 1997, the Company adopted the Financial and Accounting Standard's Board's Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). Information concerning the Company's revenues and long-lived assets as required by SFAS 131 is as follows (in thousands of dollars):
LONG-LIVED REVENUES ASSETS -------- -------- AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 United States ............................... $245,458 $366,638 Kingdom of Thailand ......................... 39,393 160,666 -------- -------- $284,851 $527,304 ======== ======== AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 United States ............................... $203,364 $295,108 Kingdom of Thailand ......................... -- 89,757 -------- -------- $203,364 $384,865 ======== ======== AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995 United States ............................... $156,729 $232,527 Kingdom of Thailand ......................... -- 29,306 -------- -------- $156,729 $261,833 ======== ========
(5) SALES TO MAJOR CUSTOMERS The Company is an oil and gas exploration and production company that generally sells its oil and gas to numerous customers on a month-to-month basis. Sales to the following customers exceeded 10% of revenues during any one of the three years indicated (expressed in thousands):
1997 1996 1995 ------- ------- ------- Enron Corp. and affiliates ....................... $57,965 $58,101 $42,895 Petroleum Authority of Thailand (PTT) ............ $30,108 $ -- $ -- Coastal Gas Marketing Company .................... $ -- $18,376 $18,117
(6) CREDIT RISK Substantially all of the Company's accounts receivable at December 31, 1997 and 1996, result from oil and gas sales and joint interest billings to other companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized. Historically, credit losses incurred by the Company on receivables generally have not been material. No known material credit losses were experienced during 1997 or 1996. A substantial portion of the Company's oil and gas operations are conducted in Southeast Asia, and a substantial portion of its natural gas and liquid hydrocarbon production are sold there. In recent months, Southeast Asia in general, and the Kingdom of Thailand in particular, have experienced severe economic difficulties which have been characterized by sharply reduced economic activity, illiquidity, highly volatile foreign currency exchange rates and unstable stock markets. The government of the Kingdom of Thailand and other governments in the region are currently acting to address these issues. However, the economic difficulties currently being experienced in Thailand, together with the volatility of the Thai Baht against the F-15 144 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) U.S. dollar, will continue to have a material impact on the Company's operations in the Kingdom of Thailand, together with the prices that the Company receives for its oil and natural gas production there. All of the Company's current natural gas production from its Thailand operations committed under a long term Gas Sales Agreement to PTT at a price denominated in Thai Baht. The Company's crude oil and condensate production from its Thailand operations is sold on a tanker load by tanker load basis. Prices that the Company receives for such production are based on world benchmark prices, which are denominated in U.S. dollars, and are currently expected on future crude oil sales to be paid in U.S. dollars. The Company believes that the current economic difficulties in Southeast Asia have resulted in a decreased demand for petroleum products in the region, which has contributed to the recent general decline in crude oil and condensate prices throughout the world. (7) EMPLOYEE BENEFITS As permitted by SFAS No. 123, the Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Since the exercise price of the options granted is equal to the quoted market price of the Company's stock at the date of grant, no compensation cost has been recognized for its stock option plans. Had compensation costs been determined based on the fair value at the grant dates for awards made in 1997, 1996, and 1995 consistent with the methods of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except for per share amounts):
1997 1996 1995 ---------- ---------- ---------- Net income: As reported ........................................... $ 37,116 $ 32,760 $ 9,230 Pro forma ............................................. $ 34,220 $ 31,194 $ 8,619 Earnings per share: As reported (restated for 1996 and 1995) -- Basic ..... $ 1.11 $ 0.99 $ 0.28 As reported (restated for 1996 and 1995) -- Diluted ... $ 1.06 $ 0.95 $ 0.28 Pro forma -- Basic .................................... $ 1.04 $ 0.94 $ 0.26 Pro forma -- Diluted .................................. $ 0.99 $ 0.91 $ 0.26
The fair value of grants was estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used in 1997, 1996, and 1995, respectively: risk-free interest rates of 6.10%, 6.25%, and 6.00%, expected volatility of 34.63%, 39.15%, and 41.78%, dividend yields of 0.29%, 0.34%, and 0.54%, and an expected life of the options of 4 years in each of the years 1997, 1996, and 1995. The Company has a tax-advantaged savings plan in which all salaried employees may participate. Under such plan, a participating employee may allocate up to 10% of his salary, up to a maximum allowed by law ($10,000 for 1998), and the Company will then match the employee's contribution on a dollar for dollar basis up to 6% of the employee's salary. Funds contributed by the employee and the matching funds contributed by the Company are held in trust by a bank trustee in six separate funds. Amounts contributed by the employee and earnings and accretions thereon may be used to purchase shares of Common Stock, invest in a money market fund or invest in four stock, bond, or blended stock and bond mutual funds according to instructions from the employee. Matching funds contributed to the savings plan by the Company are invested only in Common Stock. The Company contributed $588,000 to the savings plan in 1997, $471,000 in 1996, and $277,000 in 1995. The Company's stock option plans authorize the granting of options to key employees and non-employee directors at prices equivalent to the market value at the date of grant. Options generally become exercisable in three annual installments commencing one year after the date of grant and, if not exercised, F-16 145 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expire 10 years from the date of grant. In 1996, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). As permitted by SFAS No. 123, the Company elected to continue to account for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, the adoption of SFAS No. 123 had no effect on the Company's results of operations in 1996 and 1997. A summary of the status of the Company's plans as of December 31, 1997, 1996, and 1995, and changes during the years ended on those dates is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE ---------- ---------- Outstanding, December 31, 1994 ................................ 1,387,537 $ 11.72 Granted .................................................. 389,000 $ 22.34 Exercised ................................................ (181,136) $ 9.48 Forfeited or expired ..................................... (20,000) $ 14.88 ---------- Outstanding, December 31, 1995 ................................ 1,575,401 $ 14.56 ========== Exercisable, December 31, 1995 ................................ 1,006,686 $ 10.87 ========== Available for grant, December 31, 1995 ........................ 1,719,893 ========== Weighted-average fair value of options granted during 1995 .... $ 8.77 Outstanding, December 31, 1995 ................................ 1,575,401 $ 14.56 Granted .................................................. 406,500 $ 34.59 Exercised ................................................ (274,714) $ 12.30 ---------- Outstanding, December 31, 1996 ................................ 1,707,187 $ 19.70 ========== Exercisable, December 31, 1996 ................................ 1,077,658 $ 14.31 ========== Available for grant, December 31, 1996 ........................ 1,313,393 ========== Weighted-average fair value of options granted during 1996 .... $ 13.56 Outstanding, December 31, 1996 ................................ 1,707,187 $ 19.70 Granted .................................................. 480,400 $ 40.49 Exercised ................................................ (229,024) $ 16.83 ---------- Outstanding, December 31, 1997 ................................ 1,958,563 $ 25.13 ========== Exercisable, December 31, 1997 ................................ 1,196,803 $ 18.15 ========== Available for grant, December 31, 1997 ........................ 832,993 ========== Weighted-average fair value of options granted during 1997 .... $ 14.63
F-17 146 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING --------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE ----------------------- REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE OPTION PRICES OUTSTANDING (DAYS) PRICE EXERCISABLE PRICE - ------------------------------------- ------------ ----------- -------- ----------- -------- $4.38........................... 92,750 12 $ 4.38 92,750 $ 4.38 $5.56 to $8.06.................. 349,361 1,107 $ 6.83 349,361 $ 6.83 $15.13 to $19.13................ 156,046 2,014 $16.46 156,046 $16.46 $20.31 to $23.88................ 484,838 2,620 $22.15 381,827 $22.17 $30.56 to $34.88................ 325,001 3,143 $33.91 102,319 $33.93 $35.13 to $38.94................ 82,667 3,150 $36.18 56,000 $36.03 $40.56 to $44.38................ 465,900 3,483 $40.80 58,500 $41.20 $48.75.......................... 2,000 3,306 $48.75 -- -- ------------ ----------- Total........................... 1,958,563 2,493 $25.13 1,196,803 $18.15 ============ ===========
F-18 147 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A trusteed retirement plan has been adopted by the Company for its salaried employees. The benefits are based on years of service and the employee's average compensation for five consecutive years within the final ten years of service which produce the highest average compensation. The Company makes annual contributions to the plan in the amount of retirement plan cost accrued or the maximum amount which can be deducted for federal income tax purposes. The following table sets forth the plan's funded status (in thousands of dollars) as of December 31, 1997, 1996, and 1995.
1997 1996 1995 -------- -------- -------- Actuarial present value (discounted at 7%, 7 1/4%, and 7 1/4%, respectively) of benefit obligations: Accumulated benefit obligations -- Vested ................................................ $ 7,355 $ 6,408 $ 5,488 Non-vested ............................................ 1,536 1,138 1,173 -------- -------- -------- Total accumulated benefit obligations ................. 8,891 7,546 6,661 Projected salary increases (escalated at 5 1/2%, 5% and 5%, respectively) and other changes ...................... 2,329 1,804 1,734 -------- -------- -------- Projected benefit obligations for service rendered to date ..................................................... 11,220 9,350 8,395 Plan assets at fair value, primarily listed securities with an expected long-term rate of return of 9 1/2%, 8 1/2% and 8 1/2%, respectively .......................................... 31,312 24,181 19,089 -------- -------- -------- Plan assets in excess of projected benefit obligations .......... 20,092 14,831 10,694 Unrecognized: Net overfunding being recognized over 15 years ............. (336) (440) (543) Net gain arising from the difference between actual experience and that assumed .............................. (13,134) (9,335) (5,989) Prior service cost ......................................... (300) (343) (387) -------- -------- -------- Accrued retirement plan asset ................................... $ 6,322 $ 4,713 $ 3,775 ======== ======== ======== Retirement plan cost (benefit) for 1997, 1996, and 1995 included the following components: Service cost, benefits accruing each year with proration for future salary increases .................... $ 746 $ 621 $ 480 Interest cost on projected benefit obligations ........ 707 604 535 Actual return on plan assets .......................... (2,286) (1,615) (1,182) Net amortization and deferral ......................... (775) (548) (333) -------- -------- -------- Accrued retirement plan cost (benefit) ..................... $ (1,608) $ (938) $ (500) ======== ======== ========
Although the Company has no obligation to do so, the Company currently provides full medical benefits to its retired employees and dependents. For current employees, the Company assumes all or a portion of post retirement medical and term life insurance costs based on the employee's age and length of service with the Company. The post retirement medical plan has no assets and is currently funded by the Company on a pay-as-you-go basis. F-19 148 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is an analysis (in thousands of dollars) of the annual expense and activity in the deferred cost and benefits obligation accounts for 1995, 1996 and 1997. The computation assumes that future increases in medical costs will trend down from 8.1% to 5% per year over the next 7 years for purposes of estimating future costs. The medical cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed medical cost trend rate by one percent in each year would increase the aggregate of service and interest cost components of net periodic post retirement benefit cost for 1997 by $170,000 and the accumulated post retirement benefit obligation as of December 31, 1997 by $1,104,000.
ANNUAL DEFERRED BENEFIT EXPENSE COSTS OBLIGATION ------- -------- ---------- Balance at January 1, 1995 ........................................... $ 3,349 $(5,487) Amortization of transition costs over 14 years representing the average remaining service period of eligible employees ............. $ 304 (304) 304 Amortization of net gain from earlier periods ........................ (69) (69) Service cost, including interest ..................................... 241 Interest cost on transition obligation ............................... 399 ------- 1995 expense ......................................................... $ 875 (875) ======= Current benefits paid ................................................ 145 Unrecognized net gain ................................................ 541 ------- ------- Balance at December 31, 1995 ......................................... 3,045 (5,441) Amortization of transition costs over 14 years ....................... $ 304 (304) 304 Amortization of net gain from earlier periods ........................ (41) (41) Service cost, including interest ..................................... 268 Interest cost on transition obligation ............................... 387 ------- 1996 expense ......................................................... $ 918 (918) ======= Current benefits paid ................................................ 94 Unrecognized net gain ................................................ 107 ------- ------- Balance at December 31, 1996 ......................................... 2,741 (5,895) Amortization of transition costs over 14 years ....................... $ 305 (305) 305 Amortization of net gain from earlier periods ........................ (26) (26) Service cost, including interest ..................................... 459 Interest cost on transition obligation ............................... 427 ------- 1997 expense ......................................................... $ 1,165 (1,165) ======= Current benefits paid ................................................ 99 Unrecognized net loss ................................................ (224) ------- Balance at December 31, 1997 ......................................... $ 2,436 ======= Plan assets at fair value ------- Funded status at December 31, 1997 (discounted at 7%) ................ $(6,906) =======
The accumulated postretirement benefit obligation (in thousands of dollars) at December 31, 1997 is attributable to the following groups: Retirees and beneficiaries.............. $1,951 Dependents of retirees.................. 978 Fully eligible active employees......... 802 Active employees, not fully eligible.... 3,175 ---------- $6,906 ==========
F-20 149 POGO PRODUCING COMPANY & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Investments Fair value is carrying value as no cash equivalents or cash investments are included in the balances as of December 31, 1997 and 1996. Debt
INSTRUMENT BASIS OF FAIR VALUE ESTIMATE - ------------------------------------------------------------------------------- Bank revolving credit agreement....... Fair value is carrying value as of December 31, 1997 and 1996 based on the market value interest rates. Uncommitted credit lines with banks... Fair value is carrying value as of December 31, 1997 and 1996 based on the market value interest rates. 2007 Notes............................ Fair value is 102.5% of carrying value as of December 31, 1997 based on a quoted market value. 2004 Notes............................ Fair value is 140.38% and 166%, of carrying value as of December 31, 1997 and 1996, respectively, based on quoted market values. 2006 Notes............................ Fair value is 93.5% and 120%, of carrying value as of December 31, 1997 and 1996, respectively, based on quoted market values.
The carrying value and estimated fair value of the Company's financial instruments at December 31, 1997 and 1996 (in thousands of dollars) are as follows:
1997 1996 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- Cash and cash investments ................... $ 19,646 $ 19,646 $ 3,054 $ 3,054 Debt: Bank revolving credit agreement ........ (47,000) (47,000) (35,000) (35,000) Uncommitted credit lines with banks .... -- -- (10,000) (10,000) 2007 Notes ............................. (100,000) (102,500) -- -- 2004 Notes ............................. (86,179) (120,978) (86,230) (143,142) 2006 Notes ............................. (115,000) (107,525) (115,000) (138,000)
The Company occasionally enters into forward and futures contracts to minimize the impact of oil and gas price fluctuations. However, the Company does not consider its forward and futures contracts to be financial instruments since these contracts require or permit settlement by the delivery of the underlying commodity. Gains and losses on these activities are recognized in revenues when the hedged production occurs. No such contracts were outstanding as of December 31, 1997 or 1996. F-21 150 UNAUDITED SUPPLEMENTARY FINANCIAL DATA OIL AND GAS PRODUCING ACTIVITIES The results of operations from oil and gas producing activities excludes non-oil and gas revenues, general and administrative expenses, interest charges, interest income and interest capitalized. United States income tax expense was determined by applying the statutory rates to pretax operating results with adjustments for permanent differences. Kingdom of Thailand tax expense was determined by applying the statutory tax rate to Thailand taxable income.
UNITED KINGDOM OF TOTAL STATES THAILAND --------- --------- --------- (EXPRESSED IN THOUSANDS) 1997 ------------------------------------- Revenues .............................................. $ 284,851 $ 245,458 $ 39,393 Lease operating expense ............................... (63,501) (43,934) (19,567) Exploration expense ................................... (10,530) (6,242) (4,288) Dry hole and impairment expense ....................... (9,631) (9,631) -- Depreciation, depletion and amortization expense ...... (101,273) (84,443) (16,830) --------- --------- --------- Pretax operating results .............................. 99,916 101,208 (1,292) Income tax (expense) benefit .......................... (30,353) (32,390) 2,037 --------- --------- --------- Operating results ..................................... $ 69,563 $ 68,818 $ 745 ========= ========= ========= 1996 ------------------------------------- Revenues .............................................. $ 204,142 $ 204,131 $ 11 Lease operating expense ............................... (37,628) (37,628) -- Exploration expense ................................... (16,777) (14,247) (2,530) Dry hole and impairment expense ....................... (8,579) (8,834) 255 Depreciation, depletion and amortization expense ...... (61,033) (60,932) (101) --------- --------- --------- Pretax operating results .............................. 80,125 82,490 (2,365) Income tax (expense) benefit .......................... (27,905) (28,767) 862 --------- --------- --------- Operating results ..................................... $ 52,220 $ 53,723 $ (1,503) ========= ========= ========= 1995 ------------------------------------- Revenues .............................................. $ 157,459 $ 157,536 $ (77) Lease operating expense ............................... (35,071) (35,071) -- Exploration expense ................................... (7,468) (6,111) (1,357) Dry hole and impairment expense ....................... (6,703) (6,703) -- Depreciation, depletion and amortization expense ...... (67,831) (67,798) (33) --------- --------- --------- Pretax operating results .............................. 40,386 41,853 (1,467) Income tax (expense) benefit .......................... (13,623) (14,334) 711 --------- --------- --------- Operating results ..................................... $ 26,763 $ 27,519 $ (756) ========= ========= =========
F-22 151 UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED) The following table sets forth the Company's capitalized costs (expressed in thousands) incurred for oil and gas producing activities during the years indicated.
1997 1996 1995 -------- -------- -------- Capitalized costs incurred: Property acquisition -- United States ................. $ 14,492 $ 5,927 $ 14,864 Property acquisition -- Kingdom of Thailand ........... 28,617 -- 4,171 Exploration -- United States .......................... 24,016 20,651 14,562 Exploration -- Kingdom of Thailand .................... 21,187 8,317 5,418 Development -- United States .......................... 95,768 99,464 39,461 Development -- Kingdom of Thailand .................... 60,996 53,564 23,994 Interest capitalized -- United States ................. 3,331 4,244 1,834 Interest capitalized -- Kingdom of Thailand ........... 2,748 -- -- -------- -------- -------- $251,155 $192,167 $104,304 ======== ======== ======== Provision for depreciation, depletion and amortization: United States ......................................... $ 85,104 $ 61,033 $ 67,798 Kingdom of Thailand ................................... 16,830 101 33 -------- -------- -------- $101,934 $ 61,134 $ 67,831 ======== ======== ========
F-23 152 UNAUDITED SUPPLEMENTARY FINANCIAL DATA -- (CONTINUED) The following information regarding estimates of the Company's proved oil and gas reserves, which are located offshore in United States waters of the Gulf of Mexico, onshore in the United States and offshore in the Kingdom of Thailand is based on reports prepared by Ryder Scott Company Petroleum Engineers. The definitions and assumptions that served as the basis for the discussions under the caption "Item 1. Business -- Exploration and Production Data -- Reserves" should be referred to in connection with the following information. ESTIMATES OF PROVED RESERVES
TOTAL COMPANY UNITED STATES --------------------------- --------------------------- OIL OIL CONDENSATE CONDENSATE & NATURAL NATURAL & NATURAL NATURAL GAS LIQUIDS GAS GAS LIQUIDS GAS (BBLS.) (MMCF) (BBLS.) (MMCF) ----------- ----------- ----------- ----------- Proved Reserves as of December 31, 1994 .......... 33,861,612 242,890 26,187,240 186,151 Revisions of previous estimates .............. 496,849 21,800 363,213 16,592 Extensions, discoveries and other additions .. 11,901,880 78,434 4,267,871 35,058 Purchase of properties ....................... 4,015,131 30,054 460,156 3,770 Sale of properties ........................... (15,144) (748) (15,144) (748) Estimated 1995 production .................... (5,078,326) (44,369) (5,078,326) (44,369) ----------- ----------- ----------- ----------- Proved Reserves as of December 31, 1995 .......... 45,182,002 328,061 26,185,010 196,454 Revisions of previous estimates .............. (499,595) (30,034) 3,374,647 3,022 Extensions, discoveries and other additions .. 9,810,363 102,039 3,601,333 55,592 Purchase of properties ....................... -- -- -- -- Sale of properties ........................... -- -- -- -- Estimated 1996 production .................... (4,890,588) (39,122) (4,890,588) (39,122) ----------- ----------- ----------- ----------- Proved Reserves as of December 31, 1996 .......... 49,602,182 360,944 28,270,402 215,946 Revisions of previous estimates .............. 1,033,664 (16,860) 2,194,936 (5,582) Extensions, discoveries and other additions .. 9,316,407 92,063 4,649,856 49,651 Purchase of properties ....................... 5,175,501 30,319 409,428 8,919 Sale of properties ........................... (6,155) (1,864) (6,155) (1,864) Estimated 1997 production .................... (6,957,246) (63,114) (6,136,957) (50,350) ----------- ----------- ----------- ----------- Proved Reserves as of December 31, 1997 .......... 58,164,353 401,488 29,381,510 216,720 =========== =========== =========== =========== Proved developed reserves as of: December 31, 1994 ............................ 24,669,755 178,518 24,669,755 178,518 December 31, 1995 ............................ 22,487,608 164,679 22,487,608 164,679 December 31, 1996 ............................ 31,090,407 238,032 25,898,414 192,034 December 31, 1997 ............................ 33,149,612 239,732 26,167,519 179,972 KINGDOM OF THAILAND --------------------------- OIL CONDENSATE & NATURAL NATURAL GAS LIQUIDS GAS (BBLS.) (MMCF) ----------- ----------- Proved Reserves as of December 31, 1994 .......... 7,674,372 56,739 Revisions of previous estimates .............. 133,636 5,208 Extensions, discoveries and other additions .. 7,634,009 43,376 Purchase of properties ....................... 3,554,975 26,284 Sale of properties ........................... -- -- Estimated 1995 production .................... -- -- ----------- ----------- Proved Reserves as of December 31, 1995 .......... 18,996,992 131,607 Revisions of previous estimates .............. (3,874,242) (33,056) Extensions, discoveries and other additions .. 6,209,030 46,447 Purchase of properties ....................... -- -- Sale of properties ........................... -- -- Estimated 1996 production .................... -- -- ----------- ----------- Proved Reserves as of December 31, 1996 .......... 21,331,780 144,998 Revisions of previous estimates .............. (1,161,272) (11,278) Extensions, discoveries and other additions .. 4,666,551 42,412 Purchase of properties ....................... 4,766,073 21,400 Sale of properties ........................... -- -- Estimated 1997 production .................... (820,289) (12,764) ----------- ----------- Proved Reserves as of December 31, 1997 .......... 28,782,843 184,768 =========== =========== Proved developed reserves as of: December 31, 1994 ............................ -- -- December 31, 1995 ............................ -- -- December 31, 1996 ............................ 5,191,993 45,998 December 31, 1997 ............................ 6,982,093 59,760
F-24 153 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED
TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND ----------- ----------- ----------- (EXPRESSED IN THOUSANDS) 1997 ------------------------------------------- Future gross revenues ...................................... $ 1,801,254 $ 1,002,609 $ 798,645 Future production costs: Lease operating expense ............................... (604,665) (269,505) (335,160) Future development and abandonment costs ................... (401,970) (155,179) (246,791) ----------- ----------- ----------- Future net cash flows before income taxes .................. 794,619 577,925 216,694 Discount at 10% per annum .................................. (331,838) (171,764) (160,074) ----------- ----------- ----------- Discounted future net cash flow before income taxes ........ 462,781 406,161 56,620 Future income taxes, net of discount at 10% per annum ...... (113,316) (93,386) (19,930) ----------- ----------- ----------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves .................. $ 349,465 $ 312,775 $ 36,690 =========== =========== =========== 1996 ------------------------------------------- Future gross revenues ...................................... $ 2,318,113 $ 1,491,057 $ 827,056 Future production costs: Lease operating expense ............................... (504,899) (259,501) (245,398) Future development and abandonment costs ................... (310,839) (126,086) (184,753) ----------- ----------- ----------- Future net cash flows before income taxes .................. 1,502,375 1,105,470 396,905 Discount at 10% per annum .................................. (547,830) (332,343) (215,487) ----------- ----------- ----------- Discounted future net cash flow before income taxes ........ 954,545 773,127 181,418 Future income taxes, net of discount at 10% per annum ...... (268,505) (212,906) (55,599) ----------- ----------- ----------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves .................. $ 686,040 $ 560,221 $ 125,819 =========== =========== =========== 1995 ------------------------------------------- Future gross revenues ...................................... $ 1,495,320 $ 873,578 $ 621,742 Future production costs: Lease operating expense ............................... (415,829) (208,477) (207,352) Future development and abandonment costs ................... (247,019) (119,821) (127,198) ----------- ----------- ----------- Future net cash flows before income taxes .................. 832,472 545,280 287,192 Discount at 10% per annum .................................. (299,997) (144,435) (155,562) ----------- ----------- ----------- Discounted future net cash flow before income taxes ........ 532,475 400,845 131,630 Future income taxes, net of discount at 10% per annum ...... (155,330) (104,864) (50,466) ----------- ----------- ----------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves .................. $ 377,145 $ 295,981 $ 81,164 =========== =========== ===========
The standardized measure of discounted future net cash flows from the production of proved reserves is developed as follows: 1. Estimates are made of quantities of proved reserves and the future periods in which they are expected to be produced based on year end economic conditions. F-25 154 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED) 2. The estimated future gross revenues from proved reserves are priced on the basis of year end prices, except in those instances where fixed and determinable natural gas price escalations are covered by contracts. 3. The future gross revenue streams are reduced by estimated future costs to develop and to produce the proved reserves, as well as certain abandonment costs based on year end cost estimates, and the estimated effect of future income taxes. These cost estimates are subject to some uncertainty, particularly those estimates relating to the Company's properties located in the Kingdom of Thailand. The standardized measure of discounted future net cash flows does not purport to present the fair market value of the Company's oil and gas reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and the risks inherent in reserve estimates. The following are the principal sources of change in the standardized measure of discounted future net cash flows. All amounts are related to changes in reserves located in the United States and the Kingdom of Thailand, as noted.
YEAR ENDED DECEMBER 31, 1997 ------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND --------- --------- --------- (EXPRESSED IN THOUSANDS) Beginning balance ............................................... $ 686,040 $ 560,221 $ 125,819 Revisions to prior years' proved reserves: Net changes in prices and production costs ................. (473,086) (344,493) (128,593) Net changes due to revisions in quantity estimates ......... (18,624) 9,619 (28,243) Net changes in estimates of future development costs ....... (83,170) (75,649) (7,521) Accretion of discount ...................................... 95,455 77,313 18,142 Changes in production rate ................................. (2,907) 8,568 (11,475) Other ...................................................... (28,225) (13,086) (15,139) --------- --------- --------- Total revisions ....................................... (510,557) (337,728) (172,829) New field discoveries and extensions, net of future production and development costs .............................. 79,258 76,687 2,571 Purchases of properties ......................................... 10,189 5,899 4,290 Sales of properties ............................................. (6,069) (6,069) -- Sales of oil and gas produced, net of production costs .......... (221,350) (201,524) (19,826) Previously estimated development costs incurred ................................................ 156,764 95,768 60,996 Net change in income taxes ...................................... 155,190 119,521 35,669 --------- --------- --------- Net change in standardized measure of discounted future net cash flows ............................... (336,575) (247,446) (89,129) --------- --------- --------- Ending balance .................................................. $ 349,465 $ 312,775 $ 36,690 ========= ========= =========
F-26 155 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES -- UNAUDITED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 ------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND --------- --------- --------- (EXPRESSED IN THOUSANDS) Beginning balance .......................................... $ 377,145 $ 295,981 $ 81,164 Revisions to prior years' proved reserves: Net changes in prices and production costs ............... 304,233 289,182 15,051 Net changes due to revisions in quantity estimates ....... 6,717 53,708 (46,991) Net changes in estimates of future development costs ..... (132,685) (79,791) (52,894) Accretion of discount .................................... 53,248 40,085 13,163 Changes in production rate ............................... (59,714) (35,762) (23,952) Other .................................................... (12,760) (2,831) (9,929) --------- --------- --------- Total revisions ....................................... 159,039 264,591 (105,552) New field discoveries and extensions, net of future production and development costs ......................... 275,738 173,962 101,776 Sales of oil and gas produced, net of production costs ..... (165,736) (165,736) -- Previously estimated development costs incurred ............ 153,028 99,464 53,564 Net change in income taxes ................................. (113,174) (108,041) (5,133) --------- --------- --------- Net change in standardized measure of discounted future net cash flows ............................ 308,895 264,240 44,655 --------- --------- --------- Ending balance ............................................. $ 686,040 $ 560,221 $ 125,819 ========= ========= =========
YEAR ENDED DECEMBER 31, 1995 ------------------------------------- TOTAL UNITED KINGDOM OF COMPANY STATES THAILAND --------- --------- --------- (EXPRESSED IN THOUSANDS) Beginning balance .......................................... $ 290,069 $ 257,266 $ 32,803 Revisions to prior years' proved reserves: Net changes in prices and production costs ............... 34,004 69,988 (35,984) Net changes due to revisions in quantity estimates ....... 29,630 26,109 3,521 Net changes in estimates of future development costs ..... (8,632) (36,721) 28,089 Accretion of discount .................................... 38,298 33,087 5,211 Changes in production rate ............................... (14,754) (15,792) 1,038 Other .................................................... (4,393) (432) (3,961) --------- --------- --------- Total revisions ....................................... 74,153 76,239 (2,086) New field discoveries and extensions, net of future production and development costs ......................... 105,172 71,701 33,471 Purchases of properties .................................... 29,299 5,160 24,139 Sales of properties ........................................ (969) (969) -- Sales of oil and gas produced, net of production costs ..... (121,615) (121,615) -- Previously estimated development costs incurred ............ 63,455 39,461 23,994 Net change in income taxes ................................. (62,419) (31,262) (31,157) --------- --------- --------- Net change in standardized measure of discounted future net cash flows ............................ 87,076 38,715 48,361 --------- --------- --------- Ending balance ............................................. $ 377,145 $ 295,981 $ 81,164 ========= ========= =========
F-27 156 QUARTERLY RESULTS -- UNAUDITED Summaries of the Company's results of operations by quarter for the years 1997 and 1996 are as follows:
QUARTER ENDED ----------------------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- ---------- (EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 Revenues ................................................... $ 61,314 $ 76,740 $ 77,177 $ 71,069 Gross profit(a) ............................................ $ 27,776 $ 23,953 $ 27,648 $ 20,104 Net income ................................................. $ 12,818 $ 9,174 $ 7,386 $ 7,738 Earnings per share(b): Basic ................................................. $ 0.38 $ 0.27 $ 0.22 $ 0.23 Diluted ............................................... $ 0.36 $ 0.26 $ 0.21 $ 0.22 1996 1996 Revenues ................................................... $ 48,052 $ 51,543 $ 48,233 $ 56,149 Gross profit(a) ............................................ $ 17,004 $ 20,011 $ 16,845 $ 25,276 Income before extraordinary loss ........................... $ 6,265 $ 8,937 $ 6,971 $ 11,408 Extraordinary loss on early extinguishment of debt ......... -- $ (821) -- -- Net income ................................................. $ 6,265 $ 8,116 $ 6,971 $ 11,408 Earnings per share(b): Basic -- Income before extraordinary loss ................. $ 0.19 $ 0.27 $ 0.21 $ 0.34 Extraordinary loss ............................... -- $ (0.02) -- -- Net income ....................................... $ 0.19 $ 0.25 $ 0.21 $ 0.34 Diluted -- Income before extraordinary loss ................. $ 0.19 $ 0.26 $ 0.20 $ 0.32 Extraordinary loss ............................... -- $ (0.02) -- -- Net income ....................................... $ 0.19 $ 0.24 $ 0.20 $ 0.32
- ------------ (a) Represents revenues less lease operating, exploration, dry hole and impairment, and depreciation depletion and amortization expenses. (b) Restated for September 30, 1997, and all prior periods F-28 157 =============================================================================== YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT OFFERING THE EXCHANGE NOTES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS AS OF ANY DATE OTHER THAN THE DATE STATED ON THE COVER. $150,000,000 POGO PRODUCING COMPANY OFFER TO EXCHANGE 10 3/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2009 FOR 10 3/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2009 ------------------------- PROSPECTUS ------------------------- , 1999 =============================================================================== 158 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law, inter alia, empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Similar indemnity is authorized for such persons against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of any such threatened, pending or completed action or suit if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that (unless a court of competent jurisdiction otherwise provides) such person shall not have been adjudged liable to the corporation. Any such indemnification may be made only as authorized in each specific case upon a determination by the shareholders or disinterested directors or by independent legal counsel in a written opinion that indemnification is proper because the indemnitee has met the applicable standard of conduct. Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would otherwise have the power to indemnify him under Section 145. The Company maintains policies insuring its and its subsidiaries' officers and directors against certain liabilities for actions taken in such capacities, including liabilities under the Securities Act of 1933, as amended. Article X of the Restated Certificate of Incorporation of the Company eliminates the personal liability of each director of the Company to the Company and its stockholders for monetary damages for breach of fiduciary duty as a director involving any act or omission of any such director occurring on or after September 30, 1986; provided, however, that such provision does not eliminate or limit the liability of a director (i) for any breach of such director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Title 8, Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction from which such director derived an improper personal benefit. The Bylaws of the Company provide that the Company will indemnify and hold harmless, to the fullest extent permitted by applicable law as in effect as of the date of the adoption of the Bylaws or as it may thereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person. The Bylaws further provide that the Company will indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Company. The Bylaws further provide that the Company will pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in his capacity as a director or officer (except with regard to service to an employee benefit plan or non-profit organizations in advance of the final disposition of the proceeding) will be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified. The Company has placed in effect insurance which purports (a) to insure it against certain costs of indemnification which may be incurred by it pursuant to the aforementioned Bylaw provision or otherwise and (b) to insure the officers and directors of the Company and of specified subsidiaries against certain liabilities incurred by II-1 159 them in the discharge of their functions as officers and directors except for liabilities arising from their own malfeasance. ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES The following instruments and documents are included as Exhibits to this Registration Statement. Exhibits incorporated by reference are so indicated by parenthetical information.
EXHIBIT NO. EXHIBIT ----------- -------- 4.1 -- Purchase Agreement, dated January 12, 1999, between Pogo Producing Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Goldman, Sachs & Co. 4.2 -- Indenture dated as of January 15, 1999 between Pogo Producing Company and State Street Bank and Trust Company, as Trustee, which includes the form of the 103/8% Senior Subordinated Note due 2009 as an exhibit thereto 4.3 -- Registration Rights Agreement dated January 15,1999 among Pogo Producing Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co. 5.1 -- Opinion of Gerald A. Morton 12.1 -- Computation of ratio of earnings to fixed charges 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Ryder Scott Company Petroleum Engineers 23.3 -- Consent of Gerald A. Morton (contained in his opinion filed as Exhibit 5.1) 24.1 -- Powers of Attorney 25.1 -- Statement of Eligibility of Trustee 99.1 -- Form of Letter of Transmittal 99.2 -- Form of Notice of Guaranteed Delivery 99.3 -- Form of Letter to Depository Trust Company Participants 99.4 -- Form of Letter to Clients
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; II-2 160 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. 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 Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement: (2) That, for the purpose of determining any liability under the Securities Act, 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. (4) For purposes of determining any liability under the Securities Act, each filing of the Company's annual report pursuant to section 13(a) or section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Exchange Act) 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. (5) To respond to requests for information that is incorporated by reference into the Prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described under Item 20 above, or otherwise, the Company 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 Company 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 Company 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. II-3 161 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, the State of Texas on February 10, 1999. POGO PRODUCING COMPANY By: /s/ Paul G. Van Wagenen ---------------------------------------------- Paul G. Van Wagenen Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Paul G. Van Wagenen Chairman of the Board, President and February 10, 1999 - ---------------------------- Chief Executive Officer (Principal Paul G. Van Wagenen Executive Officer and Director) /s/ John W. Elsenhans Vice President and Chief Financial February 10, 1999 - ---------------------------- Officer (Principal Financial Officer) John W. Elsenhans /s/ Thomas E. Hart Vice-President and Controller February 10, 1999 - ---------------------------- (Principal Accounting Officer) Thomas E. Hart * - ---------------------------- Director February 10, 1999 Jerry M. Armstrong * - ---------------------------- Director February 10, 1999 Tobin Armstrong * - ---------------------------- Director February 10, 1999 Jack S. Blanton * - ---------------------------- Director February 10, 1999 W. M. Brumley, Jr. * - ---------------------------- Director February 10, 1999 John B. Carter, Jr. * - ---------------------------- Director February 10, 1999 William L. Fisher * - ---------------------------- Director February 10, 1999 Gerrit W. Gong * - ---------------------------- Director February 10, 1999 J. Stuart Hunt
II-4 162
* - ---------------------------- Director February 10, 1999 Frederick A. Klingenstein * - ---------------------------- Director February 10, 1999 Jack A. Vickers *By: /s/ Thomas E. Hart -------------------------------- Thomas E. Hart, Attorney-in-Fact
II-5 163
EXHIBIT NO. EXHIBIT ----------- -------- 4.1 -- Purchase Agreement, dated January 12, 1999, between Pogo Producing Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Goldman, Sachs & Co. 4.2 -- Indenture dated as of January 15, 1999 between Pogo Producing Company and State Street Bank and Trust Company, as Trustee, which includes the form of the 103/8% Senior Subordinated Note due 2009 as an exhibit thereto 4.3 -- Registration Rights Agreement dated January 15,1999 among Pogo Producing Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co. 5.1 -- Opinion of Gerald A. Morton 12.1 -- Computation of ratio of earnings to fixed charges 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Ryder Scott Company Petroleum Engineers 23.3 -- Consent of Gerald A. Morton (contained in his opinion filed as Exhibit 5.1) 24.1 -- Powers of Attorney 25.1 -- Statement of Eligibility of Trustee 99.1 -- Form of Letter of Transmittal 99.2 -- Form of Notice of Guaranteed Delivery 99.3 -- Form of Letter to Depository Trust Company Participants 99.4 -- Form of Letter to Clients
EX-4.1 2 PURCHASE AGREEMENT, DATED 01/12/99 1 Exhibit 4.1 ================================================================================ POGO PRODUCING COMPANY $150,000,000 10 3/8 % SENIOR SUBORDINATED NOTES DUE 2009 PURCHASE AGREEMENT ================================================================================ 2 TABLE OF CONTENTS SECTION 1. Representations and Warranties.........................................................2 (a) Representations and Warranties by the Company..........................................2 (i) Similar Offerings...........................................................2 (ii) Offering Memorandum.........................................................2 (iii) Incorporated Documents......................................................2 (iv) Independent Accountants.....................................................3 (v) Financial Statements........................................................3 (vi) No Material Adverse Change in Business......................................3 (vii) Good Standing of the Company................................................3 (viii) Good Standing of Designated Subsidiaries....................................3 (ix) Capitalization..............................................................4 (x) Authorization of Agreement..................................................4 (xi) Authorization of the Indenture..............................................4 (xii) Authorization of the Securities.............................................4 (xiii) Description of the Securities and the Indenture.............................5 (xiv) Absence of Defaults and Conflicts...........................................5 (xv) Absence of Labor Dispute....................................................5 (xvi) Absence of Proceedings......................................................5 (xvii) Absence of Further Requirements.............................................6 (xviii) Possession of Licenses and Permits..........................................6 (xix) Title to Property...........................................................6 (xx) Environmental Laws..........................................................6 (xxi) Investment Company Act......................................................7 (xxii) Rule 144A Eligibility.......................................................7 (xxiii) No Registration Required....................................................7 (b) Officer's Certificates.................................................................7 SECTION 2. Sale and Delivery to Initial Purchasers; Closing.......................................7 (a) Securities.............................................................................7 (b) Payment................................................................................7 (c) Qualified Institutional Buyer..........................................................8 (d) Denominations; Registration............................................................8 SECTION 3. Covenants of the Company...............................................................8 (a) Offering Memorandum....................................................................8 (b) Notice and Effect of Material Events...................................................8 (c) Amendment to Offering Memorandum and Supplements.......................................8 (d) Qualification of Securities for Offer and Sale.........................................8 (e) Rating of Securities...................................................................9 (f) DTC....................................................................................9 (g) Use of Proceeds........................................................................9 (h) Restriction on Sale of Securities......................................................9 SECTION 4. Payment of Expenses....................................................................9 (a) Expenses...............................................................................9 (b) Termination of Agreement...............................................................9
-i- 3 SECTION 5. Conditions of Initial Purchasers' Obligations..........................................9 (a) Opinions of Counsel for Company.......................................................10 (b) Opinion of Counsel for Initial Purchasers.............................................10 (c) Officers' Certificate.................................................................10 (d) Accountant's Comfort Letter...........................................................10 (e) Bring-down Comfort Letter.............................................................10 (f) Maintenance of Ratings................................................................10 (g) PORTAL................................................................................10 (h) Additional Documents..................................................................11 (i) Termination of Agreement..............................................................11 SECTION 6. Subsequent Offers and Sales of the Securities.........................................11 (a) Offer and Sale Procedures.............................................................11 (i) Offers and Sales only to Qualified Institutional Buyers....................11 (ii) Restrictions on Transfer...................................................11 (iii) Delivery of Offering Memorandum............................................11 (b) Covenants of the Company..............................................................11 (i) Due Diligence..............................................................11 (ii) Rule 144A Information......................................................12 (iii) Restriction on Repurchases.................................................12 SECTION 7. Indemnification.......................................................................12 (a) Indemnification of Initial Purchasers.................................................12 (b) Indemnification of Company, Directors and Officers....................................12 (c) Actions against Parties; Notification.................................................13 (d) Settlement without Consent if Failure to Reimburse....................................13 SECTION 8. Contribution..........................................................................13 SECTION 9. Representations, Warranties and Agreements to Survive Delivery........................14 SECTION 10. Termination of Agreement..............................................................15 (a) Termination; General..................................................................15 (b) Liabilities...........................................................................15 SECTION 11. Default by One of the Initial Purchasers..............................................15 SECTION 12. Notices...............................................................................15 SECTION 13. Parties...............................................................................16 SECTION 14. Governing Law and Time................................................................16 SECTION 15. Effect of Headings....................................................................16
-ii- 4 $150,000,000 POGO PRODUCING COMPANY (A DELAWARE CORPORATION) 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009 PURCHASE AGREEMENT January 12, 1999 Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Goldman, Sachs & Co. c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Pogo Producing Company, a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Goldman, Sachs & Co. (together, the "Initial Purchasers", which term shall also include any initial purchaser substituted as hereinafter provided in Section 11 hereof), with respect to the issue and sale by the Company and the purchase by the Initial Purchasers, acting severally and not jointly, of the respective principal amounts set forth in Schedule A hereto of $150,000,000 aggregate principal amount of the Company's Senior Subordinated Notes due 2009 (the "Securities"). The Securities are to be issued pursuant to an indenture to be dated as of January 15, 1999 (the "Indenture") between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"). The Securities will be issued in book-entry form only and registered in the name of Cede & Co. as nominee of The Depository Trust Company ("DTC") pursuant to a letter agreement, to be dated on or before the Closing Time (as defined in Section 2(b)) (the "DTC Agreement"), among the Company, the Trustee and DTC. The Company understands that the Initial Purchasers propose to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers ("Subsequent Purchasers") at any time after the date of this Agreement. The Securities are to be offered and sold through the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities and the Indenture, investors that acquire Securities may only resell or otherwise transfer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A ("Rule 144A") of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the "Commission")). The Company has prepared and delivered to each Initial Purchaser copies of a preliminary offering memorandum dated January 4, 1999 (the "Preliminary Offering Memorandum") and has prepared and will deliver to each Initial Purchaser, on the date hereof or the next succeeding day, copies of a final offering memorandum dated January 12, 1999 (the "Final Offering Memorandum"), each for use by such Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. "Offering 5 Memorandum" means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum or the Final Offering Memorandum, as amended or supplemented), including exhibits thereto and any documents incorporated therein by reference, which has been prepared and delivered by the Company to the Initial Purchasers in connection with their solicitation of purchases of, or offering of, the Securities. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which are incorporated by reference in the Offering Memorandum; and all references in this Agreement to amendments or supplements to the Offering Memorandum shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934, as amended (the "1934 Act") which is incorporated by reference in the Offering Memorandum. The Initial Purchasers and other holders (including subsequent transferees) of Securities will be entitled to the benefits of the registration rights agreement, to be dated as of the Closing Time (the "Registration Rights Agreement") among the Company and the Initial Purchasers, in the form attached hereto as Exhibit B. Pursuant to the Registration Rights Agreement, subject to the terms and conditions thereof, the Company will agree, among other things, to file with the Commission a registration statement pursuant to the 1933 Act in connection with an offer to exchange the Securities for securities having substantially identical terms as the Securities, and to effect such exchange offer, or, in certain circumstances, to file a registration statement pursuant to Rule 415 under the 1933 Act to permit the resale of the Securities. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Initial Purchaser as follows: (i) Similar Offerings. The Company has not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the Securities to be registered under the 1933 Act. (ii) Offering Memorandum. The Offering Memorandum does not, and at the Closing Time will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum made in reliance upon and in conformity with information furnished to the Company in writing by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (iii) Incorporated Documents. The Offering Memorandum as delivered from time to time shall incorporate by reference the most recent Annual Report of the Company on Form 10-K filed with the Commission and each Quarterly Report of the Company on Form 10-Q and each Current Report of the Company on Form 8-K filed with the Commission since the filing of the end of the fiscal year to which such Annual Report relates, together with any amendment to each such report. The documents incorporated or deemed to be incorporated by reference in the Offering Memorandum at the time they were or hereafter are filed with the Commission complied and will -2- 6 comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Offering Memorandum, at the date of the Offering Memorandum and at the Closing Time, do not and will not include 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, in the light of the circumstances under which they were made, not misleading. (iv) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Offering Memorandum are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of Regulation S-X under the 1933 Act. (v) Financial Statements. The financial statements, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The selected financial data and the summary financial information included in the Offering Memorandum present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum. (vi) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise (a "Material Adverse Effect"), whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Company or its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the common stock, par value $1.00 per share, of the Company (the "Common Stock") in amounts per share that are consistent with past practice, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock (other than rights to acquire preferred stock attached to the shares of Common Stock issued in connection with the Company's acquisition of Arch Petroleum Inc.). (vii) Good Standing of the Company. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (viii) Good Standing of Designated Subsidiaries. Each corporate "significant subsidiary" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Designated Subsidiary" and, collectively, the "Designated Subsidiaries") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to -3- 7 conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Offering Memorandum, all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and (except for directors' qualifying shares or shares representing an immaterial equity interest that are required under the laws of any foreign jurisdiction to be owned by others) is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of the Designated Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, or under the charter or by-laws of any Designated Subsidiary or under any agreement to which the Company or any Designated Subsidiary is a party. The subsidiaries of the Company other than Designated Subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (ix) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to employee or director benefit plans referred to in the Offering Memorandum or pursuant to the exercise of convertible securities or options referred to or incorporated by reference in the Offering Memorandum). (x) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company. (xi) Authorization of the Indenture. The Indenture has been duly authorized by the Company and, at the Closing Time, will have been duly executed and delivered by the Company and will (assuming due authorization, execution and delivery by the Trustee) constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xii) Authorization of the Securities. The Securities have been duly authorized and, at the Closing Time, the global certificate representing the Securities will have been duly executed by the Company and, when such global certificate has been authenticated in the manner provided for the Indenture and the Securities have been delivered through the facilities of DTC against payment of the purchase price therefor, the Securities will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers) reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture. -4- 8 (xiii) Description of the Securities and the Indenture. The Securities and the Indenture will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. (xiv) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter, by-laws or other governing documents, as applicable, or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or its subsidiaries is a party or by which any of them may be bound, or to which any of the property or assets of the Company or its subsidiaries is subject (collectively, "Agreements and Instruments") except for such violations or defaults that have not resulted or would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture and the Securities and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum (including the Registration Rights Agreement) and the consummation of the transactions contemplated herein and therein and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its subsidiaries pursuant to, the Agreements and Instruments except for such conflicts, breaches or defaults or liens, charges or encumbrances that, singly or in the aggregate, have not resulted or would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of the charter, by-laws or other governing documents of the Company or its subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or its subsidiaries or any of their assets or properties. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or its subsidiaries. No default, or condition that with notice or lapse of time or both would constitute a default, exists with respect to any agreement or obligation that would constitute "Senior Indebtedness" within the meaning of the Indenture. (xv) Absence of Labor Dispute. No labor dispute with the employees of the Company or its subsidiaries exists or, to the knowledge of the Company, is imminent, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xvi) Absence of Proceedings. Except as disclosed in the Offering Memorandum, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary thereof which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement (including the transactions contemplated by the Registration Rights Agreement) or the performance by the Company of its obligations hereunder. -5- 9 (xvii) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or Governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement (including the transactions contemplated by the Registration Rights Agreement), except such as have been already obtained or as may be required under federal securities laws in connection with the Registration Rights Agreement and under state securities or "blue sky" laws of any jurisdiction. (xviii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure to possess such Governmental Licenses, would not, singly or in the aggregate, have a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect. (xix) Title to Property. Each of the Company and its subsidiaries has (i) generally satisfactory title to its oil and gas properties, title investigations having been carried out by the Company in accordance with the practice in the oil and gas industry in the areas in which the Company operates, (ii) good and marketable title to all other real property owned by it to the extent necessary to carry on its business, and (iii) good and marketable title to all personal property owned by it, in each case free and clear of all liens, encumbrances and defects except such as are described or incorporated by reference in the Offering Memorandum or such as do not materially affect the value of the properties of the Company and its subsidiaries, considered as one enterprise, and do not interfere with the use made and proposed to be made of such properties, by the Company and its subsidiaries, considered as one enterprise; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of such the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease. (xx) Environmental Laws. Except as described in the Offering Memorandum or except for such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, -6- 10 pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the knowledge of the Company, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or its subsidiaries relating to Hazardous Materials or Environmental Laws. (xxi) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxii) Rule 144A Eligibility. The Securities are eligible for resale pursuant to Rule 144A and will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system. (xxiii) No Registration Required. Subject to compliance by the Initial Purchasers with the representations and warranties set forth in Section 2 and the procedures set forth in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "1939 Act"). (b) Officer's Certificates. Any certificate signed by any officer of the Company delivered to the Initial Purchasers or to counsel for the Initial Purchasers shall be deemed a representation and warranty by the Company to each Initial Purchaser as to the matters covered thereby. SECTION 2. Sale and Delivery to Initial Purchasers; Closing. (a) Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Initial Purchaser, severally and not jointly, and each Initial Purchaser, severally and not jointly, agrees to purchase from the Company, at the price set forth in Schedule B, the aggregate principal amount of Securities set forth in Schedule A opposite the name of such Initial Purchaser, plus any additional principal amount of Securities which such Initial Purchaser may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the office of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas 77002, or at such other place as shall be agreed upon by the Initial Purchasers and the Company, at 10:00 A.M. on the third business day after the date hereof (unless postponed in accordance with the provisions of Section 11), or such other time not later than ten business days after such date as shall be agreed upon by the Initial Purchasers and the Company (such time and date of payment and delivery being herein called the "Closing -7- 11 Time"). Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery of the Securities in book-entry form only, through the facilities of DTC, to Merrill Lynch, for the respective accounts of the Initial Purchasers. (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company that it is a "qualified institutional buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified Institutional Buyer"). (d) Denominations; Registration. A single global certificate representing the Securities shall be registered in the name of Cede & Co. pursuant to the DTC Agreement and shall be delivered to the Trustee, as custodian for DTC, at or prior to the Closing Time. SECTION 3. Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (a) Offering Memorandum. The Company, as promptly as possible, will furnish to each Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto and documents incorporated by reference therein as such Initial Purchaser may reasonably request. (b) Notice and Effect of Material Events. The Company will immediately notify each Initial Purchaser, and confirm such notice in writing, of (x) any filing made by the Company of information relating to the offering of the Securities with any securities exchange or any other regulatory body in the United States or any other jurisdiction, and (y) prior to the completion of the placement of the Securities by the Initial Purchasers as evidenced by a notice in writing from the Initial Purchasers to the Company, any material changes in or affecting the earnings, business affairs or business prospects of the Company and its subsidiaries which (i) make any statement in the Offering Memorandum false or misleading or (ii) are not disclosed in the Offering Memorandum. In such event or if during such time any event shall occur as a result of which it is necessary, in the reasonable opinion of the Company, its counsel, the Initial Purchasers or counsel for the Initial Purchasers, to amend or supplement the Final Offering Memorandum in order that the Final Offering Memorandum not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances then existing, the Company will forthwith amend or supplement the Final Offering Memorandum by preparing and furnishing to each Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Final Offering Memorandum (in form and substance satisfactory in the reasonable opinion of counsel for the Initial Purchasers) so that, as so amended or supplemented, the Final Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading. (c) Amendment to Offering Memorandum and Supplements. The Company will advise each Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum and will not effect such amendment or supplement without the consent of the Initial Purchasers. Neither the consent of the Initial Purchasers, nor the Initial Purchaser's delivery of any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. (d) Qualification of Securities for Offer and Sale. The Company will use its reasonable best efforts, in cooperation with the Initial Purchasers, to qualify the Securities for offering and sale under the applicable securities laws of such jurisdictions as the Initial Purchasers may designate and will maintain such -8- 12 qualifications in effect as long as required for the sale of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any U.S. jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (e) Rating of Securities. The Company shall take all reasonable action necessary to enable Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. ("S&P"), and Moody's Investors Service, Inc. ("Moody's") to provide their respective credit ratings of the Securities. (f) DTC. The Company will cooperate with the Initial Purchasers and use its reasonable best efforts to permit the Securities to be eligible for clearance and settlement through the facilities of DTC. (g) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Offering Memorandum under "Use of Proceeds." (h) Restriction on Sale of Securities. During a period of 180 days from the date of the Final Offering Memorandum, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any debt securities of the Company or securities of the Company that are convertible into, or exchangeable for, debt securities (in each case, except as contemplated by the Registration Rights Agreement). SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and any filing of the Offering Memorandum (including financial statements and any schedules or exhibits and any document incorporated therein by reference) and of each amendment or supplement thereto, (ii) the printing or reproducing and delivery to the Initial Purchasers of this Agreement, any Agreement among Initial Purchasers, the Indenture, the Registration Rights Agreement and such other documents as may be required in connection with the offering, purchase, sale and delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Initial Purchasers, including any charges of DTC in connection therewith, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection therewith and in connection with the preparation of the blue sky survey or any supplement thereto, (vi) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities, (vii) any fees payable in connection with the rating of the Securities, and (viii) any fees payable to the review by the National Association of Securities Dealers, Inc. (the "NASD") in connection with the initial and continued designation of the Securities as PORTAL securities under the PORTAL Market Rules pursuant to NASD Rule 5322. (b) Termination of Agreement. If this Agreement is terminated by the Initial Purchasers in accordance with the provisions of Section 5 or Section 10(a)(i) hereof, the Company shall reimburse the Initial Purchasers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of the several Initial Purchasers hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer -9- 13 of the Company or its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Opinions of Counsel for Company. At the Closing Time, the Initial Purchasers shall have received the favorable opinions, dated as of the Closing Time, of (i) Baker & Botts L.L.P., counsel for the Company, in form and substance reasonably satisfactory to counsel for the Initial Purchasers, to the effect set forth in Exhibit A-1 hereto, and (ii) Gerald A. Morton, Vice President -- Law and Corporate Secretary of the Company, in form and substance reasonably satisfactory to counsel for the Initial Purchasers, to the effect set forth in Exhibit A-2 hereto. (b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the Initial Purchasers shall have received the favorable opinion, dated as of the Closing Time, of Vinson & Elkins L.L.P., counsel for the Initial Purchasers, with respect to the incorporation of the Company, the validity of the Indenture, the Securities, the Offering Memorandum and other related matters as you may reasonably request. The Company confirms that Vinson & Elkins L.L.P., by virtue of its acting as counsel to the Initial Purchasers, has not established and is not establishing an attorney-client relationship with the Company, as the Company is separately represented in this transaction by counsel of its own choosing; provided, however, that it is understood that, Vinson & Elkins L.L.P., by virtue of its acting as counsel to the Initial Purchasers, has access to material confidential information of the Company and that such access to that information may preclude Vinson & Elkins L.L.P. from undertaking a legal representation adverse to the Company. (c) Officers' Certificate. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Initial Purchasers shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, and (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. (d) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Initial Purchasers shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Initial Purchasers, containing statements and information of the type ordinarily included in accountants' "comfort letters" to initial purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (e) Bring-down Comfort Letter. At the Closing Time, the Initial Purchasers shall have received from Arthur Andersen LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (f) Maintenance of Ratings. At the Closing Time, the Securities shall be rated at least "B2" by Moody's and "B+" by S&P, and the Company shall have delivered to the Initial Purchasers a letter dated the Closing Time, from each such rating agency, or other evidence satisfactory to the Initial Purchasers, confirming that the Securities have such ratings; and since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to the Securities or any of the Company's other debt securities by any nationally recognized securities rating agency, and no such securities rating agency shall have -10- 14 publicly announced that it has under surveillance or review, with possible negative implications, its rating of the Securities or any of the Company's other debt securities. (g) PORTAL. At the Closing Time, the Securities shall have been designated for trading on PORTAL. (h) Additional Documents. At the Closing Time, counsel for the Initial Purchasers shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Initial Purchasers and counsel for the Initial Purchasers. (i) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Initial Purchasers by notice to the Company at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Subsequent Offers and Sales of the Securities. (a) Offer and Sale Procedures. Each of the Initial Purchasers and the Company hereby establish and agree to observe the following procedures in connection with the offer and sale of the Securities: (i) Offers and Sales only to Qualified Institutional Buyers. Offers and sales of the Securities will be made only by the Initial Purchasers or Affiliates thereof qualified to do so in the jurisdiction in which such offers or sales are made. Each such offer or sale shall only be made to persons whom the offeror or seller reasonably believes to be qualified institutional buyers (as defined in Rule 144A) in transactions meeting the requirements of Rule 144A. (ii) Restrictions on Transfer. The transfer restrictions and the other provisions set forth in Section 2.7 of the Indenture, including the legend required thereby, shall apply to the Securities except as otherwise agreed by the Company and the Initial Purchasers. Following the sale of the Securities by the Initial Purchasers to Subsequent Purchasers pursuant to the terms hereof, the Initial Purchasers shall not be liable or responsible to the Company for any losses, damages or liabilities suffered or incurred by the Company, including any losses, damages or liabilities under the 1933 Act, arising from or relating to any resale or transfer of any Security. (iii) Delivery of Offering Memorandum. Each Initial Purchaser will deliver to each purchaser of the Securities from such Initial Purchaser, in connection with its original distribution of the Securities, a copy of the Offering Memorandum, as amended and supplemented at the date of such delivery. (b) Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (i) Due Diligence. In connection with the original distribution of the Securities, the Company agrees that, prior to any offer or resale of the Securities by the Initial Purchasers, the Initial Purchasers and counsel for the Initial Purchasers shall have the right to make reasonable inquiries into the business of the Company and its subsidiaries. The Company also agrees to provide -11- 15 answers to each prospective Subsequent Purchaser of Securities who so requests concerning the Company and its subsidiaries (to the extent that such information is available and has been previously provided to the public and can be acquired and made available to prospective Subsequent Purchasers without unreasonable effort or expense and to the extent the provision thereof is not prohibited by contract or applicable law) and the terms and conditions of the offering of the Securities, as provided in the Offering Memorandum. (ii) Rule 144A Information. The Company agrees that, in order to render the Securities eligible for resale pursuant to Rule 144A under the 1933 Act, while any of the Securities remains outstanding, it will make available, upon request, to any holder of Securities or prospective purchasers of Securities the information specified in Rule 144A(d)(4), unless the Company furnishes information to the Commission pursuant to Section 13 or 15(d) of the 1934 Act. (iii) Restriction on Repurchases. Until the expiration of two years after the original issuance of the Securities, the Company will not, and will cause its Affiliates not to, purchase or agree to purchase or otherwise acquire any Securities which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited broker's transactions) unless, immediately upon any such purchase, the Company or any Affiliate shall submit such Securities to the Trustee for cancellation. SECTION 7. Indemnification. (a) Indemnification of Initial Purchasers. The Company agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Memorandum or the Final Offering Memorandum (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 7(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission -12- 16 made in reliance upon and in conformity with written information furnished to the Company by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum (or any amendment thereto). (b) Indemnification of Company, Directors and Officers. Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, each officer and director of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Offering Memorandum in reliance upon and in conformity with written information furnished to the Company by such Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 7(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7 or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent the indemnifying party considers such request to be reasonable and (ii) provided written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. -13- 17 SECTION 8. Contribution. If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total initial purchasers' discount received by the Initial Purchasers, bear to the aggregate initial offering price of the Securities. The relative fault of the Company on the one hand and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser, and each officer and director of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act -14- 18 shall have the same rights to contribution as the Company. The Initial Purchasers' respective obligations to contribute pursuant to this Section 8 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 9. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Initial Purchasers. SECTION 10. Termination of Agreement. (a) Termination; General. The Initial Purchasers may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Initial Purchasers, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or limited by the Commission or the New York Stock Exchange, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the NASDAQ National Market System has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 7 and 8 shall survive such termination and remain in full force and effect. SECTION 11. Default by One of the Initial Purchasers. If one of the Initial Purchasers shall fail at the Closing Time to purchase the Securities which it is obligated to purchase under this Agreement (the "Defaulted Securities"), the other Initial Purchaser shall have the right, but not the obligation, within 24 hours thereafter, to make arrangements for itself, or any other Initial Purchasers, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth. If, however, the Initial Purchasers shall not have completed such arrangements within such 24-hour period, then this Agreement shall terminate without liability on the part of the non-defaulting Initial Purchaser. No action taken pursuant to this Section shall relieve the defaulting Initial Purchaser from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement, either the Initial Purchasers or the Company shall have the right to postpone the Closing Time for a period not -15- 19 exceeding seven days in order to effect any required changes in the Offering Memorandum or in any other documents or arrangements. As used herein, the term "Initial Purchaser" includes any person substituted for an Initial Purchaser under this Section 11. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Initial Purchasers shall be directed to Merrill Lynch, Pierce, Fenner & Smith Incorporated at North Tower, World Financial Center, New York, New York 10281-1201, attention of Michael F. Senft; notices to the Company shall be directed to it at Pogo Producing Company, 5 Greenway Plaza, Suite 2700, Houston, Texas 77046- 0504, attention: Corporate Secretary. SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the Initial Purchasers and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Initial Purchasers and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Initial Purchasers and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. SECTION 14. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. -16- 20 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Initial Purchasers and the Company in accordance with its terms. Very truly yours, POGO PRODUCING COMPANY By: /s/ JOHN W. ELSENHANS -------------------------------------------- Name: John W. Elsenhans Title: Vice President and Chief Financial Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ MARISA D. DREW ----------------------------------- Authorized Signatory GOLDMAN, SACHS & CO. By: /s/ GOLDMAN, SACHS & CO. ----------------------------------- Authorized Signatory -17- 21 SCHEDULE A
PRINCIPAL AMOUNT NAME OF INITIAL PURCHASER OF SECURITIES ------------------------- ---------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated....................... $ 97,500,000 Goldman, Sachs & Co...................................................... $ 52,500,000 ------------ Total........................................................... $150,000,000 ============
-18- 22 SCHEDULE B POGO PRODUCING COMPANY $150,000,000 Senior Subordinated Notes due 2009 1. The initial public offering price of the Securities shall be 97.7% of the principal amount thereof, plus accrued interest, if any, from the date of issuance. 2. The purchase price to be paid by the Initial Purchasers for the Securities shall be 95.95% of the principal amount thereof. 3. Interest on the Securities shall be payable at the rate of 10 3/8% per annum, and shall be payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 1999. 4. The Securities will be redeemable at the option of the Company, in whole or in part, at any time on or after February 15, 2004, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning on February 15 of the years indicated below:
YEAR PRICE ---- ------- 2004.................................... 105.188% 2005.................................... 103.458% 2006.................................... 101.729% 2007.................................... 100.000%
-19- 23 EXHIBIT A-1 FORM OF OPINION OF BAKER & BOTTS, L.L.P. TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under the Purchase Agreement and the Registration Rights Agreement. (iii) The Purchase Agreement and the Registration Rights Agreement have been duly authorized, executed and delivered by the Company. (iv) The Indenture has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the Trustee) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (v) The Securities have been duly authorized by the Company, the global certificate representing the Securities is in the form contemplated by the Indenture and has been duly executed by the Company and, when such global certificate has been authenticated by the Trustee in the manner provided in the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and the Securities have been delivered through the facilities of DTC against payment of the purchase price therefor, the Securities will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium (including, without limitation, all laws relating to fraudulent transfers), or other similar laws relating to or affecting enforcement of creditor's rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be entitled to the benefits of the Indenture. (vi) The Securities, the Indenture and the Registration Rights Agreement conform, as to legal matters, in all material respects to the descriptions thereof contained in the Offering Memorandum. (vii) No authorization, approval, consent or order of any court or governmental authority or agency other than such as may be required under the applicable securities laws of the various jurisdictions in which the Securities will be offered or sold (as to which we express no opinion) is required to be obtained by the Company in connection with the due authorization, execution and delivery of the Purchase Agreement or the due execution, delivery or performance of the Indenture by the Company or for the offering, issuance, sale or delivery of the Securities to the Initial Purchasers or the resale by the Initial Purchasers in accordance with the Purchase Agreement. A1-1 24 (viii) It is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by the Purchase Agreement and the Offering Memorandum to register the Notes under the 1933 Act or to qualify the Indenture under the Trust Indenture Act. (ix) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. We have participated in conferences with certain officers and representatives of the Company, representatives of the Initial Purchasers, counsel to the Initial Purchasers and representatives of the independent public accountants of the Company at which the contents of the Offering Memorandum and related matters were discussed and, although we are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Offering Memorandum, on the basis of the foregoing (relying in part upon the statements of officers and other representatives of the Company), no facts have come to our attention that have caused us to believe that the Offering Memorandum (other than the reserve information, financial statements and other financial data included or incorporated by reference in the Offering Memorandum, as to which we have not been asked to comment), as of its date or as of the date hereof, contained or contains any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The opinions set forth above are limited in all respects to matters of the laws of the State of Texas, the General Corporation Law of the State of Delaware, the contract law of the State of New York and the applicable federal laws of the United States, each as in effect on the date hereof. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A1-2 25 EXHIBIT A-2 FORM OF OPINION OF GERALD A. MORTON TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (ii) The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements, employee or director benefit plans or the exercise of convertible securities or options referred to in the Offering Memorandum). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non assessable, and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (iii) Each Designated Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect, all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, (except for directors' qualifying shares or shares representing an immaterial equity interest that are required under the laws of any foreign jurisdiction to be owned by others, and except as set forth in the Offering Memorandum) is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (iv) The documents filed with the Commission pursuant to the 1934 Act that are incorporated by reference in the Offering Memorandum (other than the financial statements, other financial information and reserve information and supporting schedules therein, as to which I express no opinion), when filed with the Commission, complied as to form in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder. (v) There is not pending or, to the best of my knowledge, threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary thereof is subject, before or brought by any court or governmental agency or body, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder or the transactions contemplated by the Offering Memorandum; A2-1 26 (vi) The execution, delivery and performance of the Purchase Agreement, the DTC Agreement, the Indenture, the Registration Rights Agreement and the Securities and the consummation of the transactions contemplated in the Purchase Agreement, the Registration Rights Agreement and in the Offering Memorandum (including the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement, the Registration Rights Agreement, the Indenture and the Securities will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary thereof pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to me, to which the Company or its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary thereof is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter, by-laws or other governing document, as applicable, of the Company or its subsidiaries, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to me (other than federal and state securities or blue sky laws, as to which I express no opinion), of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations. In addition, I have participated in the preparation of the Offering Memorandum (except for the financial statements and other financial and reserve information contained or incorporated by reference therein, as to which I express no opinion) and nothing has come to my attention that leads me to believe that the Offering Memorandum contained as of its date, or contains as of the date of this opinion, an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent he deems proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A2-2 27 EXHIBIT B FORM OF REGISTRATION RIGHTS AGREEMENT [INCLUDED IN EXHIBIT 4.3 TO THE REGISTRATION STATEMENT ON FORM S-4] A2-3 EX-4.2 3 INDENTURE, DATED 01/15/99 1 Exhibit 4.2 - -------------------------------------------------------------------------------- POGO PRODUCING COMPANY AND STATE STREET BANK AND TRUST COMPANY Trustee ---------------------- Indenture Dated as of January 15, 1999 ---------------------- $150,000,000 10 3/8% Series A Senior Subordinated Notes due 2009 and 10 3/8% Series B Senior Subordinated Notes due 2009 - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 Definitions..........................................................................1 SECTION 1.2 Other Definitions...................................................................32 SECTION 1.3 Incorporation by Reference of Trust Indenture Act...................................33 SECTION 1.4 Rules of Construction...............................................................33 ARTICLE II THE SECURITIES SECTION 2.1 Forms Generally.....................................................................34 SECTION 2.2 Title and Terms.....................................................................35 SECTION 2.3 Denominations.......................................................................36 SECTION 2.4 Execution, Authentication, Delivery and Dating......................................36 SECTION 2.5 Temporary Securities................................................................37 SECTION 2.6 Security Register and Depositary....................................................38 SECTION 2.7 Transfer and Exchange...............................................................38 SECTION 2.8 Additional Provisions for Global Securities.........................................44 SECTION 2.9 Mutilated, Destroyed, Lost and Stolen Securities....................................44 SECTION 2.10 Payment of Interest; Interest Rights Preserved......................................45 SECTION 2.11 Persons Deemed Owners...............................................................46 SECTION 2.12 Cancellation........................................................................46 SECTION 2.13 Computation of Interest.............................................................46 SECTION 2.14 CUSIP Numbers.......................................................................47 ARTICLE III SATISFACTION AND DISCHARGE SECTION 3.1 Satisfaction and Discharge of Indenture.............................................47 SECTION 3.2 Application of Trust Money..........................................................48
i 3 ARTICLE IV REMEDIES SECTION 4.1 Events of Default...................................................................49 SECTION 4.2 Acceleration of Maturity; Rescission and Annulment..................................51 SECTION 4.3 Collection of Indebtedness and Suits for Enforcement by Trustee.....................53 SECTION 4.4 Trustee May File Proofs of Claim....................................................53 SECTION 4.5 Trustee May Enforce Claims Without Possession of Securities.........................54 SECTION 4.6 Application of Money Collected......................................................54 SECTION 4.7 Limitation on Suits.................................................................55 SECTION 4.8 Unconditional Right of Holders to Receive Principal, Premium and Interest...........56 SECTION 4.9 Restoration of Rights and Remedies..................................................56 SECTION 4.10 Rights and Remedies Cumulative......................................................56 SECTION 4.11 Delay or Omission Not Waiver........................................................56 SECTION 4.12 Control by Holders..................................................................57 SECTION 4.13 Waiver of Past Defaults.............................................................57 SECTION 4.14 Waiver of Stay, Extension or Usury Laws.............................................57 SECTION 4.15 Undertaking for Costs...............................................................58 ARTICLE V THE TRUSTEE SECTION 5.1 Notice of Defaults..................................................................58 SECTION 5.2 Certain Rights of Trustee...........................................................58 SECTION 5.3 Trustee Not Responsible for Recitals or Issuance of Securities......................60 SECTION 5.4 May Hold Securities.................................................................60 SECTION 5.5 Money Held in Trust.................................................................60 SECTION 5.6 Compensation and Reimbursement......................................................60 SECTION 5.7 Corporate Trustee Required; Eligibility.............................................61 SECTION 5.8 Conflicting Interests...............................................................62 SECTION 5.9 Resignation and Removal; Appointment of Successor...................................62 SECTION 5.10 Acceptance of Appointment by Successor..............................................63 SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business.........................64 SECTION 5.12 Preferential Collection of Claims Against Company...................................64
ii 4 ARTICLE VI HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 6.1 Disclosure of Names and Addresses of Holders........................................64 SECTION 6.2 Reports By Trustee..................................................................65 SECTION 6.3 Reports by Company..................................................................65 ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 7.1 Company May Consolidate, etc., Only on Certain Terms................................66 SECTION 7.2 Successor Substituted...............................................................67 ARTICLE VIII SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures without Consent of Holders..................................68 SECTION 8.2 Supplemental Indentures with Consent of Holders.....................................69 SECTION 8.3 Execution of Supplemental Indentures................................................70 SECTION 8.4 Effect of Supplemental Indentures...................................................70 SECTION 8.5 Conformity with Trust Indenture Act.................................................70 SECTION 8.6 Reference in Securities to Supplemental Indentures..................................70 SECTION 8.7 Notice of Supplemental Indentures...................................................71 ARTICLE IX COVENANTS SECTION 9.1 Payment of Principal, Premium, if any, and Interest.................................71 SECTION 9.2 Maintenance of Office or Agency.....................................................71 SECTION 9.3 Money for Security Payments to Be Held in Trust.....................................72 SECTION 9.4 Corporate Existence.................................................................73 SECTION 9.5 Payment of Taxes and Other Claims...................................................73 SECTION 9.6 Maintenance of Properties...........................................................74 SECTION 9.7 Insurance...........................................................................74 SECTION 9.8 Statement by Officers as to Default.................................................74 SECTION 9.9 Reports.............................................................................75 SECTION 9.10 Limitation on Restricted Payments...................................................75 SECTION 9.11 Limitation on Indebtedness..........................................................79
iii 5 SECTION 9.12 Limitation on Non-Guarantor Restricted Subsidiaries.................................80 SECTION 9.13 Limitation on Issuances and Sales of Restricted Subsidiary Capital Stock............81 SECTION 9.14 Limitation on Liens.................................................................81 SECTION 9.15 Change of Control...................................................................82 SECTION 9.16 Limitation on Disposition of Proceeds of Asset Sales................................83 SECTION 9.17 Limitation on Transactions with Affiliates..........................................86 SECTION 9.18 Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries.............................................................87 SECTION 9.19 Limitation on Other Senior Subordinated Indebtedness................................88 SECTION 9.20 Limitation on Conduct of Business...................................................88 SECTION 9.21 Registration Rights Agreement.......................................................88 SECTION 9.22 Waiver of Certain Covenants.........................................................88 ARTICLE X REDEMPTION OF SECURITIES SECTION 10.1 Right of Redemption.................................................................88 SECTION 10.2 Applicability of Article............................................................89 SECTION 10.3 Election to Redeem; Notice to Trustee...............................................89 SECTION 10.4 Selection by Trustee of Securities to Be Redeemed...................................89 SECTION 10.5 Notice of Redemption................................................................90 SECTION 10.6 Deposit of Redemption Price.........................................................90 SECTION 10.7 Securities Payable on Redemption Date...............................................91 SECTION 10.8 Securities Redeemed in Part.........................................................91 ARTICLE XI DEFEASANCE AND COVENANT DEFEASANCE SECTION 11.1 Company's Option to Effect Defeasance or Covenant Defeasance........................91 SECTION 11.2 Defeasance and Discharge............................................................92 SECTION 11.3 Covenant Defeasance.................................................................92 SECTION 11.4 Conditions to Defeasance or Covenant Defeasance.....................................93 SECTION 11.5 Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions......................................................94 SECTION 11.6 Reinstatement.......................................................................95
iv 6 ARTICLE XII GUARANTEES SECTION 12.1 Unconditional Guarantee.............................................................95 SECTION 12.2 Subsidiary Guarantors May Consolidate, etc. on Certain Terms........................97 SECTION 12.3 Release of a Subsidiary Guarantor...................................................98 SECTION 12.4 Limitation of Subsidiary Guarantor's Liability......................................98 SECTION 12.5 Contribution........................................................................98 SECTION 12.6 Execution and Delivery of Notation of Subsidiary Guarantee..........................99 SECTION 12.7 Severability........................................................................99 SECTION 12.8 Subsidiary Guarantees Subordinated to Guarantor Senior Indebtedness.................99 SECTION 12.9 Subsidiary Guarantors Not to Make Payments with Respect to Subsidiary Guarantees in Certain Circumstances................................................100 SECTION 12.10 Subsidiary Guarantees Subordinated to Prior Payment of All Guarantor Senior Indebtedness upon Dissolution, etc..........................................101 SECTION 12.11 Holders to be Subrogated to Rights of Holders of Guarantor Senior Indebtedness.......................................................................103 SECTION 12.12 Obligations of the Subsidiary Guarantors Unconditional.............................103 SECTION 12.13 Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice............104 SECTION 12.14 Application by Trustee of Money Deposited with it..................................104 SECTION 12.15 Subordination Rights Not Impaired by Acts or Omissions of Subsidiary Guarantors or Holders of Guarantor Senior Indebtedness.............................105 SECTION 12.16 Holders Authorize Trustee to Effectuate Subordination of Subsidiary Guarantees.........................................................................106 SECTION 12.17 Right of Trustee to Hold Guarantor Senior Indebtedness.............................106 SECTION 12.18 Article XII Not to Prevent Events of Default.......................................106 SECTION 12.19 Payment............................................................................106 ARTICLE XIII SUBORDINATION OF SECURITIES SECTION 13.1 Securities Subordinate to Senior Indebtedness......................................106 SECTION 13.2 Payment Over of Proceeds upon Dissolution, etc.....................................107 SECTION 13.3 Suspension of Payment When Senior Indebtedness in Default..........................108 SECTION 13.4 Trustee's Relation to Senior Indebtedness..........................................110 SECTION 13.5 Subrogation to Rights of Holders of Senior Indebtedness............................110 SECTION 13.6 Provisions Solely To Define Relative Rights........................................111 SECTION 13.7 Trustee To Effectuate Subordination................................................111 SECTION 13.8 No Waiver of Subordination Provisions..............................................112 SECTION 13.9 Notice to Trustee..................................................................112
v 7 SECTION 13.10 Reliance on Judicial Order or Certificate of Liquidating Agent.....................113 SECTION 13.11 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights.............................................................................113 SECTION 13.12 Article Applicable to Paying Agents................................................114 SECTION 13.13 No Suspension of Remedies..........................................................114 ARTICLE XIV MISCELLANEOUS SECTION 14.1 Compliance Certificates and Opinions...............................................114 SECTION 14.2 Form of Documents Delivered to Trustee.............................................115 SECTION 14.3 Acts of Holders....................................................................115 SECTION 14.4 Notices, etc. to Trustee, Company and Subsidiary Guarantors........................117 SECTION 14.5 Notice to Holders; Waiver..........................................................117 SECTION 14.6 Effect of Headings and Table of Contents...........................................118 SECTION 14.7 Successors and Assigns.............................................................118 SECTION 14.8 Separability Clause................................................................118 SECTION 14.9 Benefits of Indenture..............................................................118 SECTION 14.10 Governing Law; Trust Indenture Act Controls........................................118 SECTION 14.11 Legal Holidays.....................................................................119 SECTION 14.12 No Recourse Against Others.........................................................119 SECTION 14.13 Duplicate Originals................................................................119 SECTION 14.14 No Adverse Interpretation of Other Agreements......................................119 EXHIBIT A FORM OF SECURITY..........................................................................A-1 EXHIBIT B FORM OF NOTATION RELATING TO SUBSIDIARY GUARANTEES........................................B-1 EXHIBIT C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF SECURITIES....................................................C-1 EXHIBIT D TRANSFEREE LETTER OF REPRESENTATIONS......................................................D-1
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART OF THE INDENTURE. vi 8 Reconciliation and tie between Trust Indenture Act of 1939 and Indenture
Trust Indenture Indenture Act Section Section - --------------- --------- Section 310(a)(1) ................................................... 5.7 (a)(2) ................................................... 5.7 (b) ................................................... 5.7, 5.8 Section 311(a) ................................................... 5.12 (b) ................................................... 5.12 Section 312(c) ................................................... 6.1 Section 313(a) ................................................... 6.2 (b) ................................................... 6.2 (c) ................................................... 6.2, 6.3(c) Section 314(a) ................................................... 6.3, 9.9 (a)(4) ................................................... 9.8(a) (c)(1) ................................................... 14.1 (c)(2) ................................................... 14.1 (d) ................................................... 14.1 (e) ................................................... 14.1 Section 315(a) ................................................... 5.2 (b) ................................................... 5.1 (c) ................................................... 5.2 (d) ................................................... 5.2 (e) ................................................... 4.14 Section 316(a) (last sentence) ................................................... 1.1 ("Outstanding") (a)(1)(A) ................................................... 4.2, 4.12 (a)(1)(B) ................................................... 4.13 (b) ................................................... 4.8 (c) ................................................... 14.3(d) Section 317(a)(1) ................................................... 4.3 (a)(2) ................................................... 4.4 (b) ................................................... 9.3 Section 318(a) ................................................... 14.10(b)
NOTE: THIS RECONCILIATION AND TIE SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART OF THE INDENTURE. vii 9 INDENTURE, dated as of January 15, 1999 between POGO PRODUCING COMPANY, a Delaware corporation (hereinafter called the "Company") and State Street Bank and Trust Company, trustee (hereinafter called the "Trustee"). RECITALS OF THE COMPANY Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 10 3/8% Series A Senior Subordinated Notes due 2009 (the "Series A Securities") and the Company's 10 3/8% Series B Senior Subordinated Notes due 2009 (the "Series B Securities" and, collectively with the Series A Securities, the "Securities" or each, a "Security"). This Indenture shall be subject to the provisions of the Trust Indenture Act that are required to be part of an indenture qualified thereunder and shall, to the extent applicable, be governed by such provisions. All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company and the Trustee, in accordance with their and its 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, as follows: 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 Asset Acquisition from such Person, (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 Asset Acquisition or such Person becoming such a Subsidiary) or (c) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company of any Indebtedness described in clause (a) or (b) of this definition, including any successive refinancings, so long as (i) 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 1 10 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 as necessary to accomplish such refinancing, plus the amount of expenses of the Company incurred in connection with such refinancing, (ii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Securities at least to the same extent as the Indebtedness being refinanced and (iii) such new Indebtedness has an Average Life longer than the Average Life of the Securities and a final Stated Maturity later than the final Stated Maturity of the Securities. "Act," when used with respect to any Holder, has the meaning specified in Section 14.3. "Adjusted Consolidated Net Tangible Assets" means (without duplication), as of the date of determination, (a) the sum of (i) discounted future net revenues from proved oil and gas reserves of the Company and its Restricted Subsidiaries calculated in accordance with SEC guidelines 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 revenues from (A) estimated proved oil and gas reserves acquired since the date of such year-end reserve report, and (B) estimated oil and gas reserves attributable to upward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to exploration, development or exploitation activities, in each case calculated in accordance with SEC guidelines (using the prices used in such year-end reserve report), and decreased by, as of the date of determination, the estimated discounted future net revenues from (C) estimated proved oil and gas reserves produced or disposed of since the date of such year-end reserve report and (D) estimated oil and gas reserves attributable to downward revisions of estimates of proved oil and gas reserves since the date of such year-end reserve report due to changes in geological conditions or other factors which would, in accordance with standard industry practice, cause such revisions, in each case calculated in accordance with SEC guidelines (using the prices used 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 revenues used 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 duplication, Investments in unconsolidated Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of the 2 11 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 Subsidiary that is a business trust or similar entity formed for the primary purpose of issuing preferred securities the proceeds of which are loaned to the Company or a Restricted Subsidiary), (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 revenues, calculated in accordance with SEC guidelines (using the prices used in the Company's year-end reserve report), attributable to reserves which are required to be delivered to third parties to fully satisfy the obligations of the Company and its Restricted Subsidiaries with respect to Volumetric Production Payments on the schedules specified with respect thereto and (iv) the discounted future net revenues, calculated in accordance with SEC guidelines, attributable to reserves subject to Dollar-Denominated Production Payments which, based on the estimates of production and price assumptions included in determining the discounted future net revenues specified in (a)(i) above, would be necessary to fully satisfy the payment obligations of the Company and its Restricted Subsidiaries with respect to Dollar-Denominated Production Payments on the schedules specified with respect thereto. If the Company changes its method of accounting from the successful efforts method to the full cost method or a similar method of accounting, "Adjusted Consolidated Net Tangible Assets" will continue to be calculated as if the Company were still using the successful efforts method of accounting. "Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean (a) the amount by which the fair value of the Properties of such Subsidiary Guarantor exceeds (b) the total amount of liabilities of such Subsidiary Guarantor at such date 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. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of this definition, beneficial ownership of 10% or more of the voting common equity (on a fully diluted basis) or options or warrants to purchase such equity (but only if exercisable at the date of determination or within 60 days thereof) of a Person shall be deemed to constitute control of such Person. No Person shall be deemed an Affiliate of an oil and gas royalty trust solely by virtue of ownership of units of beneficial interest in such trust. "Asset Acquisition" means (a) an Investment by the Company or any Restricted Subsidiary in any other Person pursuant to which such Person shall become a Restricted Subsidiary or any Restricted Subsidiary shall be merged with or into the Company or any Restricted Subsidiary or (b) the acquisition by the Company or any Restricted Subsidiary of the Properties of any Person 3 12 which constitute all or substantially all of the Properties of such Person or any division or line of business of such Person. "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 by means of a Sale/Leaseback Transaction or 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; (b) the properties and assets of any division or line of business of the Company or any of its Restricted Subsidiaries substantially as an entirety; or (c) any other Properties of the Company or any of its Restricted Subsidiaries other than a disposition of hydrocarbons or other mineral products in the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any transfer of Properties that is governed by, and made in accordance with, the provisions of Article VII hereof; (ii) any transfer of Properties to any Person, if permitted under Section 9.10 hereof; (iii) any trade or exchange of properties and assets used in the Oil and Gas Business of the Company or any Restricted Subsidiary or shares of Capital Stock in any Person in the Oil and Gas Business owned by the Company or any Restricted Subsidiary for properties and assets used in the Oil and Gas Business of any Person or shares of Capital Stock in any Person owned or held by another Person, provided, that (A) the Fair Market Value of the Properties traded or exchanged by the Company or such Restricted Subsidiary (including any cash or Cash Equivalents, not to exceed 15% of such Fair Market Value, to be delivered by the Company or such Restricted Subsidiary) is reasonably equivalent to the Fair Market Value of the Properties (together with any cash or Cash Equivalents, not to exceed 15% of such Fair Market Value) to be received by the Company or such Restricted Subsidiary; provided, that if such Fair Market Value is equal to or in excess of $10,000,000 the Company shall deliver to the Trustee a written appraisal by a nationally recognized investment banking firm or appraisal firm, in each case specializing or having a speciality in oil and gas Properties, and (B) such exchange is approved by a majority of the Disinterested Directors; or (iv) any transfer of Properties in a single transaction or series of related transactions having a Fair Market Value of less than $5,000,000. "Attributable Indebtedness" means, with respect to any particular lease under which any Person is at the time liable and at any date as of which the amount thereof is to be determined, the present value of the total net amount of rent required to be paid by such Person under the lease during the primary term thereof, without giving effect to any renewals at the option of the lessee, discounted from the respective due dates thereof to such date of determination at the rate of interest per annum implicit in the terms of the lease. As used in the preceding sentence, the "net amount of rent" under any lease for any such period shall mean the sum of rental and other payments required to be paid with respect to such period by the lessee thereunder, excluding any amounts required to be paid by such lessee on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges. In the case of any lease which is terminable by the lessee upon payment of a penalty, such net amount of rent shall also include the amount of 4 13 such penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. "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. "Bank Co-agents" mean Bank of Montreal and Banque Paribas as co-agents, or any successor or replacement agents, under the Credit Agreement. "Board of Directors" means, (a) with respect to the Company, either the board of directors or any properly constituted committee thereof that is (i) authorized to take the action in question and (ii) comprised of members, a majority of whom are not Officers or employees of the Company or any Subsidiary of the Company and (b) with respect to any Restricted Subsidiary, the board of directors of that Restricted Subsidiary or any properly constituted committee thereof that is authorized to take the action in question. "Board Resolution" means, with respect to the Company, 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 Restricted Subsidiary, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Restricted 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 in which the Trustee's Corporate Trust Office is located, 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), warrants or options exercisable for, exchangeable for or convertible into such an equity interest in such Person. "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 5 14 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. "Cash Equivalents" means (a) any evidence of Indebtedness with a maturity of 365 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), (b) demand and time deposits and certificates of deposit or acceptances with a maturity of 365 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 $100,000,000 or any commercial bank organized under the laws of any country other than the United States of America that is a member of the Organization for Economic Cooperation and Development ("OECD") and has total assets in excess of $100,000,000, (c) commercial paper with a maturity of 365 days or less issued by a Person that is not an Affiliate of the Company and is organized under the laws of any state of the United States of America or the District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody's (or, if at any time neither S&P nor Moody's shall be rating such obligations, then from such other rating service as may be acceptable to the Trustee), (d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any commercial bank meeting the specifications of clause (b) above, (e) overnight bank deposits and bankers' acceptances at any commercial bank meeting the qualifications specified in clause (b) above and (f) investments in money market mutual or similar funds which have assets in excess of $500,000,000. "Change of Control" means the occurrence of any of the following events: (a) the Company's properties and assets are sold or otherwise disposed of substantially as an entirety on a consolidated basis to any Person or related group of Persons in any one transaction or a series of related transactions; (b) there shall be consummated any consolidation or merger of the Company (i) in which the Company is not the continuing or surviving Person (other than a consolidation or merger with a wholly owned Subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same number of shares of Common Stock of such Subsidiary) or (ii) pursuant to which the Common Stock would be converted into cash, securities or other property, in each case, other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the Common Stock of the continuing or surviving Person immediately after such consolidation or merger; or (c) any Person or any Persons acting together which would constitute a "group" for purposes of Section 13(d) of the Exchange Act (other than the Company, any Subsidiary of the Company, any employee stock purchase plan, stock option plan or other stock incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of the Company or any Subsidiary of the Company or any Person holding securities of the Company for or pursuant to the terms of any such employee benefit plan), together with any Affiliates thereof, shall acquire beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of at least 50% of the Voting Stock of the Company. 6 15 "Code" shall mean the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations and rulings thereof or 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 Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) the sum of Consolidated Net Income, Consolidated Interest Expense, 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 (i) the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments and (ii) 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, that (A) 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 clause (i) of Section 9.11 hereof and 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, (B) 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 clause (i) of Section 9.11 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, (C) notwithstanding clauses (A) and (B) of this proviso, interest on 7 16 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 and (D) in making such calculation, Consolidated Interest Expense shall exclude interest attributable to Dollar-Denominated Production Payments. "Consolidated Income Tax Expense" means, for any period, the provision for federal, state, local and foreign income taxes 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, 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, (i) any amortization of debt discount, (ii) the net cost under Interest Rate Protection Obligations (including any amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and (v) 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 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, accrued and/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 or accrued on Redeemable Capital Stock or Preferred Stock of the Company and its Restricted Subsidiaries, to the extent such Redeemable Capital Stock or Preferred Stock is owned by Persons other than Restricted Subsidiaries. "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 interest on indebtedness, dividends or other distributions actually paid to the Company or its Restricted Subsidiaries in cash by such other Person during such period (regardless of whether such cash interest on indebtedness, dividends or other distributions 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 8 17 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) income resulting from transfers of assets received by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary and (g) any write-downs of non-current assets; provided, however, that any ceiling limitation write-downs under SEC guidelines shall be treated as capitalized costs, as if such write-downs had not occurred. "Consolidated Net Worth" means, at any date, the consolidated stockholders' equity of the Company 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, impairment 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 which requires 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 Goodwin Square, 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103, Attention: Corporate Trust Administration. "Credit Agreement" means the Amended and Restated Credit Agreement dated August 1, 1997 among the Company and Bank of Montreal and Banque Paribas, as co-agents, and the other banks specified therein, including any notes and guarantees executed in connection therewith, as such agreement has been and may be amended, modified, supplemented, extended, restated, replaced (including replacement after the termination of such agreement), restructured, increased, renewed or refinanced from time to time in one or more credit agreements, loan agreements, instruments or similar agreements, whether or not with the same lenders or agents, as such may be further amended, modified, supplemented, extended, restated, replaced (including replacement after the termination of such agreement), restructured, increased, renewed or refinanced from time to time. "Credit Agreement Obligations" means all monetary obligations of every nature of the Company or a Restricted Subsidiary, including without limitation, obligations to pay principal and interest, reimbursement obligations under letters of credit, fees, expenses and indemnities, from time to time owed to the lenders or any agent under or in respect of the Credit Agreement. "Default" means any event, act or condition that is, or after notice or passage of time or both would be, an Event of Default. 9 18 "Definitive Securities" means Securities that are in the form set forth in Exhibit A attached hereto (but without including the paragraph referred to in the footnote on page A-2 thereof). "Depositary" means with respect to the Securities issuable or issued in whole or in part in global form, the Person specified in Section 2.6 hereof as the Depositary with respect to the Securities, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Designated Guarantor Senior Indebtedness" means, with respect to a Subsidiary Guarantor, (a) all Guarantor Senior Indebtedness of such Subsidiary Guarantor under the Credit Agreement Obligations and (b) any other Guarantor Senior Indebtedness which (i) at the time of incurrence equals or exceeds $10,000,000 in aggregate principal amount and (ii) is specifically designated by such Subsidiary Guarantor in the instrument evidencing such Guarantor Senior Indebtedness as "Designated Guarantor Senior Indebtedness" for purposes of this Indenture. "Designated Senior Indebtedness" means (a) all Senior Indebtedness constituting Credit Agreement Obligations and (b) any other Senior Indebtedness which (i) at the time of incurrence equals or exceeds $10,000,000 in aggregate principal amount and (ii) is specifically designated by the Company in the instrument evidencing such Senior Indebtedness as "Designated Senior Indebtedness" for purpose of this Indenture. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors is required to deliver its resolution under this Indenture, a member of the 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 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. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and rulings thereof issued by the Internal Revenue Service or the Department of Labor thereunder. "ERISA Affiliate" shall mean any subsidiary or trade or business (whether or not incorporated) which is a member of a group of which the Company is a member and which is under common control within the meaning of Section 414 of the Code (such rules and regulations shall also be deemed to apply to foreign corporations and entities). "Event of Default" has the meaning specified in Section 4.1 hereto. 10 19 "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 by the Company to the Holders of all outstanding Transfer Restricted Securities to exchange all such outstanding Transfer Restricted Securities held by such Holders for Series B Securities, in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Securities tendered in such exchange offer by such Holders. "Fair Market Value" means the fair market value of any Property as determined in good faith (a) by the Board of Directors if the fair market value of such Property, as evidenced by a Board Resolution, is $5 million or more, or (b) by an Officer of the Company if the fair market value of such Property, as evidenced by an Officers' Certificate, is less than $5 million which determination shall be conclusive for purposes of this Indenture. Unless specifically required by the terms of this Indenture, no valuation or assessment from any investment banker, appraiser or other third party shall be required to be obtained in connection with either determination contemplated by the first sentence of this definition of Fair Market Value. "Federal Bankruptcy Code" means the United States Bankruptcy Code of Title 11 of the United States Code, as amended from time to time. "Foreign Subsidiary" means (a) any Restricted Subsidiary engaged in the Oil and Gas Business having the majority of its operations outside the United States of America, irrespective of its jurisdiction of organization, and (b) any other Restricted Subsidiary whose assets (excluding any cash and Cash Equivalents) consist exclusively of Capital Stock or Indebtedness of one or more Restricted Subsidiaries described in clause (a) of this definition. "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 applicable as of the date of this Indenture. "Global Security" means a Security that is issued in global form in the name of Cede & Co. or such other name as may be requested by an authorized representative of the Depositary and that contains the paragraph referred to in the footnote on page A-2 of, and the additional schedule referred to in, the form of Security attached hereto as Exhibit A. "guarantee" means, as applied to any obligation, (a) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (b) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or 11 20 performance (or payment of damages in the event of nonperformance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. When used as a verb, "guarantee" shall have a corresponding meaning. "Guarantor Senior Indebtedness" means all Indebtedness of a Subsidiary Guarantor created, incurred, assumed or guaranteed by such Subsidiary Guarantor (and all renewals, substitutions, refinancings or replacements thereof) (including the principal of, interest on and fees, premiums, expenses (including costs of collection), indemnities and other amounts payable in connection with such Indebtedness) (and including, in the case of the Credit Agreement, interest accruing after the filing of a petition by or against such Subsidiary Guarantor under any bankruptcy law, in accordance with and at the rate, including any default rate, specified with respect to such Indebtedness, whether or not a claim for such interest is allowed as a claim after such filing in any proceeding under such bankruptcy law), unless the instrument governing such Indebtedness expressly provides that such Indebtedness is not senior in right of payment to its Subsidiary Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness of a Subsidiary Guarantor will not include (a) Indebtedness of such Subsidiary Guarantor evidenced by its Subsidiary Guarantee, (b) Indebtedness of such Subsidiary Guarantor that is expressly subordinated or junior in right of payment to any Guarantor Senior Indebtedness of such Subsidiary Guarantor or its Subsidiary Guarantee, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is by its terms without recourse to such Subsidiary Guarantor or Non-Recourse Indebtedness, (d) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock of such Subsidiary Guarantor, (e) to the extent it might constitute Indebtedness, any liability for federal, state, local or other taxes owed or owing by such Subsidiary Guarantor, (f) Indebtedness of such Subsidiary Guarantor to the Company or any of the Company's other Subsidiaries or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, and (g) that portion of any Indebtedness of such Subsidiary Guarantor which at the time of issuance is issued in violation of this Indenture (but, as to any such Indebtedness, no such violation shall be deemed to exist for purposes of this clause (g) if the holder(s) of such Indebtedness or their representative or such Subsidiary Guarantor shall have furnished to the Trustee an Opinion of Counsel, addressed to the Trustee (which counsel may, as to matters of fact, rely upon a certificate of such Subsidiary Guarantor) to the effect that the incurrence of such Indebtedness does not violate the provisions of such Indenture); provided, that the foregoing exclusions shall not affect the priorities of any Indebtedness arising solely by operation of law in any case or proceeding or similar event described in clause (a), (b) or (c) of the definition of "Insolvency or Liquidation Proceedings." "Hedging Obligations" means obligations of any Person arising out of hedging transactions entered into in the ordinary course of business, including, without limitation, swaps, options, forward sales and futures contracts entered into in connection with interest rates, currencies and energy-related commodities. "Holder" or "Noteholder" means a Person in whose name a Security is registered in the Security Register. 12 21 "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, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit, bankers' acceptance or other similar credit transaction and in connection with 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, now or hereafter outstanding, 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) the Attributable Indebtedness (in excess of any related Capitalized Lease Obligations) related to any Sale/Leaseback Transaction of such Person, (f) 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, contingent or otherwise, 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), (g) all guarantees by such Person of Indebtedness referred to in this definition (including, with respect to any Production Payment, any warranties or guarantees 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), (h) all Redeemable Capital Stock of such Person valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued dividends, (i) all obligations of such Person under or in respect of currency exchange contracts and Interest Rate Protection Obligations and (j) any amendment, supplement, modification, deferral, renewal, extension or refunding of any liability of such Person of the types referred to in clauses (a) through (i) above. 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, 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 (g) of the first 13 22 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. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co., as initial purchasers in the Offering. "Insolvency or Liquidation Proceeding" means, with respect to any Person, (a) an insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization proceeding or other similar case or proceeding in connection therewith, relating to such Person or to its creditors, as such, or its assets, (b) any liquidation, dissolution or other winding-up of such Person, whether voluntary or involuntary, 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 includes, 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 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 the Company in such Unrestricted Subsidiary at such time. "Investments" shall exclude (a) extensions of trade credit on commercially reasonable terms in accordance with normal trade practices and (b) Interest Rate Protection Obligations entered into in the ordinary course of business or as required by any Permitted Indebtedness, Permitted Subsidiary Indebtedness or any Indebtedness incurred in compliance with Section 9.11 hereof, but only to the extent that the notional principal amount of such Interest Rate Protection Obligations does not exceed 105% of the principal amount of such 14 23 Indebtedness to which such Interest Rate Protection Obligations relate and (c) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under Section 9.16 hereof. "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; provided, however, "Lien" shall not include rights created in a third Person in connection with the creation by the Company or a Subsidiary of a Production Payment. 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. "Material Change" means an increase or decrease (excluding changes that result solely from changes in prices) of more than 50% 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 as provided in Section 9.16 hereof. "Material Restricted Subsidiary" means, at any particular time, (a) any Subsidiary Guarantor and (b) any other Restricted Subsidiary that, together with its Subsidiaries, (i) 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 (ii) 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 (i) and (ii) on the consolidated financial statements of the Company and its Restricted Subsidiaries for such fiscal year. "Maturity" means, with respect to any Security, the date on which any principal of such Security becomes due and payable as provided therein or herein, 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. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, Section 414 of the Code or Section 3(37) of ERISA, subject to Title IV of ERISA, to 15 24 which the Company or any ERISA Affiliate is making or accruing or has made or accrued an obligation to make contributions. "Multiple Employer Plan" shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA, other than a Multiemployer Plan, subject to Title IV of ERISA, to which the Company or any ERISA Affiliate and an employer other than an ERISA Affiliate or the Company contribute and which is subject to Section 4064 of ERISA. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof received by the Company or any Restricted Subsidiary 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 (a) brokerage commissions and other fees and expenses (including fees and expenses of engineers, legal counsel, accountants and investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) amounts required to be paid (i) to any minority interest holder or other Person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale or (ii) in respect of any Indebtedness (other than Indebtedness under the Credit Agreement) secured by a Lien on any of the Properties that were the subject of such Asset Sale and (d) 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 (a) all current assets of the Company and its Restricted Subsidiaries, minus (b) all current liabilities of the Company and its Restricted Subsidiaries, except current liabilities included in Indebtedness, in each case as set forth in financial statements of the Company prepared in accordance with GAAP. "Non-payment Default" means, for purposes of Article XIII hereof, any event (other than a Payment Default) the occurrence of which entitles one or more Persons to act to accelerate the maturity of any Designated Senior Indebtedness. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness of the Company or a Restricted Subsidiary incurred in connection with the acquisition by the Company or a Restricted Subsidiary of any property or assets and as to which (a) the holders of such Indebtedness agree that they will look solely to the property or assets so acquired and securing such Indebtedness for payment on or in respect of such Indebtedness and (b) no default with 16 25 respect to such Indebtedness would permit (after notice or passage of time or both), according to the terms of any other Indebtedness of the Company or a Restricted Subsidiary, any holder of such other Indebtedness to declare a default under such other Indebtedness or cause the payment of such other Indebtedness to be accelerated or payable prior to its stated maturity. "Note Obligations" means any principal of, premium, if any, and interest on, and any other amounts (including, without limitation, any payment obligations with respect to the Securities as a result of any Asset Sale, Change of Control or redemption) owing in respect of, the Securities payable pursuant to the terms of the Securities or this Indenture or upon acceleration of the Securities. "Offering" means the offering of the Series A Securities pursuant to the Offering Memorandum. "Offering Memorandum" means the Offering Memorandum of the Company, dated January 12, 1999, relating to the Offering. "Officer" means, with respect to any Person, the Chairman of the Board, the President, a Vice President, the Chief Financial Officer, the Treasurer or an Assistant Treasurer of such Person or any individual holding a similar or greater position of authority within the organization of such Person or, if such Person is a limited partnership, within the organization of the general partner of such limited partnership, including, without limitation, the manager or managing member of a limited liability company or a director or managing director of a foreign subsidiary. "Officers' Certificate" means a certificate delivered to the Trustee signed by the Chairman, the President, a Vice President or the Chief Financial Officer, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company. "Oil and Gas Business" means (a) the acquisition, exploration, exploitation, development, operation and disposition of interests in oil, gas and other hydrocarbon properties, (b) the gathering, marketing, treating, processing, storage, refining, selling and transporting of any production from such interests or properties, (c) any business relating to or arising from exploration for or exploitation, development, production, treatment, processing, storage, refining, transportation or marketing of oil, gas and other minerals and products produced in association therewith, (d) any power generation and electrical transmission business in a jurisdiction outside North America where fuel required by such business is supplied, directly or indirectly, from hydrocarbons produced substantially from properties in which the Company or its Restricted Subsidiaries, directly or indirectly, participates and (e) any activity necessary, appropriate or incidental to the activities described in the foregoing clauses (a) through (d) of this definition. "Opinion of Counsel" means a written opinion of legal counsel for the Company (or any Subsidiary Guarantor, if applicable), including an employee of the Company (or any Subsidiary Guarantor, if applicable), who is reasonably acceptable to the Trustee. 17 26 "Outstanding," when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (a) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) 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; (c) Securities, except to the extent provided in Sections 11.2 and 11.3 hereof, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article XI hereof; and (d) Securities which have been paid pursuant to Section 2.9 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 a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such 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 (a) the Company's 8 3/4% Senior Subordinated Notes due 2007 issued under the Indenture dated as of May 15, 1997 between the Company and Fleet National Bank (the Trustee has succeeded to the interest of Fleet National Bank under such Indenture), and (b) any other Indebtedness of the Company that is pari passu in right of payment to the Securities. 18 27 "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 Default" means any default in the payment when due (whether at Stated Maturity, upon scheduled repayment, upon acceleration or otherwise) of principal of (or premium, if any, on) or interest on, or of unreimbursed amounts under any drawn letter of credit or fees relating to any letter of credit constituting, any Designated Senior Indebtedness. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "PBGC Plan" shall mean any employee pension benefit plan as defined in Section 3(2) of ERISA sponsored by the Company or an ERISA Affiliate (excluding any Multiemployer Plan and any Multiple Employer Plan) and which is subject to Title IV of ERISA or Section 412 of the Code. "Permitted Guarantor Junior Securities" means, with respect to any Subsidiary Guarantor, debt or equity securities of such Subsidiary Guarantor or any successor corporation provided for or by a plan of reorganization or readjustment that are subordinated at least to the same extent that such Subsidiary Guarantee is subordinated to the payment of all Guarantor Senior Indebtedness of such Subsidiary Guarantor when outstanding, so long as the effect of any exclusion employing this definition is not to cause such Subsidiary Guarantee to be treated in any case or proceeding or similar event described in clause (a), (b) or (c) of the definition of Insolvency or Liquidation Proceeding as part of the same class of claims as Guarantor Senior Indebtedness of such Subsidiary Guarantor or any class of claims pari passu with, or senior to, Guarantor Senior Indebtedness of such Subsidiary Guarantor, for any payment or distribution; provided, that (a) if a new corporation results from such reorganization or readjustment, such corporation assumes any Guarantor Senior Indebtedness of such Subsidiary Guarantor not paid in full in cash or Cash Equivalents in connection with such reorganization or readjustment and (b) the rights of the holders of such Guarantor Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. "Permitted Indebtedness" means any of the following: (a) Indebtedness of the Company under one or more bank credit or revolving credit facilities in an aggregate principal amount at any one time outstanding not to exceed (i) the greater of (A) $270,000,000 and (B) an amount equal to the sum of (1) $170,000,000 and (2) 10% of Adjusted Consolidated Net Tangible Assets determined as of the date of the most recent quarterly consolidated financial statements of the Company and its Restricted Subsidiaries, less (ii) the amount of Net Cash Proceeds applied to reduce Indebtedness pursuant to Section 9.16 hereof (together with interest and fees under such facilities, the "Maximum Credit Amount," with the Maximum Credit Amount being an aggregate maximum amount for the Company and all Guarantor Subsidiaries, pursuant 19 28 to clause (a) of the definition of "Permitted Subsidiary Indebtedness"), and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings or replacements (each, for purposes of this clause, a "refinancing") thereof by the Company, including any successive refinancings thereof by the Company, so long as the aggregate principal amount of any such new Indebtedness, together with the aggregate principal amount of all other Indebtedness outstanding pursuant to this clause (a) (and clause (a) of the definition of "Permitted Subsidiary Indebtedness"), shall not at any one time exceed the Maximum Credit Amount; (b) Indebtedness of the Company under the Securities; (c) Indebtedness of the Company outstanding on the date of this Indenture (and not repaid or defeased with the proceeds of the Offering); (d) obligations of the Company pursuant to Interest Rate Protection Obligations, but only to the extent 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 Obligations; (e) Indebtedness of the Company to any Restricted Subsidiaries; (f) in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; (g) Indebtedness in respect of bid, performance or surety bonds issued or other reimbursement obligations for the account of the Company in the ordinary course of business, including guarantees and letters of credit supporting such bid, performance, surety bonds or other reimbursement obligations (in each case other than for an obligation for money borrowed); (h) Non-Recourse Indebtedness; (i) Indebtedness incurred in respect of any letters of credit in the ordinary course of business of the Company or reimbursement obligations in respect thereof; (j) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company of any Indebtedness of the Company described in clause (b) or (c) above, including any successive refinancings by the Company, so long as (i) 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 20 29 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 as necessary to accomplish such refinancing, plus the amount of expenses of the Company incurred in connection with such refinancing, and (ii) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Securities at least to the same extent as the Indebtedness being refinanced and (iii) 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; (k) other Indebtedness of the Company in an aggregate principal amount not in excess of $25,000,000 at any one time outstanding. "Permitted Investments" means any of the following: (a) Investments in Cash Equivalents; (b) Investments in the Company or any of its Restricted Subsidiaries; (c) Investments by the Company or any of its Restricted Subsidiaries in another Person, if as a result of such Investment (i) such other Person becomes a Restricted Subsidiary of the Company or (ii) such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all of its properties and assets to, the Company or a Restricted Subsidiary; (d) entry into operating agreements, joint ventures, partnership agreements, working interests, royalty interests, mineral leases, processing agreements, farm-out agreements, contracts for the sale, transportation or exchange of oil and natural gas, unitization agreements, pooling arrangements, area of mutual interest agreements, development agreements, joint ownership arrangements and other similar or customary agreements, transactions, properties, interests, and arrangements, whether or not any such Investment involves or results in the creation of a legal entity, and Investments and expenditures in connection therewith or pursuant thereto, in each case made or entered into in the ordinary course of the Company or its Restricted Subsidiaries' Oil and Gas Business; (e) entry into any arrangement pursuant to which the Company or any of its Restricted Subsidiaries may incur Hedging Obligations; and (f) other Investments having an aggregate fair market value (measured on the date each such Investment was made without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (f) 21 30 that are at the time outstanding (net of repayments, dividends and distributions received with respect to such Investments), not to exceed $25,000,000 at any one time outstanding. "Permitted Junior Securities" means debt or equity securities of the Company or any successor corporation provided for or by a plan of reorganization or readjustment that are subordinated at least to the same extent that the Securities are subordinated to the payment of all Senior Indebtedness when outstanding, so long as the effect of any exclusion employing this definition is not to cause the Securities to be treated in any case or proceeding or similar event described in clause (a), (b) or (c) of the definition of Insolvency or Liquidation Proceeding as part of the same class of claims as Senior Indebtedness or any class of claims pari passu with, or senior to, Senior Indebtedness, for any payment or distribution; provided, that (a) if a new corporation results from such reorganization or readjustment, such corporation assumes any Senior Indebtedness not paid in full in cash or Cash Equivalents in connection with such reorganization or readjustment and (b) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. "Permitted Liens" means the following types of Liens: (a) Liens existing as of the date the Securities are first issued; (b) Liens securing the Securities; (c) Liens in favor of the Company or a Subsidiary Guarantor; (d) Liens securing any Senior Indebtedness or Guarantor Senior Indebtedness; (e) Liens for taxes, assessments and governmental charges or claims either (i) not delinquent or (ii) contested in good faith by appropriate proceedings and as to which the Company or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (f) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (g) Liens incurred and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security and Liens incurred and deposits made to secure the payment or performance of tenders, statutory or regulatory obligations, surety and appeal bonds, bids, leases, government contracts and leases, trade contracts (other than to secure an obligation for borrowed money), performance and return of money bonds and other similar obligations (exclusive of obligations for the payment 22 31 of borrowed money but including lessee and operator obligations under statutes, governmental regulations or instruments related to the ownership, exploration and production of oil, gas and minerals on state, federal or foreign lands or waters); (h) pre-judgment Liens and judgment Liens not giving rise to an Event of Default so long as any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceeding may be initiated shall not have expired; (i) any interest or title of a lessor under any Capitalized Lease Obligation or operating lease; (j) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of defeasing Indebtedness of the Company or any of the Subsidiaries; customary Liens for the fees, costs and expenses of trustees and escrow agents pursuant to the indenture, escrow agreement or other similar agreement establishing such trust or escrow arrangement; and Liens pursuant to merger agreements, stock purchase agreements, asset sale agreements and similar agreements (i) limiting the transfer of properties and assets pending consummation of the subject transaction and (ii) in respect of earnest money deposits, good faith deposits, purchase price adjustment escrows or similar deposits or escrow arrangements made or established thereunder; (k) Liens securing any Hedging Obligations of the Company or any Restricted Subsidiary; (l) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (m) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (n) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets and Liens to secure Indebtedness used to finance all or a part of the construction of property or assets used by the Company or any of its Restricted Subsidiaries in the Oil and Gas Business, provided, that such Liens do not extend to any other property or assets owned by the Company or its Restricted Subsidiaries; 23 32 (o) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (p) Liens securing Interest Rate Protection Obligations which Interest Rate Protection Obligations relate to Indebtedness that is secured by Liens otherwise permitted under this Indenture; (q) Liens on, or related to, properties or assets to secure all or part of the costs incurred in the ordinary course of business for the exploration, drilling, development or operation thereof; (r) Liens on pipeline or pipeline facilities which arise out of operation of law; (s) Liens arising under operating agreements, joint venture agreements, partnership agreements, oil and gas leases, farm-out agreements, division orders, contracts for the sale, purchase, transportation, processing or exchange of oil, gas or other hydrocarbons, unitization and pooling declarations and agreements, area of mutual interest agreements, development agreements, joint ownership arrangements and other agreements which are customary in the Oil and Gas Business; (t) Liens reserved in oil and gas mineral leases for bonus or rental payments and for compliance with the terms of such leases; (u) Liens constituting survey exceptions, encumbrances, easements, or reservations of, or rights to others for, rights-of-way, zoning restrictions and other similar charges and encumbrances as to the use of real properties, and minor defects of title which, in the case of any of the foregoing, were not incurred or created to secure the payment of borrowed money or the deferred purchase price of Property or services, and in the aggregate do not interfere in any material respect with the ordinary conduct of the business of the Company or its Restricted Subsidiaries; (v) rights reserved to or vested in any municipality or governmental, statutory or public authority by the terms of any right, power, franchise, grant, license or permit, or by any provision of law, to terminate such right, power, franchise, grant, license or permit or to purchase, condemn, expropriate or recapture or to designate a purchaser of any of the property of such Person; rights reserved to or vested in any municipality or governmental, statutory or public authority to control or regulate any property of such Person, or to use such property in a manner which does not materially impair the use of such property for the purposes for which it is held by such Person; any obligation or duties affecting the property of such Person to any municipality or governmental, statutory or public authority with respect to any franchise, grant, license or permit; 24 33 (w) Liens securing Non-Recourse Indebtedness; provided, however, that the related Non-Recourse Indebtedness shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets acquired by the Company with the proceeds of such Non-Recourse Indebtedness; and (x) Liens securing Acquired Indebtedness; provided, however, that any such lien extends only to the properties or assets 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. Notwithstanding anything in clauses (a) through (x) of this definition, the term "Permitted Liens" does not include any Liens resulting from the creation, incurrence, issuance, assumption or guarantee of any Production Payments other than Production Payments that are created, incurred, issued, assumed or guaranteed in connection with the financing of, and within 30 days after, the acquisition of the Properties are subject thereto. "Permitted Subsidiary Indebtedness" means any of the following: (a) Indebtedness of any Guarantor Subsidiary under one or more bank credit or revolving credit facilities (and "refinancings" thereof) in an amount at any one time outstanding not to exceed the Maximum Credit Amount (in the aggregate for all Guarantor Subsidiaries and the Company, pursuant to clause (a) of the definition of "Permitted Indebtedness"); (b) Indebtedness of any Restricted Subsidiary outstanding on the date of this Indenture; (c) obligations of any Restricted Subsidiary pursuant to Interest Rate Protection Obligations, but only to the extent such obligations do not exceed 105% of the aggregate principal amount of the Indebtedness covered by such Interest Rate Protection Obligations; and Hedging Obligations of any Restricted Subsidiary; (d) the Subsidiary Guarantees (and any assumption of the obligations guaranteed thereby); (e) Indebtedness of any Restricted Subsidiary relating to guarantees by such Restricted Subsidiary of Permitted Indebtedness; (f) in-kind obligations relating to net gas balancing positions arising in the ordinary course of business and consistent with past practice; (g) Indebtedness in respect of bid, performance or surety bonds or other reimbursement obligations issued for the account of any Restricted Subsidiary in the ordinary 25 34 course of business, including guarantees and letters of credit supporting such bid, performance, surety bonds or other reimbursement obligations (in each case other than for an obligation for money borrowed); (h) Indebtedness of any Restricted Subsidiary to any other Restricted Subsidiary or to the Company; (i) Indebtedness relating to guarantees by any Restricted Subsidiary permitted to be incurred pursuant to Section 9.12(a) hereof; (j) Indebtedness incurred in respect of letters of credit in the ordinary course of business of any Restricted Subsidiary or reimbursement obligation in respect thereof; (k) Non-Recourse Indebtedness; (l) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by any Restricted Subsidiary of any Indebtedness of such Restricted Subsidiary, including any successive refinancings by such Restricted Subsidiary, so long as (i) 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 such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of such Subsidiary incurred in connection with such refinancing and (ii) 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 (m) other Indebtedness incurred by one or more Restricted Subsidiaries that are not Guarantor Subsidiaries in an aggregate principal amount not to exceed $20,000,000 at any time outstanding. "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 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 2.9 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. 26 35 "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. "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. "Public Market" exists at any time with respect to the Qualified Capital Stock of the Company if such Qualified Capital Stock of the Company is then (a) registered with the Commission pursuant to Section 12(b) or 12(g) of the Exchange Act and (b) traded either on a national securities exchange or on the NASDAQ Stock Market. "Qualified Capital Stock" of any Person means any and all Capital Stock of such Person other than Redeemable Capital Stock. "Qualified Redemption Transaction" means a call for redemption of any Capital Stock or Subordinated Indebtedness (including any Subordinated Indebtedness accounted for as a minority interest of the Company that is held by a Subsidiary that is a business trust or similar entity formed for the primary purpose of issuing preferred securities the proceeds of which are loaned to the Company or a Restricted Subsidiary) that by its terms is convertible into Common Stock of the Company if on the date of notice of such call for redemption (a) a Public Market exists in the shares of Common Stock of the Company and (b) the average closing price on the Public Market for shares of Common Stock of the Company for the twenty trading days immediately preceding the date of such notice exceeds 120% of the conversion price per share (determined by reference to the redemption price) of Common Stock of the Company issuable upon conversion of the Capital Stock or Subordinated Indebtedness called for redemption. "Redeemable Capital Stock" means any class or series of 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 91 days after the final Stated Maturity of the Securities or is redeemable at the option of the holder thereof at any time prior to 91 days after such final Stated Maturity, or is convertible into or exchangeable for debt securities at any time prior to 91 days after such final Stated Maturity. "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. 27 36 "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. "Registrable Securities" shall have the meaning assigned to such term in the Registration Rights Agreement. "Registration Rights Agreement" means that certain Registration Rights Agreement dated as of January 15, 1999, among the Company and the Initial Purchasers. "Regular Record Date" for the interest payable on any Interest Payment Date means the February 1 or August 1 (whether or not a Business Day, as the case may be), next preceding each such Interest Payment Date. "Reportable Event" shall mean any event described in Section 4043 (excluding subsections (b)(7) and (b)(9)) of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for thirty-day notice to the PBGC under such regulations). "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. "S&P" means Standard and Poor's Rating Services, a division of The McGraw-Hill Companies, Inc., and its successors. "Sale/Leaseback Transaction" means, with respect to any Person, any direct or indirect arrangement pursuant to which properties or assets are sold or transferred by such Person or a Subsidiary of such Person and are thereafter leased back from the purchaser or transferee thereof by such Person or one of its Subsidiaries; provided, however, Sale/Leaseback Transactions shall not include transactions whereby property or assets are sold or transferred by the Company or any of its Restricted Subsidiaries to any Affiliate of the Company or pursuant to any Permitted Investment constituting a joint ownership arrangement, which property or assets are leased back, directly or indirectly, to the Company, any Affiliate of the Company or to the constituent parties to any such joint venture arrangement. "Securities" means the Series A Securities and the Series B Securities treated as a single class of Securities. For purposes of this Indenture, the term "Securities" shall, except where the context otherwise requires, include the Subsidiary Guarantees, if any. 28 37 "Securities Act" means the Securities of 1933, as amended, or any successor statute. "Security Custodian" means the Trustee, as custodian with respect to the Global Securities, or any successor entity thereto. "Senior Indebtedness" means the principal of, premium, if any, and interest on any Indebtedness of the Company (including, in the case of the Credit Agreement, interest accruing after the filing of a petition by or against the Company under any bankruptcy law, in accordance with and at the rate, including any default rate, specified with respect to such indebtedness, whether or not a claim for such interest is allowed as a claim after such filing in any proceeding under such bankruptcy law), 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 shall not be senior in right of payment to the Securities. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a) Indebtedness evidenced by the Securities, (b) Indebtedness that is expressly subordinate or junior in right of payment to any Senior Indebtedness of the Company, (c) Indebtedness which, when incurred and without respect to any election under Section 1111(b) of Title 11 United States Code, is by its terms without recourse to the Company or which is Non-Recourse Indebtedness, (d) any repurchase, redemption or other obligation in respect of Redeemable Capital Stock of the Company, (e) to the extent it might constitute Indebtedness, any liability for federal, state, local or other taxes owed or owing by the Company, (f) Indebtedness of the Company to a Subsidiary of the Company or any other Affiliate of the Company or any of such Affiliate's Subsidiaries, and (g) that portion of any Indebtedness of the Company which at the time of issuance is issued in violation of this Indenture (but, as to any such Indebtedness, no such violation shall be deemed to exist for purposes of this clause (g) if the holder(s) of such Indebtedness or their representative or the Company shall have furnished to the Trustee an Opinion of Counsel addressed to the Trustee (which counsel may, as to matters of fact, rely upon a certificate of the Company) to the effect that the incurrence of such Indebtedness does not violate the provisions of such Indenture); provided, that the foregoing exclusions shall not affect the priorities of any Indebtedness arising solely by operation of law in any case or proceeding or similar event described in clause (a), (b) or (c) of the definition of "Insolvency or Liquidation Proceeding." "Senior Representative" means the Bank Co-agents or any other representatives designated in writing to the Trustee of the holders of any class or issue of Designated Senior Indebtedness; provided, in the absence of a representative of the type described above, any holder or holders of a majority of the principal amount outstanding of any class or issue of Designated Senior Indebtedness may collectively act as Senior Representative for such class or issue, subject to the provisions of any agreements relating to such Designated Senior Indebtedness. "Series A Securities" means the Company's 10 3/8% Series A Senior Notes due 2009 to be issued pursuant to this Indenture. 29 38 "Series B Securities" means the Company's 10 3/8% Series B Senior Notes due 2009 to be issued pursuant to this Indenture in the Exchange Offer. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 2.10 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 (a) the Company's 5 1/2% Convertible Subordinated Notes due 2006 issued under the Indenture dated as of June 15, 1996 between the Company and Fleet National Bank (the Trustee has succeeded to the interest of Fleet National Bank under such Indenture), as Trustee, and (b) other Indebtedness of the Company which, by its terms, is subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person, a corporation, partnership, limited liability company, association or other business entity 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. For purposes of the foregoing definition, an arrangement by which a Person who owns an interest in an oil and gas property is subject to a joint operating agreement, processing agreement, net profits interest, overriding royalty interest, farmout agreement, development agreement, area of mutual interest agreement, joint bidding agreement, unitization agreement, pooling arrangement or other similar agreement or arrangement shall not, in and of itself, be considered a Subsidiary. "Subsidiary Guarantee" means any guarantee of the Securities by any Restricted Subsidiary in accordance with Section 9.12 hereof. "Subsidiary Guarantor" means each of the Company's Restricted Subsidiaries that becomes a guarantor of the Securities in compliance with the provisions of Section 9.12 hereof or otherwise executes a supplemental indenture in which such Subsidiary agrees to be bound by the terms of this Indenture and to guarantee on a senior subordinated basis the payment of the Securities pursuant to the provisions of Article XII hereof. "Transfer Restricted Securities" means the Registrable Securities under the Registration Rights Agreement. 30 39 "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 was executed, except as provided in Section 8.5 hereof. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture, and its successors and assigns, 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 (a) any Subsidiary of the Company that at the time of determination will be designated an Unrestricted Subsidiary by the Board of Directors as provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company as an Unrestricted Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness of such Subsidiary, (ii) 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, (iii) 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 9.10 hereof (other than Investments of the type described in clause (d) of the definition of "Permitted Investments"), and (iv) 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 9.14 hereof); provided, however, that with respect to clause (i), the Company or a Restricted Subsidiary may be liable for Indebtedness of an Unrestricted Subsidiary if (A) such liability constituted a Permitted Investment or a Restricted Payment permitted by Section 9.10 hereof, in each case at the time of incurrence, or (B) the 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 shall be evidenced to the Trustee by filing a Board Resolution of the Company with the Trustee giving effect to such designation. The Board of Directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation, (1) no Default or Event of Default shall have occurred and be continuing, (2) the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 9.11 hereof and (3) 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 9.14 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." 31 40 "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 vote in the election of the board of directors, managers or trustees of any Person (irrespective of whether or not, at the time, Capital 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 (a) all of the Capital Stock in such Restricted Subsidiary, other than any directors qualifying shares mandated by applicable law, is owned directly or indirectly by the Company or (b) 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 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"...................................................... 2.8(b) "Change of Control Notice"........................................... 9.15(c) "Change of Control Offer"............................................ 9.15(a) "Change of Control Purchase Date".................................... 9.15(c) "Change of Control Purchase Price"................................... 9.15(a) "Defaulted Interest"................................................. 2.10 "Excess Proceeds".................................................... 9.16(b) "Funding Guarantor".................................................. 12.5 "Net Proceeds Deficiency"............................................ 9.16(c) "Net Proceeds Offer"................................................. 9.16(c) "Net Proceeds Payment Date".......................................... 9.16(c) "Offered Price"...................................................... 9.16(c) "Pari Passu Indebtedness Amount"..................................... 9.16(c) "Pari Passu Offer"................................................... 9.16(c) "Payment Amount"..................................................... 9.16(b) "Payment Blockage Notice"............................................ 13.3(b)
32 41 "Payment Blockage Period" ........................................... 13.3(b) "Purchase Notice".................................................... 9.16(c) "Restricted Payment"................................................. 9.10(a) "Security Register".................................................. 2.6 "Security Registrar"................................................. 2.6 "Subsidiary Guarantor Non-payment Default"........................... 12.9(b) "Subsidiary Guarantor Payment Default"............................... 12.9(a) "Subsidiary Guarantor Payment Notice"................................ 12.9(b) "Surviving Entity"................................................... 7.1(a) "Trigger Date"....................................................... 9.16(c) "U.S. Government Obligations"........................................ 11.4(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. 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; 33 42 (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) unless the context otherwise requires, the word "or" is not exclusive; (e) the word "including" (and, with correlative meaning, the word "include") means including, without limiting the generality of any description preceding such word; (f) provisions apply to successive events and transactions; and (g) references to agreements and other instruments include subsequent amendments and waivers but only to the extent not prohibited by this Indenture. ARTICLE II THE SECURITIES 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 and the Trustees certificate of authentication) bought and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent Global Securities substantially in the form set forth in Exhibit A attached hereto deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. Subject to the limitation set forth in Section 2.2, the principal amount 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 Depositary, as hereinafter provided. Securities (including the notations thereon relating to any Subsidiary Guarantees and the Trustees certificate of authentication) offered and sold other than as described in the preceding paragraph shall be issued in the form of Definitive Securities in registered form in substantially the form set forth in Exhibit A. The Securities, the notations thereon relating to any Subsidiary Guarantees and the Trustee's certificate of authentication shall be in substantially the forms set forth in Exhibit A attached hereto, with such appropriate insertions, omissions, substitutions and other variations 34 43 as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or 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. 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 Sections 9.15 and 9.16 hereof. SECTION 2.2 Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $150,000,000 except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 2.5, 2.7, 2.9, 8.6, 9.15, 9.16 or 10.8 hereof. The Series A Securities shall be known and designated as the "10 3/8% Series A Senior Subordinated Notes due 2009" of the Company, and the Series B Securities shall be known and designated as the "10 3/8% Series B Senior Subordinated Notes due 2009" of the Company. Their Stated Maturity shall be February 15, 2009, and they shall bear interest at the rate of 10 3/8% per annum from January 15, 1999, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable semiannually on February 15 and August 15 in each year, commencing August 15, 1999, and at said Stated Maturity, until the principal thereof is paid or duly provided for. The Series A Securities and the Series B Securities shall be considered collectively to be single class for all purposes of this Indenture, including waivers, amendments, redemptions and offers to purchase. 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, interest may be paid, at the option of the Company, by check mailed to the Persons entitled thereto at their respective addresses as shown on the Security Register or, upon application to the Trustee by any Holder of an aggregate principal amount of Securities in excess of $500,000 not later than the applicable Regular Record Date, by transfer to an account (such transfer to be made only to a Holder of an aggregate principal amount of Securities in excess of $500,000) maintained by such Holder with a bank in the City of New York. No transfer will be made to any such account unless the Trustee has received written wire instructions not less than 15 days prior to the relevant payment date. The Securities shall be redeemable as provided in Article X hereof. 35 44 The Securities shall be subject to defeasance at the option of the Company as provided in Article XI hereof. Initially, the Securities shall not be guaranteed by any Subsidiary of the Company. In the circumstances set forth in Section 9.12(a) hereof, however, the Securities shall be guaranteed in the future by the Subsidiary Guarantors as provided in Article XII hereof. The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article XIII hereof. SECTION 2.3 Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 2.4 Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman, its President or one of its Vice Presidents, under its corporate seal reproduced thereon or affixed thereto and attested by its Secretary or one of its Assistant Secretaries. 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 and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company and, if guaranteed by a Subsidiary Guarantor, having the notation of Subsidiary Guarantees executed by the Subsidiary Guarantors to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities with the notation of Subsidiary Guarantees, if any, thereon as provided in this Indenture. 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 36 45 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 VII hereof, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its Properties substantially as an entirety 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 conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article VII hereof, any of the Securities authenticated or delivered prior to such 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 2.5 Temporary Securities. Pending the preparation of Definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the Definitive Securities in lieu of which they are issued and having the notations of Subsidiary Guarantees, if any, thereon and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities and notations of Subsidiary Guarantees may determine, as conclusively evidenced by their execution of such Securities and notations of Subsidiary Guarantees. 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 9.2 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 authorized denominations having notations of Subsidiary Guarantees, if any, thereon. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as Definitive Securities. 37 46 SECTION 2.6 Security Register and Depositary. The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency designated pursuant to Section 9.2 hereof being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The 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. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Global Security. SECTION 2.7 Transfer and Exchange. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented to the Securities Registrar with the request: (x) to register the transfer of the Definitive Securities, or (y) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Security Registrar shall register the transfer or make the exchange as requested if its requirement for such transactions are met; provided, however, that the Definitive Securities presented or surrendered for registration of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Security Registrar duly executed by the Holder thereof or by his attorney, duly authorized in writing; and (ii) in the case of Transfer Restricted Securities that are Definitive Securities, shall be accompanied by the following additional information and documents, as applicable, upon which the Security Registrar may conclusively rely: (A) if such Transfer Restricted Securities are 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 C hereto); or 38 47 (B) if such Transfer Restricted Securities are being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act (and based upon an opinion of counsel if the Company or the Trustee so requests) or (3) pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit C hereto); or (C) if such Transfer Restricted Securities are being transferred to an institutional "accredited investor," within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a private placement exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company or the Trustee so requests), a certification to that effect from such Holder (in substantially the form of Exhibit C hereto) and a certification from the applicable transferee (in substantially the form of Exhibit D hereto); or (D) if such Transfer Restricted Securities are being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company or the Trustee so requests), a certification to that effect from such Holder (in substantially the form of Exhibit C hereto). (b) Restriction on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security. (c) Transfer and Exchange of Global Securities. The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (d) Transfer of a Beneficial Interest in a Global Security for a Definitive Security. (i) Any Person having a beneficial interest in a Global Security may upon request exchange such beneficial interest for a Definitive Security only under the circumstances contemplated by subsection (f) of this Section 2.7. 39 48 (e) Restrictions on Transfer and Exchange of Global Securities. Notwithstanding any other provisions of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.7), a Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Definitive Securities in Absence of Depositary. If at any time: (i) the Depositary for the Securities notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Securities and a successor Depositary for the Global Securities is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Securities under this Indenture, then the Company will execute, and the Trustee will authenticate and deliver Definitive Securities, in an aggregate principal amount equal to the principal amount of the Global Securities, in exchange for such Global Securities and registered in such names as the Depositary shall instruct the Trustee or the Company in writing. (g) Legends. (i) Except as permitted by the following paragraphs (ii) and (iii) immediately below, each Security certificate evidencing the Global Securities and the Definitive Securities (and all Securities issued in exchange therefor or substitution thereof) shall bear a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DAY ON WHICH POGO PRODUCING COMPANY (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE 40 49 COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT IS ACQUIRING SUCH SECURITY 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) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT ("INSTITUTIONAL ACCREDITED INVESTOR") THAT IS ACQUIRING SUCH SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF ANOTHER INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. Each Security certificate evidencing the Global Securities also shall bear the paragraph referred to in the first footnote on page A-2 of the form of Security attached hereto as Exhibit A. (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Security) pursuant to Rule 144 under the Securities Act or an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and (B) in the case of any Transfer Restricted Security represented by a Global Security, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above if all other interests in such Global Security have been or are concurrently being sold or transferred pursuant to Rule 144 under 41 50 the Securities Act or pursuant to an effective registration statement under the Securities Act, but such Transfer Restricted Security shall continue to be subject to the provisions of Section 2.7(c) hereof. (iii) Notwithstanding the foregoing, upon consummation of the Exchange Offer, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.4 hereof, the Trustee shall authenticate Series B Securities in exchange for Series A Securities accepted for exchange in the Exchange Offer, which Series B Securities shall not bear the legend set forth in (i) above, and the Registrar shall rescind any restriction on the transfer of such Securities, in each case unless the Holder of such Series A Securities is either (A) a broker-dealer, (B) a Person participating in the distribution of the Series A Securities or (C) a Person who is an affiliate (as defined in Rule 144 under the Securities Act) of the Company. The Company shall identify to the Trustee such Holders of the Securities in a written certification signed by an Officer of the Company and, absent certification from the Company to such effect, the Trustee shall assume that there are no such Holders. (h) Cancellation and/or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for Definitive Securities, redeemed, repurchased or canceled, such Global Security shall be returned to or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by such Global Security shall be reduced and an endorsement shall be made on such Global Security, by the Trustee or the Security Custodian, at the direction of the Trustee to reflect such reduction. (i) General Provisions with respect to Transfer and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Definitive Securities and Global Securities at the Security Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange or redemption of Securities (except as otherwise permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to the last paragraph of Section 2.4 or Sections 2.5, 8.6 or 10.8 hereof). (iii) The Trustee shall authenticate Definitive Securities and Global Securities in accordance with the provisions of Section 2.4 hereof. 42 51 (iv) Notwithstanding any other provisions of this Indenture to the contrary, the Company shall not be required to register the transfer or exchange of a Security between a Regular Record Date and the next succeeding Interest Payment Date. (v) Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, Securities by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Securities. Neither the Company nor the Trustee shall be liable for any delay by the related Global Security Holder or the Depositary in identifying the beneficial owners of the related Securities and each such Person may conclusively rely on, and shall be protected in relying on, instructions from such Global Security Holder or the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Securities to be issued). (vi) Neither the Trustee, the Security Registrar nor the Company shall be required (A) to issue, register the transfer of or exchange any 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 10.4 hereof and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. (vii) All Securities and the Subsidiaries Guarantees, if any, noted thereon 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. (viii) Each Holder of a Security agrees to indemnify the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Security in violation of any provision of this Indenture and/or applicable federal or state securities law. (ix) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 43 52 SECTION 2.8 Additional Provisions for Global Securities. (a) The Global Security initially shall be registered in the name of the Depositary for such Global Security or the nominee of such Depositary and be delivered to the Trustee as custodian for such Depositary. (b) Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (c) The registered 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 2.9 Mutilated, Destroyed, Lost and Stolen Securities. If (a) any mutilated Security is surrendered to the Trustee or (b) 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 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 has been acquired by a bona fide purchaser, the Company shall execute, any Subsidiary Guarantors shall execute the notations 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 notations of Subsidiary Guarantees, if any, thereon 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. 44 53 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 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 2.10 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 9.2 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 proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited 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 14.5 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 45 54 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 2.11 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 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 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 or the Trustee shall be affected by notice to the contrary. SECTION 2.12 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 permitted by this Indenture. All canceled Securities held by the Trustee shall be delivered to the Company. SECTION 2.13 Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 46 55 SECTION 2.14 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE III SATISFACTION AND DISCHARGE SECTION 3.1 Satisfaction and Discharge of Indenture. This Indenture shall upon a 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 5.6 hereof, execute proper instruments acknowledging satisfaction and discharge of this Indenture when (a) either (i) all Securities theretofore authenticated and delivered (other than (A) Securities which have been mutilated, destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9 hereof and (B) Securities for whose payment money or United States governmental obligations of the type described in clause (a) of the definition of Cash Equivalents has 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 9.3 hereof) have been delivered to the Trustee for cancellation, or (ii) all such Securities not theretofore delivered to the Trustee for cancellation (A) have become due and payable, or (B) will become due and payable at their Stated Maturity within one year, or 47 56 (C) 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 (ii)(A), (ii)(B) or (ii)(C) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose 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 payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each satisfactory in form to the Trustee, 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 5.6 hereof and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (a)(i) of this Section, the obligations of the Trustee under Section 3.2 hereof and the last paragraph of Section 9.3 hereof shall survive. SECTION 3.2 Application of Trust Money. Subject to the provisions of the last paragraph of Section 9.3 hereof, all money deposited with the Trustee pursuant to Section 3.1 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 principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. 48 57 ARTICLE IV REMEDIES SECTION 4.1 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 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, whether such payment is due at 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 VII hereof, the failure to make or consummate a Change of Control Offer in accordance with Section 9.15 hereof or the failure to make or consummate a Net Proceeds Offer in accordance with the provisions of Section 9.16 hereof; or (d) the Company or any Subsidiary Guarantor shall fail to perform or observe any other term, covenant or agreement contained in the Securities, any Subsidiary Guarantee or this Indenture (other than a default specified in (a), (b) or (c) above) for a period of 45 days after written notice of such failure requiring the Company to remedy the same shall have been given (i) to the Company by the Trustee or (ii) 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 Non-Recourse Indebtedness) or any Restricted Subsidiary for money borrowed when due, or any other default causing acceleration of any Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Restricted Subsidiary for money borrowed; provided, that the aggregate principal amount of such Indebtedness shall exceed $12,000,000; 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 this Indenture and any consequential acceleration of the Securities shall be automatically rescinded, so long as such rescission does not conflict with any judgment or decree; or (f) the commencement of proceedings, or the taking of any enforcement action (including by way of set-off), by any holder of at least $12,000,000 in aggregate principal amount of Indebtedness (other than Non-Recourse Indebtedness) of the Company or any Restricted 49 58 Subsidiary, after a default under such Indebtedness, to retain in satisfaction of such Indebtedness or to collect or seize, dispose of or apply in satisfaction of such Indebtedness, Property of the Company or any Restricted Subsidiary having a Fair Market Value in excess of $12,000,000 individually or in the aggregate; provided, that if any such proceedings or actions are terminated or rescinded, or such Indebtedness is repaid, such Event of Default under this Indenture and any consequential acceleration of the Securities shall be automatically rescinded, so long as (i) such rescission does not conflict with any judgment or decree and (ii) the holder of such Indebtedness shall not have applied any such Property in satisfaction of such Indebtedness; or (g) 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 of any such Subsidiary Guarantee in accordance with this Indenture); or (h) if (i) any material "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code), shall exist with respect to any PBGC Plan or Multiple Employer Plan (unless a waiver or extension is obtained under Section 412(d) or (e) of the Code and Sections 303 and 304 of ERISA), if such accumulated funding deficiency would give rise to a material liability of the Company, (ii) a Reportable Event shall occur with respect to any PBGC Plan or Multiple Employer Plan, which Reportable Event is likely to result in the termination of such PBGC Plan or Multiple Employer Plan for purposes of Title IV of ERISA and to give rise to a material liability of the Company, (iii) proceedings to have a trustee appointed shall commence, or a trustee shall be appointed to terminate or administer a PBGC Plan or Multiple Employer Plan, which proceeding is likely to result in the termination of such PBGC Plan or Multiple Employer Plan and to give rise to a material liability of the Company with respect to such termination, (iv) a notice of intent to terminate a PBGC Plan or Multiple Employer Plan in a distress termination under Section 4041(c) of ERISA is furnished to participants, (v) any Multiemployer Plan is in reorganization or is insolvent and the circumstances are such that such reorganization or insolvency will likely result in a material liability to the Company, (vi) there is a complete or partial withdrawal from a Multiemployer Plan under circumstances that would likely subject the Company to material liability, or (vii) any event or condition described in (i) through (vi) above (determined without regard to whether the event or condition taken alone would or could result in a material liability) shall occur or exist with respect to a PBGC Plan, Multiple Employer Plan or Multiemployer Plan which in combination with one or more of any events described in (i) through (vi) above (determined without regard to whether the event or condition taken alone would or could result in a material liability) that has occurred or exists, would likely subject the Company, any Subsidiary Guarantor or any other Restricted Subsidiary to any material tax, penalty or other liability (for purposes of this paragraph (i) the term "material" and "material liability" shall mean any tax, penalty or liability in excess of $12,000,000); or (i) 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 50 59 an aggregate amount, that is more than $12,000,000 over the coverage under applicable insurance policies and either (i) 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 (ii) 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 (j) the entry of a decree or order by a court having jurisdiction in the premises (i) for relief in respect of the Company or any Material Restricted 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 (ii) adjudging the Company or any Material Restricted Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of the Company or a Material Restricted Subsidiary under the Federal Bankruptcy Code or any other 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 Restricted Subsidiary or of a substantial part of their consolidated assets, or ordering the winding up or liquidation of their 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 (k) the commencement by the Company or any Material Restricted Subsidiary of a voluntary case or proceeding under the Federal Bankruptcy Code or any other 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 the Company or any Material Restricted 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 other 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 Restricted 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 any of the Company or any Material Restricted Subsidiary or of any substantial part of their consolidated assets, or the making by it of an assignment for the benefit of creditors under any such law. SECTION 4.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 4.1(j) or (k) hereof) shall occur and be continuing, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Outstanding Securities, by notice to the Trustee and the Company, may declare all unpaid principal of (premium, if any, on), and accrued and unpaid interest on all of the Securities to be due and payable immediately, upon which declaration all amounts payable in respect of the Securities shall be immediately due and payable. If an Event of Default specified in Section 4.1(j) or (k) occurs and is continuing, then 51 60 the principal of (premium, if any, on), and accrued and unpaid interest on all of the Securities shall ipso facto 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 Outstanding Securities, by written notice to the Company and the Trustee, may rescind 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 (i) all sums paid or advanced by the Trustee under this Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Outstanding Securities, (iii) all unpaid principal of (and premium, if any, on) any Outstanding Securities which has 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 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, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Securities which has become due otherwise than by such declaration of acceleration (without duplication of any amount deposited pursuant to clauses (ii) and (iii) above); (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the nonpayment of principal of (or premium, if any, on) and interest on Securities that has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 4.13 hereof. No such rescission shall affect any subsequent Default or impair any right consequent thereon. 52 61 SECTION 4.3 Collection of Indebtedness and Suits for Enforcement by Trustee. Subject to Article XIII, 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 a 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 moneys 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 any provision of the Securities, this Indenture or the Registration Rights Agreement in aid of the exercise of any power granted therein or herein, or to enforce any other proper remedy. SECTION 4.4 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 or the Property of the Company, any Subsidiary Guarantor or of such other obligor or their creditors, 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, any Subsidiary Guarantor or such other obligor for the payment 53 62 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) to collect and receive any moneys or other Property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or 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 5.6 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 any Subsidiary Guarantees 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 4.5 Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities or any Subsidiary Guarantees 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 4.6 Application of Money Collected. Subject to Sections 12.8, 12.9 and 12.10 and Article XIII, 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: 54 63 FIRST: To the payment of all amounts due the Trustee under Section 5.6 hereof; SECOND: 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: The balance, if any, to the Company. SECTION 4.7 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 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. 55 64 SECTION 4.8 Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article XI hereof) and in such Security of the principal of (and premium, if any, on) and (subject to Section 2.10 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. SECTION 4.9 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, 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 4.10 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 2.9 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 4.11 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. 56 65 SECTION 4.12 Control by Holders. The Holders of not less than a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; 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. SECTION 4.13 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 (premium, if any, on), or interest on any Security; or (b) in respect of a covenant or provision hereof which under Article VIII 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 Default or Event of Default or impair any right consequent thereon. SECTION 4.14 Waiver of Stay, Extension or Usury Laws. The Company covenants, and each Subsidiary Guarantor shall covenant, (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, 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) and/or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives, and each Subsidiary Guarantor shall expressly waive all 57 66 benefit or advantage of any such law, and the Company covenants and each Subsidiary Guarantor shall covenant that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.15 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 4.15 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 4.8 hereof or a suit by Holders of more than 10% in principal amount of the then Outstanding Securities. ARTICLE V THE TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. SECTION 5.1 Notice of Defaults. If a Default or Event of Default occurs and is known to the Trustee, the Trustee shall mail to each Holder notice of the Default or Event of Default within 60 days after the occurrence thereof in the manner and to the extent provided in TIA Section 313(c), provided, however, that, except in the case of a Default or Event of 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 determine that the withholding of such notice is in the interests of the Holders. SECTION 5.2 Certain Rights of Trustee. Subject to the provisions of TIA Sections 315(a) through 315(d): (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or 58 67 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 of its selection, and the 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 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 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 know or otherwise have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact a Default or Event of Default is 59 68 received by a Responsible Officer of the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and 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 5.3 Trustee Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities and the notations of Subsidiary Guarantees thereon, 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 or of 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, and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth herein. The Trustee shall not be accountable for the use or application by the Company of the Securities or the proceeds thereof. Section 5.4 May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, any Subsidiary Guarantor 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, may otherwise deal with the Company and any Subsidiary Guarantor with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. Section 5.5 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 in writing with the Company or any Subsidiary Guarantor. Section 5.6 Compensation and Reimbursement. The Company agrees: (a) to pay to the Trustee from time to time such compensation as shall be agreed in writing from time to time between the Company and the Trustee for all services 60 69 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 negligence or bad faith); and (c) to indemnify the Trustee or any predecessor Trustee for, and to hold it harmless against, any and all loss, liability, damage, claim or expense, including taxes (other than taxes based on the income of the Trustee) incurred without 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 5.6 to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall 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 a Default or an Event of Default specified in paragraphs (j) or (k) of Section 4.1 of this Indenture, such expenses and the compensation for such services are intended to constitute expenses of administration under any Insolvency or Liquidation Proceeding. Section 5.7 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 5.7, 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 61 70 accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 5.8 Conflicting Interests. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act. The indenture of the Company dated as of May 15, 1997 relating to its 8 3/4% Senior Subordinated Notes due 2007 shall be excluded from the operation of paragraph (1) of Section 310(b). Section 5.9 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 5.10 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 5.10 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, at the expense of the Company, 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 principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. If the instrument of acceptance by a successor Trustee required by Section 5.10 shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the Trustee being removed may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee. (d) If at any time (i) 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 (ii) the Trustee shall cease to be eligible under Section 5.7 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 (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 62 71 then, in any such case, (A) the Company, by a Board Resolution, may remove the Trustee, or (B) 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 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. 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 14.5 hereof. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 5.10 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 5.6 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 property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. 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. 63 72 Section 5.11 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 or in this Indenture; 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 5.12 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. ARTICLE VI HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 6.1 Disclosure of Names and Addresses of Holders. 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, the Security Registrar or the Trustee, or any agent of either of them, shall be held accountable by reason of the disclosure of any such 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, 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). 64 73 Section 6.2 Reports By Trustee. Within 60 days after May 15 of each year commencing with May 15, 1999, 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. 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 6.3 Reports by Company. The Company (and any Subsidiary Guarantor, if applicable) shall: (a) file with the Trustee, and provide to each Holder, without cost to such Holder, within 15 days after the Company (and any Subsidiary Guarantor, if applicable) 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 (and any Subsidiary Guarantor, if applicable) may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company (and any Subsidiary Guarantor, if applicable) is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (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 (and any Subsidiary Guarantor, if applicable) with the 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), within 30 days after the filing thereof with Trustee, such summaries of any information, documents and reports required to be filed by the Company (and any Subsidiary Guarantor, if applicable) pursuant to paragraphs (a) and (b) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. Delivery of such reports, 65 74 information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). ARTICLE VII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 7.1 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 or lease or otherwise dispose of the Properties of the Company and its Restricted Subsidiaries substantially as an entirety on a consolidated basis to any Person, and the Company shall not permit any Restricted Subsidiary to enter into any transaction or series of related transactions if such transaction or series of transactions would result in a sale, assignment, conveyance, transfer, lease or other disposition of the Properties of the Company and its Restricted Subsidiaries substantially as an entirety on a consolidated basis to any Person, unless at the time and after giving affect thereto: (a) either (i) if the transaction or series of related transactions 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 or such Restricted Subsidiary is merged or to which the Properties of the Company or such Restricted Subsidiary, as the case may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed of (any such surviving Person or transferee Person being 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 for the due and punctual payment of the principal of (and premium, if any, on) and interest on all the Securities and the performance and observance of every covenant of this Indenture on the part of the Company to be performed or observed, and this Indenture shall remain in full force and effect; (b) immediately before and 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 series of transactions as having been incurred at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; 66 75 (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 series of 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 least equal to the Consolidated Net Worth of the Company immediately before such transaction or series of transactions; (d) except in the case of the consolidation or merger of (i) any Restricted Subsidiary with or into the Company or any Wholly Owned Restricted Subsidiary or (ii) the Company with or into any Person that has no Indebtedness outstanding, immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (on the assumption that the transaction or series of transactions occurred on the first day of the period of four full fiscal quarters ending immediately prior to the consummation of such transaction or series of transactions, with the appropriate adjustments with respect to such transaction or series of 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 (other than Permitted Indebtedness) under Section 9.11 hereof; (e) each Subsidiary Guarantor, unless it is the party to the transactions or series of transactions described above, shall have by supplemental indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations under this Indenture and the Securities; (f) if any of the Properties of the Company or any Restricted Subsidiary would upon such transaction or series of 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 9.14 hereof; and (g) the Company or such Person shall have delivered to the Trustee (i) an Officers' Certificate in form and substance reasonably acceptable to the Trustee, 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, complies with this Indenture and that all conditions precedent herein relating to such transaction or transactions have been satisfied and (ii) an Opinion of Counsel stating that the requirements of Section 7.1(a) hereof have been complied with. Section 7.2 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 substantially as an entirety on a consolidated basis of the Properties of the Company to any Person in accordance with Section 7.1 hereof, the Surviving Entity formed by such consolidation or into which the Company is merged or to which such sale, assignment, conveyance, transfer or other 67 76 disposition (other than by lease) is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such 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 Surviving Entity which shall theretofore become such in the manner described in Section 7.1 hereof), except in the case of a lease, shall be discharged of 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 merger, or the sale, assignment, lease, conveyance, transfer or other disposition substantially as an entirety of the Properties of the Company to any Person otherwise results in a Change of Control. ARTICLE VIII SUPPLEMENTAL INDENTURES Section 8.1 Supplemental Indentures without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, any Subsidiary Guarantors, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, 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 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 5.9 and 5.10 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 qualify, or maintain the qualification of, the Indenture under the TIA or to make any other provisions with respect to matters or questions arising under this Indenture or the Registration Rights Agreement; provided, that such action shall not adversely affect the interests of the Holders; or 68 77 (f) to secure the Securities pursuant to the requirements of Section 9.14 hereof or otherwise; or (g) to add any Person as a Subsidiary Guarantor as provided in Section 9.12(a) hereof or to evidence the succession of another Person to any Subsidiary Guarantor 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 as provided in Section 12.2(b) hereof; or (h) to release a Subsidiary Guarantor from its Subsidiary Guarantee pursuant to Section 9.12(b) hereof; or (i) to provide for uncertificated Securities in addition to or in place of certificated Securities. Section 8.2 Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, any Subsidiary Guarantors, when authorized by a Board Resolution, and the Trustee 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) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment of any Security, or change the coin or currency in which any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or (b) reduce the percentage of aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain Defaults or Events of Default hereunder and their consequences provided for in this Indenture; or (c) modify any of the provisions of this Section or Section 4.13 or 9.22 hereof, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; 69 78 (d) modify Section 9.12 hereof or any provisions of this Indenture relating to any Subsidiary Guarantees in a manner adverse to the Holders thereof; or (e) amend or modify the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control, or to make and consummate a Net Proceeds Offer with respect to any Asset Sale or modify any of the provisions or definitions with respect thereto. 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. Section 8.3 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 8.4 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 8.5 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 8.6 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 70 79 Guarantors, if any, and authenticated and delivered by the Trustee in exchange for Outstanding Securities. Section 8.7 Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 8.2 hereof, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 14.5 hereof, setting forth in general terms the substance of such supplemental indenture. ARTICLE IX COVENANTS Section 9.1 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 on the Securities in accordance with the terms of the Securities, the Registration Rights Agreement and this Indenture. The Company shall pay interest (including post-petition interest in any proceeding under the Federal Bankruptcy Code or any similar state bankruptcy law) on overdue principal, and premium, if any, at the rate borne by the Securities to the extent lawful; and it shall pay interest (including post-petition interest in any proceeding under the Federal Bankruptcy Code or any similar state bankruptcy law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. Section 9.2 Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, the City of New York, 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 office of State Street Bank and Trust Company, N.A., 61 Broadway, 15th Floor, New York, New York 10005 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 aforementioned office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. 71 80 The Company may also from time to time designate one or more other offices or agencies (in or outside of the City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. 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 9.3 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 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 sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Securities, it will, on or before 11:00 A.M., New York City time, on each due date of the principal of (and premium, if any, on), or interest on, any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum 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) 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. 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 72 81 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. 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 two years or such lesser period of time as may be required by applicable escheat laws 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 9.4 Corporate Existence. Except as permitted by Article VII hereof, Section 9.16 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, right or franchise, if the Company shall determine that 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 9.5 Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all 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, could by law become a Lien upon the Property of the Company or any Restricted Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made in accordance with GAAP. 73 82 Section 9.6 Maintenance of Properties. The Company shall 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); provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such Properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Restricted Subsidiary and not disadvantageous in any material respect to the Holders. Notwithstanding the foregoing, nothing contained in this Section 9.6 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 9.7 Insurance. The Company shall at all times keep all of its and its Restricted Subsidiaries' 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 is usually so insured by corporations similarly situated and owning like Properties. The Company 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 owning like Properties, as may be determined by the Company. Section 9.8 Statement by Officers as to Default. (a) The Company shall deliver to the Trustee, within 90 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, in each case ending after the date hereof, an Officers' Certificate stating that a review of the activities of the Company 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 his knowledge the Company is not in Default in the performance or observance of any of the terms, provisions and conditions hereof or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities are prohibited or if such event has occurred, a description of the event. Such Officers' Certificate shall comply with TIA Section 314(a)(4). For purposes of this 74 83 Section 9.8(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) The Company and any Subsidiary Guarantors shall, so long as any of the Securities are outstanding, deliver to the Trustee forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company or any Subsidiary Guarantor proposes to take with respect thereto within 10 days after its becoming aware of the occurrence of such Default or Event of Default. Section 9.9 Reports. The Company and any Subsidiary Guarantors shall file on a timely basis with the Commission, 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(d) of the Exchange Act. The Company (and the Subsidiary Guarantors, if applicable) will also be required (a) to file with the Trustee, and provide to each Holder of Securities, without cost to such Holder, copies of such reports and documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company (and the Subsidiary Guarantors, if applicable) would be required to file such reports and documents if the Company (and the Subsidiary Guarantors, if applicable) were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to furnish at the Company's cost copies of such reports and documents to any Holder of Securities promptly upon written request. During any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act and, for so long as any Transfer Restricted Securities remain outstanding, the Company shall furnish to all Holders and prospective purchasers of the Securities designated by the Holders of Transfer Restricted Securities, promptly upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) of the Securities Act. The Company and each Subsidiary Guarantor also shall comply with the other provisions of TIA Section 314(a). Section 9.10 Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions (unless such action constitutes a Permitted Investment): (i) declare or pay any dividend on, or make any distribution to holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable solely in shares of Qualified Capital Stock of the Company, options, warrants or other rights to purchase Qualified Capital Stock of the Company); 75 84 (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 of the Company) or any options, warrants or other rights to acquire such Capital Stock; provided, however, that the Company may make any payment of the applicable redemption price in connection with a Qualified Redemption Transaction; (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 Pari Passu Indebtedness or Subordinated Indebtedness, except in any case out of a Pari Passu Offer or a Net Proceeds Deficiency pursuant to the provisions of Section 9.16 hereof and except upon a Change of Control or similar event required by the indenture or other agreement or instrument pursuant to which such Pari Passu Indebtedness or Subordinated Indebtedness was issued, provided the Company is then obligated to make a Change of Control Offer in compliance with Section 9.15 hereof; provided, however, that the Company may make any payment of the applicable redemption price in connection with a Qualified Redemption Transaction; (iv) declare or pay any dividend on, or make any distribution to the holders of, any shares of Capital Stock of any Restricted Subsidiary of the Company (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 (other than a Wholly Owned 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); (v) make any Investment; or (vi) in connection with the acquisition of any property or asset by the Company or its Restricted Subsidiaries after the date of this Indenture, which property or asset would secure or be subject to any Production Payment obligations of the Company or its Restricted Subsidiaries, make any investment (of cash, property or other assets) in such property or asset so acquired in addition to the amount of Indebtedness (including Production Payment obligations) incurred by the Company or its Restricted Subsidiaries in connection with such acquisition; (such payments or other actions described in (but not excluded from) clauses (i) through (vi) are collectively referred to as "Restricted Payments"), unless at the time of and after giving effect to the proposed Restricted Payment (with the amount of any such Restricted Payment, if other than cash, being the amount determined by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution), (1) no Default or Event of Default shall have occurred and be continuing, (2) the Company could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) in accordance 76 85 with Section 9.11 hereof and (3) the aggregate amount of all Restricted Payments declared or made after the date of this Indenture shall not exceed the sum (without duplication) of the following: (I) 50% of the aggregate Consolidated Net Income of the Company accrued on a cumulative basis during the period beginning on the first day of the first month after the date of this Indenture 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 cumulative Consolidated Net Income shall be a loss, minus 100% of such loss), plus (II) the aggregate net cash proceeds received after the date of this Indenture by the Company as capital contributions to the Company (other than from any Restricted Subsidiary), plus (III) the aggregate net cash proceeds received after the date of this Indenture by the Company from the issuance or sale (other than to any of its Restricted Subsidiaries) of shares of Qualified Capital Stock of the Company or any options, warrants or rights to purchase such shares of Qualified Capital Stock of the Company, plus (IV) the aggregate net cash proceeds received after the date of this Indenture by the Company (other than from any of its Restricted Subsidiaries) upon the exercise of any options, warrants or rights to purchase shares of Qualified Capital Stock of the Company, plus (V) the aggregate net cash proceeds received after the date of this Indenture 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 to the extent such debt securities were originally sold for cash, together with the aggregate cash received by the Company at the time of such conversion or exchange, plus (VI) to the extent not otherwise included in the Company's Consolidated Net Income, the net reduction in Investments in Affiliates and Unrestricted Subsidiaries resulting from the payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Company or a Restricted Subsidiary after the date of this Indenture from any Affiliate or Unrestricted Subsidiary or from the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as provided in the definition of "Investment"), not to exceed in the case of any Affiliate or Unrestricted Subsidiary the total amount of Investments (other than 77 86 Permitted Investments) in such Affiliate or Unrestricted Subsidiary made by the Company and its Restricted Subsidiaries in such Affiliate or Unrestricted Subsidiary after the date of this Indenture, plus (VII) $15,000,000. (b) Notwithstanding paragraph (a) above, the Company and its Restricted Subsidiaries may take the following actions so long as (in the case of clauses (ii), (iii) and (iv) below) no Default or Event of Default shall have occurred and be continuing: (i) the payment of any dividend 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 shares of Qualified Capital Stock of the Company; (iii) the purchase, 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 shares of Qualified Capital Stock of the Company; (iv) the purchase, redemption, repayment, defeasance or other acquisition or retirement for value of Subordinated Indebtedness (other than Redeemable Capital Stock) 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 of the Company 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 Subordinated 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 Subordinated Indebtedness refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing, plus the amount of fees and expenses of the Company incurred in connection with such refinancing, (B) such new Subordinated Indebtedness is subordinated to the Securities at least to the same 78 87 extent as such Subordinated Indebtedness so purchased, redeemed, repaid, defeased, acquired or retired, (C) such new Subordinated Indebtedness has an Average Life to Stated Maturity that is longer than the Average Life to Stated Maturity of the Securities and such new Subordinated 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; and (v) repurchases, acquisitions or retirements of shares of Qualified Capital Stock of the Company deemed to occur upon the exercise of stock options or similar rights issued under employee benefit plans of the Company if such shares represent all or a portion of the exercise price or are surrendered in connection with satisfying any Federal income tax obligation. The actions described in clauses (i), (ii) and (iii) 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 (3) 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 (3) of paragraph (a) when declared, but not also when subsequently paid pursuant to such clause (i)), and the actions described in clauses (iv) and (v) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this paragraph and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (3) of paragraph (a). (c) In computing Consolidated Net Income of the Company under paragraph (a) above, (i) 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 (ii) 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 9.11 Limitation on Indebtedness. The Company shall not, and shall not permit any Restricted Subsidiary to, create, incur, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of (collectively "incur") any Indebtedness (including any Acquired Indebtedness), other than Permitted Indebtedness and Permitted Subsidiary Indebtedness, as the case may be; provided, 79 88 however, that the Company and its Restricted Subsidiaries that are Subsidiary Guarantors may incur additional Indebtedness if (i) the Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters immediately preceding the incurrence of such Indebtedness (and for which financial statements are available), taken as one period (at the time of such incurrence, after giving pro forma effect to: (A) the incurrence of such Indebtedness and (if applicable) the application of the net proceeds therefrom as if such Indebtedness had been incurred and the application of such proceeds had occurred at the beginning of such four-quarter period; (B) the incurrence, repayment or retirement of any other Indebtedness (including Permitted Indebtedness and Permitted Subsidiary Indebtedness) by the Company or its Restricted Subsidiaries since the first day of such four-quarter period (including any other Indebtedness to be incurred concurrent with the incurrence of such Indebtedness) as if such Indebtedness had been incurred, repaid or retired at the beginning of such four-quarter period; and (C) notwithstanding clause (d) of the definition of Consolidated Net Income, the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any Person acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, as if such acquisition or disposition had occurred at the beginning of such four-quarter period), would have been equal to at least 2.5 to 1.0 and (ii) no Default or Event of Default would occur or be continuing. Section 9.12 Limitation on Non-Guarantor Restricted Subsidiaries. (a) The Company shall not permit any Restricted Subsidiary that is not a Subsidiary Guarantor to guarantee the payment of any Indebtedness of the Company unless (i)(A) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture satisfactory in form to the Trustee providing for a Subsidiary Guarantee of the Securities by such Restricted Subsidiary which Subsidiary Guarantee will be subordinated to Guarantor Senior Indebtedness (but no other Indebtedness) to the same extent that the Securities are subordinated to Senior Indebtedness and (B), with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee shall be subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to the same extent as such Subordinated Indebtedness is subordinated to the Securities; (ii) such Restricted Subsidiary waives, and agrees not in any manner whatsoever to claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee until such time as the obligations guaranteed thereby are paid in full; and (iii) such Restricted Subsidiary shall deliver to the Trustee an Opinion of Counsel to the effect that such Subsidiary Guarantee has been duly executed and authorized and constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof (A) may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers and fraudulent conveyances), (B) is subject to general principles of equity and (C) any implied covenant of good faith or fair dealing. 80 89 (b) Notwithstanding the foregoing and the other provisions of this Indenture, each Subsidiary Guarantee shall provide by its terms that it shall be automatically and unconditionally released and discharged upon (i)(A) any sale, exchange or transfer of all the Capital Stock in the applicable Subsidiary Guarantor owned by the Company and any Restricted Subsidiary or (B) any sale, assignment, conveyance, transfer, lease or other disposition of the properties and assets of such Subsidiary Guarantor substantially as an entirety, in each case, in a single transaction or series of related transactions to any Person that is not a Restricted Subsidiary (provided, that such transaction or series of transactions is not prohibited by the Indenture), (ii) the merger or consolidation of such Subsidiary Guarantor with or into the Company or a Restricted Subsidiary (provided, that, in the case of a merger into or consolidation with a Restricted Subsidiary that is not then a Subsidiary Guarantor, the surviving Restricted Subsidiary assumes the Subsidiary Guarantee and such transaction or series of transactions is not prohibited by this Indenture) or (iii) the release or discharge of all guarantees by such Subsidiary Guarantor of Indebtedness other than the Note Obligations, except a discharge or release by or as a result of the payment of such Indebtedness by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee. Section 9.13 Limitation on Issuances and Sales of Restricted Subsidiary Capital Stock. The Company (a) shall not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Company or a Wholly Owned Restricted Subsidiary) and (b) shall not permit any Person (other than the Company and/or one or more Wholly Owned Restricted Subsidiaries) to own any Capital Stock of any Restricted Subsidiary; provided, however, that this covenant shall not prohibit (i) the issuance and sale of all, but not less than all, of the issued and outstanding Capital Stock of any Restricted Subsidiary owned by the Company or any of its Restricted Subsidiaries in compliance with the other provisions of this Indenture, (ii) the ownership by directors of directors' qualifying shares, (iii) the ownership by any Person of Capital Stock of a Restricted Subsidiary that was owned by a Person at the time such Restricted Subsidiary became a Restricted Subsidiary or acquired by a Person in connection with the formation of the Restricted Subsidiary (including, in each case, any Capital Stock issued as a result of a stock split, a dividend of shares of Capital Stock to holders of such Capital Stock, a recapitalization affecting such Capital Stock or similar event) and (iv) the ownership by any Person of Capital Stock of any Foreign Subsidiary so long as none of the Capital Stock of that Subsidiary has been issued in a public offering. Section 9.14 Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm or suffer to exist or become effective any Lien of any kind, except for Permitted Liens, on or with respect to any of its Property (including any intercompany notes), whether owned at the date of this Indenture or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (a) in the case of any Lien securing Subordinated Indebtedness, the Securities are 81 90 secured by a Lien on such Property or proceeds that is senior in priority to such Lien and (b) in the case of any other Lien, the Securities are directly secured equally and ratably with the obligation or liability secured by such Lien. Section 9.15 Change of Control. (a) Upon the occurrence of a Change of Control, the Company shall be obligated to make an offer to purchase (a "Change of Control Offer") all of the then outstanding Securities, in whole or in part, from the Holders of such Securities in integral multiples of $1,000, at a purchase price (the "Change of Control Purchase Price") equal to 101% of the aggregate principal amount of such Securities, plus accrued and unpaid interest, if any, to the Change of Control Purchase Date (as defined below), in accordance with the procedures set forth in paragraphs (b), (c) and (d) of this Section. The Company shall, subject to the provisions described below, be required to purchase all Securities properly tendered into the Change of Control Offer and not withdrawn. 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) The Change of Control Offer is required to remain open for at least 20 Business Days and until the close of business on the Change of Control Purchase Date (as defined below). (c) Not later than the 30th day following any Change of Control, the Company shall give to the Trustee in the manner provided in Section 14.4 and each Holder of the Securities in the manner provided in Section 14.5, a notice (the "Change of Control Notice") stating: (i) that a Change in Control has occurred and that such Holder has the right to require the Company to repurchase such Holder's Securities, or portion thereof, at the Change of Control Purchase Price; (ii) any information regarding such Change of Control required to be furnished pursuant to Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder; (iii) a purchase date (the "Change of Control Purchase Date") which shall be on a Business Day and no earlier than 30 days nor later than 75 days from the date the Change of Control occurred; (iv) that any Security, or portion thereof, not tendered or accepted for payment will continue to accrue interest; 82 91 (v) that unless the Company defaults in depositing money with the Paying Agent in accordance with clause (e) of this Section 9.15, or payment is otherwise prevented, any Security, or portion thereof, accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; and (vi) the instructions a Holder must follow in order to have its Securities repurchased in accordance with paragraph (e) of this Section. (d) Holders electing to have Securities purchased will be required to surrender such Securities to the Company at the address specified in the Change of Control Notice on or prior to the Change of Control Purchase Date. Holders will be entitled to withdraw their election if the Company receives, not later than one Business Day prior to the Change of Control Purchase Date, a facsimile transmission or letter setting forth the name of the Holder, the certificate number(s) and 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 whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (e) On the Change of Control Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to a Change of Control Offer, (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Securities or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Securities so accepted. The Paying Agent shall promptly mail or deliver to Holders of the Securities so accepted payment in an amount equal to the purchase price, and the Company shall execute and the Trustee will promptly 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 Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 9.15, the Trustee will act as the Paying Agent. Section 9.16 Limitation on 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 and (ii) at least 75% 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 and/or the assumption by the purchaser of liabilities of the Company (other than liabilities of the Company that are by their 83 92 terms subordinated to the Securities) or any Restricted Subsidiary as a result of which the Company and its remaining Restricted Subsidiaries are no longer liable. (b) If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may either (i) apply the Net Cash Proceeds thereof to reduce Senior Indebtedness, to reduce Guarantor Senior Indebtedness or to reduce Indebtedness of any Restricted Subsidiary incurred pursuant to clause (m) of the definition of Permitted Subsidiary Indebtedness, provided, if any such Senior Indebtedness, Guarantor Senior Indebtedness or Permitted Subsidiary Indebtedness has been incurred under any revolving credit facility, that the related commitment to lend or the amount available to be reborrowed under such facility is also reduced, or (ii) invest all or any part of the Net Cash Proceeds thereof, within 365 days after such Asset Sale, in Properties which replace the Properties that were the subject of the Asset Sale or in Properties that will be used in the business of the Company or its Restricted Subsidiaries, as the case may be ("Replacement Assets"). The amount of such Net Cash Proceeds not applied or invested as provided in this paragraph constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds equals or exceeds $15,000,000 (the "Trigger Date") the Company shall make an offer to purchase, from all Holders of the Securities and any then outstanding Pari Passu Indebtedness required to be repurchased or repaid on a permanent basis in connection with an Asset Sale, an aggregate principal amount of Securities and any then outstanding Pari Passu Indebtedness equal to such Excess Proceeds as follows: (i) (A) No later than the 30th day following the Trigger Date, the Company shall give to the Trustee in the manner provided in Section 14.4 hereof and each Holder of the Securities in the manner provided in Section 14.5 hereof, 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 $1,000) 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 such Pari Passu Indebtedness, if any (subject to proration in the event such amount is less than the aggregate Offered Price (as defined herein) of all Securities tendered), and (B) to the extent required by such 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 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. (ii) The offer price for the Securities shall be payable in cash in an amount equal to 100% of the 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 84 93 Offer is consummated (the "Offered Price"), in accordance with paragraph (e) 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 for general corporate purposes, subject to the limitations of Section 9.10 hereof. (iii) 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. Upon completion of such Net Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be reset to zero. (iv) 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 75 days from the Trigger Date. The Purchase Notice shall also state (A) 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 (iii), (B) 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, (C) that any Security, or portion thereof, not tendered or accepted for payment will continue to accrue interest, (D) that, unless the Company defaults in depositing money with the Paying Agent in accordance with clause (e) of this Section 9.16, or 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 (E) the instructions a Holder must follow in order to have its Securities repurchased in accordance with paragraph (e) of this Section. (d) Holders electing to have Securities purchased will be required to surrender such Securities to the Company at the address specified in the Purchase Notice at least one Business Day prior to the Net Proceeds Payment Date. Holders will be entitled to withdraw their election if the Company receives, not later than one Business Day prior to the Net Proceeds Payment Date, a facsimile transmission or letter setting forth the name of the Holder, the certificate number(s) and 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 whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (e) On the Net Proceeds Payment Date, the Company shall (i) accept for payment Securities or portions thereof 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 85 94 tendered, (ii) deposit with the Paying Agent money 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 mail or deliver to Holders of the Securities so accepted payment in an amount equal to the purchase price, and the Company shall execute and the Trustee will promptly 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 9.16, the Trustee will act as the Paying Agent. Section 9.17 Limitation on Transactions with Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or the rendering of any services) with, or for the benefit of, any Affiliate of the Company other than a Restricted Subsidiary (each, other than a Restricted Subsidiary, being an "Interested Person"), unless (a) such transaction or series of transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that would be available in a comparable arm's length transaction with unrelated third parties who are not Interested Persons, or, in the event no comparable transaction with an unrelated third party who is not an Interested Person is available, on terms that are fair from a financial point of view to the Company or such Restricted Subsidiary, as the case may be, (b) with respect to any one transaction or series of related transactions involving aggregate payments in excess of $10,000,000, the Company delivers an Officers' Certificate to the Trustee certifying that such transaction or series of transactions complies with clause (a) above and such transaction or series of transactions has been approved by the Board of Directors and (c) with respect to any one transaction or series of related transactions involving aggregate payments in excess of $20,000,000, the Officers' Certificate referred to in clause (b) above also includes a certification that such transaction or series of transactions has been approved by a majority of the Disinterested Directors (either of the full Board of Directors or, in the case of action by a committee thereof, of such committee) or, in the event there are no such Disinterested Directors, that the Company has obtained a written opinion from an independent nationally recognized investment banking firm or appraisal firm, in either case specializing or having a specialty in the type and subject matter of the transaction or series of related transactions at issue, which opinion shall be to the effect set forth in clause (a) above; provided, however, that this covenant will not restrict the Company from (i) paying reasonable and customary regular compensation and fees to directors of the Company who are not employees of the Company or any Restricted Subsidiary, (ii) paying dividends on, or making distributions with respect to, shares of Capital Stock of the Company on a pro rata basis to the extent permitted by Section 9.10 hereof, (iii) Restricted Payments that are permitted by Section 9.10 hereof, (iv) making loans or advances to officers, directors and employees of the Company or any Restricted 86 95 Subsidiary made in the ordinary course of business and consistent with customary practices in the Oil and Gas Business in an aggregate amount not to exceed $1,000,000 outstanding at any one time, (v) making any indemnification or similar payment to any director or officer (A) in accordance with the corporate charter or bylaws of the Company or any Restricted Subsidiary, (B) under any agreement or (C) under applicable law and (vi) fulfilling obligations of the Company or any Restricted Subsidiary under employee compensation and other benefit arrangements entered into or provided for in the ordinary course of business. Section 9.18 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 Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any Restricted Subsidiary, (c) make an Investment in the Company or any Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or any Restricted Subsidiary, except for such encumbrances or restrictions (i) pursuant to any agreement in effect or entered into on the date of this Indenture, (ii) pursuant to 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 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, (iii) by reason of customary non- assignment provisions in leases and licenses entered into in the ordinary course of business, (iv) pursuant to capital leases and purchase money obligations for property leased or acquired in the ordinary course of business that impose restrictions of the nature described in clause (d) above on the property so leased or acquired, (v) pursuant to any merger agreements, stock purchase agreements, asset sale agreements and similar agreements limiting the transfer of properties and assets pending consummation of the subject transaction, (vi) pursuant to Permitted Liens which are customary limitations on the transfer of collateral, (vii) pursuant to applicable law, (viii) pursuant to agreements among holders of Capital Stock of any Restricted Subsidiary of the Company requiring distributions in respect of such Capital Stock to be made pro rata based on the percentage of ownership in and/or contribution to such Restricted Subsidiary or (ix) existing under any agreement that extends, renews, refinances or replaces the agreements containing the restrictions in the foregoing clauses (i) and (ii), 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 evidencing the Indebtedness so extended, renewed, refinanced or replaced. 87 96 Section 9.19 Limitation on Other Senior Subordinated Indebtedness. The Company shall not incur, directly or indirectly, any Indebtedness which is expressly subordinate or junior in right of payment in any respect to Senior Indebtedness unless such Indebtedness ranks pari passu in right of payment with the Securities, or is expressly subordinated in right of payment to the Securities. Section 9.20 Limitation on Conduct of Business. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, engage in the conduct of any business other than the Oil and Gas Business, except that the Company and the Restricted Subsidiaries may engage in any business other than the Oil and Gas Business; provided, that the consolidated assets of the Company and the Restricted Subsidiaries used in such business shall not exceed, at any time, 10% of Adjusted Consolidated Net Tangible Assets. Section 9.21 Registration Rights Agreement. The Company shall perform its obligations under the Registration Rights Agreement and shall comply in all material respects with the terms and conditions contained therein including, without limitation, the payment of additional interest as described in Section 2(d) of the Registration Rights Agreement. Section 9.22 Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 9.5 through 9.11, Sections 9.13 and 9.14 and Sections 9.17 through 9.20 hereof if, before or after the time for such compliance, the Holders of at least a majority in principal amount of the Outstanding Securities and the Subsidiary Guarantors, by Act of such Holders and written agreement of the Subsidiary Guarantors, 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. ARTICLE X REDEMPTION OF SECURITIES Section 10.1 Right of Redemption. The Securities may be redeemed, at the option of the Company, in whole or in part, at any time on or after February 15, 2004, 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 88 97 (expressed as percentages of principal amount) specified in the form of Security, together with accrued and unpaid interest, if any, to the Redemption Date. Section 10.2 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 10.3 Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 10.1 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 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 10.4 hereof. Any election to redeem Securities shall be revocable until the Company gives a notice of redemption pursuant to Section 10.5 hereof to the Holders of Securities to be redeemed. Section 10.4 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, by lot 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 $1,000. 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. 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 98 Section 10.5 Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 14.5 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 identify the Securities to be redeemed (including CUSIP number) and shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Securities 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 10.7 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 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 of the Securities to be redeemed is in the form of a Global Security, then the Company shall modify such notice to the extent necessary to accord with the procedures of the Depositary applicable to the redemption. 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 10.6 Deposit of Redemption Price. On or before 11:00 A.M., New York City 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 9.3 hereof) an amount of money sufficient to pay the Redemption Price of, and accrued and unpaid interest on, all the Securities which are to be redeemed on such Redemption Date. 90 99 Section 10.7 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 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 2.10 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 10.8 Securities Redeemed in Part. Any 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 9.2 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 Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal amount of the Security so surrendered. ARTICLE XI DEFEASANCE AND COVENANT DEFEASANCE Section 11.1 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 11.2 or Section 11.3 hereof be applied to all Outstanding Securities upon compliance with the conditions set forth below in this Article XI. 91 100 Section 11.2 Defeasance and Discharge. Upon the Company's exercise under Section 11.1 hereof of the option applicable to this Section 11.2, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Securities on the date the conditions set forth in Section 11.4 hereof are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company and the Subsidiary Guarantors shall be deemed (a) 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 11.5 hereof and the other Sections of this Indenture referred to in clauses (i) and (ii) below, and (b) to have satisfied all their other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 11.4 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), (ii) the respective obligations of the Company and any Subsidiary Guarantors under Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 4.8, 5.6, 5.9, 5.10, 9.1, 9.2, 9.3, 9.4, 12.1 (to the extent it relates to the foregoing Sections and Article XI hereof), 12.4 and 12.5 hereof, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and (iv) the obligations of the Company and any Subsidiary Guarantors under this Article XI. Subject to compliance with this Article XI, the Company may exercise its option under this Section 11.2 notwithstanding the prior exercise of its option under Section 11.3 hereof with respect to the Securities. Section 11.3 Covenant Defeasance. Upon the Company's exercise under Section 11.1 hereof of the option applicable to this Section 11.3, the Company shall be released from its obligations under any covenant contained in Article VII and in Sections 9.6 through 9.20 hereof 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 may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Sections 4.1(c) or 4.1(d) hereof, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. 92 101 Section 11.4 Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 11.2 or Section 11.3 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 5.7 hereof who shall agree to comply with the provisions of this Article XI 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, (i) cash in U.S. Dollars in an amount, or (ii) 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 (iii) 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 (or Redemption Date, if applicable) of such principal (and premium, if any) or installment of interest; 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 10.3 hereof, a notice of its election to redeem all of the Outstanding Securities at a future date in accordance with Article X 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. 93 102 (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. (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 11.2 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 (A) 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 (B) the Trustee shall be under no obligation to investigate the basis of correctness of such ruling). (f) In the case of an election under Section 11.3 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, each stating that all conditions precedent provided for relating to either the legal defeasance under Section 11.2 hereof or the covenant defeasance under Section 11.3 (as the case may be) have been complied with and that no violation under agreements governing any other outstanding Indebtedness would result therefrom. Section 11.5 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 9.3 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 11.5, the "Trustee") pursuant to Section 11.4 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 94 103 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 11.4 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. Anything in this Article XI 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 11.4 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 11.6 Reinstatement. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 11.5 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 11.2 or 11.3 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 11.5 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 XII GUARANTEES Section 12.1 Unconditional Guarantee. Each Restricted Subsidiary that hereafter executes and delivers a supplemental indenture in the manner provided in Section 9.12(a) hereof shall thereby unconditionally, jointly and severally, guarantee (each such guarantee to be referred to herein as a "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 95 104 assigns, the full and prompt performance of the Company's obligations under this Indenture and the Securities and that: (a) the principal of (or premium, if any, on) and interest on the Securities will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on the Securities, if any, to the extent lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder 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 12.4 hereof. 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. The obligations of each Subsidiary Guarantor hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder 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 shall waive 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 shall covenant that its Subsidiary Guarantee will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and in the 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, the Subsidiary Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. No Subsidiary Guarantor shall be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed by the Subsidiary Guarantee until payment in full of all obligations guaranteed thereby. Each Subsidiary Guarantor shall further agree that, as between each Subsidiary Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the obligations guaranteed by the Subsidiary Guarantee may be accelerated as provided in Article IV hereof for the purposes of the Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed by the Subsidiary Guarantee, and (ii) in the 96 105 event of any acceleration of such obligations as provided in Article IV hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by each Subsidiary Guarantor for the purpose of the Subsidiary Guarantee. Section 12.2 Subsidiary Guarantors May Consolidate, etc. on Certain Terms. (a) Except as set forth in Articles VII and IX 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 or conveyance of the assets of a Subsidiary Guarantor substantially as an entirety to the Company or another Subsidiary Guarantor. (b) Except as set forth in Articles VII and IX 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 any Person or Persons other than the Company or a 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 or conveyance of the Properties of a Subsidiary Guarantor substantially as an entirety, 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, subject to Sections 12.2(a) and 12.3 hereof, (A) immediately after such transaction, and giving effect thereto, no Default or Event of Default shall have occurred as a result of such transaction and be continuing and (B) each Subsidiary Guarantor shall covenant and agree that, upon any such consolidation, merger, sale or conveyance, such Subsidiary Guarantor's Subsidiary Guarantee set forth in this Article XII 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 Person in the merger), by supplemental indenture satisfactory in form to the Trustee, 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 12.3 would result in the release of such Subsidiary Guarantee in which case such surviving Person does not have to execute any such supplemental indenture). In the case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture executed and delivered to the Trustee and satisfactory in form to the Trustee 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 a Subsidiary Guarantor. 97 106 Section 12.3 Release of a Subsidiary Guarantor. The Subsidiary Guarantee of any Restricted Subsidiary shall be released upon the terms and subject to the conditions set forth in Section 9.12 (b) hereof. Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the provisions of this Indenture shall be released from all of its Subsidiary Guarantee and related obligations set forth in this Indenture for so long as it remains an Unrestricted Subsidiary. 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. Any Subsidiary Guarantor not so released remains liable for the full amount of principal of (and premium, if any, on) and interest on the Securities as provided in this Article XII. Section 12.4 Limitation of Subsidiary Guarantor's Liability. Each Subsidiary Guarantor shall confirm, and by its acceptance hereof each Holder hereby confirms, that it is the intention of all such parties that the Guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent transfer or conveyance for purposes of any federal or state law. To effectuate the foregoing intention, the Holders hereby irrevocably agree, and each Subsidiary Guarantor shall irrevocably agree, that the obligations of each 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 12.5 hereof, 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. This Section 12.4 is for the benefit of the creditors of each Subsidiary Guarantor. Section 12.5 Contribution. In order to provide for just and equitable contribution among the Subsidiary Guarantors, the Subsidiary Guarantors shall 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. 98 107 Section 12.6 Execution and Delivery of Notation of Subsidiary Guarantee. To evidence the Subsidiary Guarantee set forth in Section 12.1 hereof, the Company shall cause each Subsidiary Guarantor to execute the notation of Subsidiary Guarantee in substantially the form set forth in Exhibit B attached hereto to be endorsed on each Security thereafter ordered to be authenticated and delivered by the Trustee, and shall cause a supplemental indenture to be executed on behalf of each Subsidiary Guarantor by its President or one of its Vice Presidents and attested to by one of its Secretaries or Assistant Secretaries. Each Subsidiary Guarantor shall agree that its Subsidiary Guarantee set forth in Section 12.1 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 two Officers, or an Officer and an Assistant Secretary or one Officer shall sign and one Officer or an Assistant Secretary (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall attest to such notation of Subsidiary Guarantee 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 the Subsidiary Guarantors. 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 12.7 Severability. In case any provision of the 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 12.8 Subsidiary Guarantees Subordinated to Guarantor Senior Indebtedness. Each Subsidiary Guarantor shall covenant and agree, and each Holder of a Security, by his acceptance of the Subsidiary Guarantees, covenants and agrees, for the benefit of the holders, from time to time, of Guarantor Senior Indebtedness, that the payments by 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 XII, to the prior payment in full in cash or Cash Equivalents 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 Guarantees of the Subsidiary Guarantors, the Indebtedness 99 108 represented thereby and the payment of the principal of (and premium, if any, on) and the interest on the Securities pursuant to the Subsidiary Guarantees in all respects shall rank pari passu with, or prior to, all existing and future unsecured indebtedness (including, without limitation, Indebtedness) of the Subsidiary Guarantors that is subordinated to the Guarantor Senior Indebtedness. This Article XII 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. Section 12.9 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 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"), 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 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) that entitles one or more Persons to accelerate the maturity of any Designated Guarantor Senior Indebtedness (a "Subsidiary Guarantor Non-payment Default"), and receipt by the applicable Subsidiary Guarantor and a Responsible Officer of the Trustee, on behalf of the Trustee, of written notice thereof from one or more of the holders of such Designated 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 Designated Guarantor Senior Indebtedness is paid in full or otherwise discharged or the holders (or a representative of the holders) of such Designated 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, subject to Section 12.9(a), such Subsidiary Guarantor will resume making any and all required payments in respect of its Subsidiary Guarantee, including any missed payments. Notwithstanding any other provision of this Indenture, only one Subsidiary Guarantor Payment Notice shall be given with respect to any Subsidiary Guarantee within any 360 consecutive day period. No Subsidiary Guarantor Non-payment Default with respect to Designated Guarantor Senior Indebtedness that existed or was continuing on the date 100 109 of any Subsidiary Guarantor Payment Notice with respect to the Designated Guarantor Senior Indebtedness initiating such Subsidiary Guarantor Payment Notice shall be, or can be, made the basis for the commencement of a subsequent Subsidiary Guarantor Payment Notice with respect to such Subsidiary Guarantee, whether or not within a period of 360 consecutive days, unless such default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent event, or any breach of any financial covenant for a period commencing after the date of commencement of such Subsidiary Guarantor Payment Notice, that, in either case, would give rise to a Subsidiary Guarantor Non-payment Default pursuant to any provision under which a Subsidiary Guarantor Non-payment Default previously existed or was continuing shall constitute a new Subsidiary Guarantor Non-payment Default for this purpose; provided, that, in the case of a breach of a particular financial covenant, such Subsidiary Guarantor shall have been in compliance for at least one full 90 consecutive day period commencing after the date of commencement of such Subsidiary Guarantor Payment Notice). In no event shall a Subsidiary Guarantor Payment Notice extend beyond 179 days from the date of its receipt and there must be a 181 consecutive day period in any 360 consecutive day period during which no Subsidiary Guarantor Payment Notice is in effect 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 12.9, 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 a Responsible Officer of the Trustee, on behalf of the Trustee, shall receive written notice of a Subsidiary Guarantor Payment Default or a Subsidiary Guarantor Non-payment Default from one or more of the Holders of Guarantor Senior Indebtedness (or their representative) prior to making any payment to Holders in respect of the Subsidiary 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 12.10 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 in cash or Cash Equivalents of such Guarantor Senior 101 110 Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness, whether or not a claim for such interest would be allowed in such a proceeding) 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 XII, 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 Guarantor Senior Indebtedness held or represented by each, to the extent necessary to make payment in full in cash or Cash Equivalents of all such Guarantor Senior Indebtedness, after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness; (c) in the event that, notwithstanding the foregoing provisions of this Section 12.10, 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 holders of such Guarantor Senior Indebtedness remaining unpaid or their representatives, 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 in cash or Cash Equivalents, after giving effect to any concurrent payment or distribution to the holders of such Guarantor Senior Indebtedness; (d) to the extent any payment of or distribution in respect of Guarantor Senior Indebtedness (whether by or on behalf of the Company or any Subsidiary Guarantor, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance, fraudulent transfer or similar law, then if such payment or distribution is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar person, the Guarantor Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payments had not occurred; and 102 111 (e) to the extent that the obligation to repay any Guarantor Senior Indebtedness is declared to be fraudulent, invalid or otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent conveyance, fraudulent transfer or similar law, then the obligation so declared fraudulent, invalid or otherwise set aside (and all other amounts that would come due with respect thereto had such obligation not been so affected) shall be deemed to be reinstated and outstanding as Guarantor Senior Indebtedness for all purposes hereof as if such declaration, invalidity or setting aside had not occurred. The Company or a Subsidiary Guarantor shall give prompt written notice to a Responsible Officer of the Trustee, on behalf of the Trustee, of the occurrence of any Insolvency or Liquidation Proceeding with respect to such Subsidiary Guarantor. Section 12.11 Holders to be Subrogated to Rights of Holders of Guarantor Senior Indebtedness. After the payment in full in cash or Cash Equivalents 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 in cash or Cash Equivalents, 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 XII 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 XII 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 12.12 Obligations of the Subsidiary Guarantors Unconditional. Nothing contained in this Article XII or elsewhere in this Indenture or in any Security is intended to or shall impair, as between 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 XII of the holders of Guarantor Senior Indebtedness in respect of cash, property or securities of 103 112 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 XII, the Trustee, subject to the provisions of Section 5.2 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 XII. Section 12.13 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 (other than the existence of a Payment Default or a Payment Blockage Period) that would prohibit the making of any payment to or by the Trustee, unless a Responsible Officer of the Trustee, on behalf of the Trustee, shall have received at the Corporate Trust Office written notice thereof from a Subsidiary Guarantor or from one or more holders of Guarantor Senior Indebtedness or Designated 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 Designated 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 Designated 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 12.14 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 12.8, 12.9, 12.10 and 12.11 hereof except that, if a Payment Default does not exist, a Payment Blockage Period is not in effect and if prior to 11:00 a.m. Eastern time on the date which is one Business Day 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 12.13 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., 104 113 Eastern time, one Business Day 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 XII, 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 XII, 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 XII. Section 12.15 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: (a) 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); (b) sell, exchange, release or otherwise deal with any Property pledged, mortgaged or otherwise securing Guarantor Senior Indebtedness; (c) 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 (d) exercise or refrain from exercising any rights against the Company and any other Person. 105 114 Section 12.16 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 XII 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 12.17 Right of Trustee to Hold Guarantor Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article XII 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. Section 12.18 Article XII 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 XII shall not be construed as preventing the occurrence of an Event of Default under this Indenture. Section 12.19 Payment. For purposes of this Article XII, a payment with respect to any Subsidiary Guarantee or with respect to principal of or interest on any 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. ARTICLE XIII SUBORDINATION OF SECURITIES Section 13.1 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 XIII, the 106 115 Indebtedness represented by the Securities and the payment of and distributions of or with respect to the Note Obligations are hereby expressly made subordinate and subject in right of payment as provided in this Article XIII to the prior payment in full in cash or Cash Equivalents of all amounts payable under all existing and future Senior Indebtedness which includes, without limitation, all Credit Agreement Obligations of the Company. This Article XIII 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 the holders of Senior Indebtedness are made obligees hereunder and they or each of them may enforce such provisions. Section 13.2 Payment Over of Proceeds upon Dissolution, etc. In the event of an Insolvency or Liquidation Proceeding with respect to the Company: (i) the holders of all Senior Indebtedness shall be entitled to receive payment in full in cash or Cash Equivalents of all Senior Indebtedness (including interest after the commencement of such proceeding at the rate specified in the applicable Senior Indebtedness, whether or not a claim for such interest would be allowed in such proceeding) before the Holders of the Securities are entitled to receive any direct or indirect payment or distribution whether in cash, property or securities (excluding Permitted Junior Securities of the Company) on account of the Note Obligations; (ii) any direct or indirect payment or distribution of Properties of the Company of any kind or character, whether in cash, property or securities (excluding Permitted Junior Securities of the Company), by set-off or otherwise, to which the Holders or the Trustee would be entitled but for the provisions of this Article XIII shall be paid by the 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 in cash or Cash Equivalents of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; (iii) in the event that, notwithstanding the foregoing provisions of this Section 13.2, 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 any Note Obligations before all Senior Indebtedness is paid or provided for in full in cash or Cash Equivalents, then and in such event such payment or distribution (excluding Permitted Junior Securities of 107 116 the Company) 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 for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full in cash or Cash Equivalents, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness; (iv) to the extent any payment of or distribution in respect of Senior Indebtedness (whether by or on behalf of the Company or any Subsidiary Guarantor, as proceeds of security or enforcement of any right of setoff or otherwise) is declared to be fraudulent or preferential, set aside or required to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or other similar Person under any bankruptcy, insolvency, receivership, fraudulent conveyance, fraudulent transfer or similar law, then if such payment or distribution is recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other similar person, the Senior Indebtedness or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payments had not occurred; and (v) to the extent that the obligation to repay any Senior Indebtedness is declared to be fraudulent, invalid or otherwise set aside under any bankruptcy, insolvency, receivership, fraudulent conveyance, fraudulent transfer or similar law, then the obligation so declared fraudulent, invalid or otherwise set aside (and all other amounts that would come due with respect thereto had such obligation not been so affected) shall be deemed to be reinstated and outstanding as Senior Indebtedness for all purposes hereof as if such declaration, invalidity or setting aside had not occurred. The consolidation of the Company with, or the merger of the Company with or into, another Person or the liquidation or dissolution of the Company following the conveyance, transfer or lease of its Properties substantially as an entirety to another corporation upon the terms and conditions set forth in Article VII hereof shall not be deemed a dissolution, winding-up, liquidation, reorganization, assignment for the benefit of creditors or marshaling of assets and liabilities of the Company for the purposes of this Article if the corporation formed by such consolidation or the surviving entity of such merger or the corporation which acquires by conveyance, transfer or lease such Properties substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance, transfer or lease, comply with the conditions set forth in such Article VII hereof to the extent applicable. Section 13.3 Suspension of Payment When Senior Indebtedness in Default. (a) Unless Section 13.2 hereof shall be applicable, upon the occurrence of a Payment Default, no direct or indirect payment or distribution of any Property of the Company of any kind or character shall be made by or on behalf of the Company on account of the Note Obligations or on account of the purchase or redemption or other acquisition of any Note 108 117 Obligations unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or such Designated Senior Indebtedness shall have been discharged or paid in full in cash or Cash Equivalents, after which, subject to Section 13.2 hereof (if applicable), the Company shall resume making any and all required payments in respect of the Securities and the other Note Obligations, including any missed payments. (b) Unless Section 13.2 hereof shall be applicable, upon (i) the occurrence of a Non-payment Default and (ii) receipt by the Trustee from a Senior Representative of written notice (a "Payment Blockage Notice") of such occurrence stating that such notice is a Payment Blockage Notice pursuant to this Section 13.3(b) of this Indenture, no payment or distribution of any Property of the Company of any kind or character shall be made by or on behalf of the Company on account of any Note Obligations or on account of the purchase or redemption or other acquisition of Note Obligations for a period ("Payment Blockage Period") commencing on the date of receipt by the Trustee of such notice unless and until the earliest to occur of the following events (subject to any blockage of payments that may then be in effect under Section 13.2 hereof or subsection (a) of this Section 13.3 hereof) (A) 179 days shall have elapsed since receipt of such written notice by the Trustee, (B) the date, as set forth in a written notice to the Company or the Trustee from the Senior Representative initiating such Payment Blockage Period, on which such Non-payment Default shall have been cured or waived or shall have ceased to exist (provided, that no other Payment Default or Non-payment Default has occurred and is then continuing after giving effect to such cure or waiver), (C) the date on which such Designated Senior Indebtedness shall have been discharged or paid in full in cash or Cash Equivalents and (D) the date on which such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from the Senior Representative initiating such Payment Blockage Period, after which, subject to Sections 13.2 and 13.3(a) hereof (if applicable), the Company shall promptly resume making any and all required payments in respect of the Note Obligations, including any missed payments. Notwithstanding any other provision of this Indenture, only one Payment Blockage Period may be commenced within any 360 consecutive day period. No Non-payment Default with respect to Designated Senior Indebtedness that existed or was continuing on the date of the commencement of any Payment Blockage Period with respect to the Designated Senior Indebtedness initiating such Payment Blockage Period shall be, or can be, made the basis for the commencement of a second Payment Blockage Period, whether or not within a period of 360 consecutive days, unless such default shall have been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent event, or any breach of any financial covenant for a period commencing after the date of commencement of such Payment Blockage Period, that, in either case, would give rise to a Non-payment Default pursuant to any provision under which a Non-payment Default previously existed or was continuing shall constitute a new Non-payment Default for this purpose; provided, however, that, in the case of a breach of a particular financial covenant, the Company shall have been in compliance for at least one full 90 consecutive day period commencing after the date of commencement of such Payment Blockage Period). In no event shall a Payment Blockage Period extend beyond 179 days from the date of the receipt of the notice referred to in clause (ii) hereof 109 118 and there must be a 181 consecutive day period in any 360 consecutive day period during which no Payment Blockage Period is in effect pursuant to this Section 13.3(b). (c) In the event that, notwithstanding the foregoing, the Trustee or the Holder of any Security shall have received any payment or distribution prohibited by the foregoing provisions of this Section 13.3, then and in such event such payment or distribution shall be paid over and delivered forthwith to the Senior Representatives or as a court of competent jurisdiction shall direct for application to the payment of any due and unpaid Senior Indebtedness, to the extent necessary to pay all such due and unpaid Senior Indebtedness in cash or Cash Equivalents, after giving effect to any concurrent payment to or for the holders of Senior Indebtedness. Section 13.4 Trustee's Relation to Senior Indebtedness. With respect to the holders of Senior Indebtedness, notwithstanding any other provisions of this Indenture, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XIII, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and the Trustee shall not be liable to any holder of Senior Indebtedness if it shall mistakenly (but not as a result of willful misconduct or gross negligence of the Trustee) pay over or deliver to Holders, the Company or any other Person moneys or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article XIII or otherwise. Section 13.5 Subrogation to Rights of Holders of Senior Indebtedness. Upon the payment in full of cash or Cash Equivalents 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 such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of, premium, if any, and interest on the Securities shall be paid in full in cash or Cash Equivalents. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XIII, and no payments over pursuant to the provisions of this Article XIII to the holders of Senior Indebtedness by Holders of the Securities or the Trustee shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Securities, be deemed to be payment or distribution by the Company to or on account of the Senior Indebtedness. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article XIII shall have been applied, pursuant to the provisions of 110 119 this Article XIII, to the payment of all amounts payable under the Senior Indebtedness of the Company and such payments or distributions received by such holders of such Senior Indebtedness shall be in excess of the amount sufficient to pay all amounts payable under or in respect of such Senior Indebtedness in full in cash or Cash Equivalents, then and in such case the Holders shall be entitled to receive the amount of such excess from the Company upon and to the extent of any return of such excess by the holders of such Senior Indebtedness. Section 13.6 Provisions Solely To Define Relative Rights. The provisions of this Article XIII 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 XIII or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness 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, premium, if any, 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 the Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon a Default or an Event of Default under this Indenture, subject to the rights, if any, under this Article XIII of the holders of Senior Indebtedness. The failure of the Company to make a payment on account of any Note Obligations by reason of any provision of this Article XIII shall not be construed as preventing the occurrence of a Default or an Event of Default hereunder. Section 13.7 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 XIII and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding-up, liquidation or reorganization of the Company whether in bankruptcy, insolvency, receivership proceedings, or otherwise, the timely filing of a claim for the unpaid balance of the Indebtedness of the Company owing to such Holder in the form required in such proceedings and the causing of such claim to be approved. If the Trustee does not file such a claim prior to 30 days before the expiration of the time to file such a claim, the holders of Senior Indebtedness, or any Senior Representative, may file such a claim on behalf of Holders of the Securities. 111 120 Section 13.8 No Waiver of Subordination Provisions. (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, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. (b) Without limiting the generality of subsection (a) of this Section 13.8, the holders of 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 provided in this Article XIII or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding or any liability of any obligor thereon; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) settle or compromise any Senior Indebtedness or any liability of any obligor thereon or release any Person liable in any manner for the collection or payment of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person; provided, however, that in no event shall any such actions limit the right of the Holders of the Securities to take any action to accelerate the maturity of the Securities pursuant to Article IV hereof or to pursue any rights or remedies hereunder or under applicable laws if the taking of such action does not otherwise violate the terms of this Indenture. Section 13.9 Notice to Trustee. (a) The Company shall give prompt written notice to the Trustee of any fact (other than the existence of a Payment Default or a Payment Blockage Period) 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 XIII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts (other than the existence of a Payment Default or a Payment Blockage Period) which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until a Responsible Officer of the Trustee, on behalf of the Trustee, shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of this Section 13.9, shall be entitled in all respects to assume that no such facts exist; provided, however, that if a Payment Default does not exist, a Payment Blockage Period is not in effect and the Trustee shall not have received the notice provided for in this Section 13.9 at least one Business Day prior to the date upon which by the terms hereof any money may become 112 121 payable for any purpose under this Indenture (including, without limitation, the payment of the principal of, premium, if any, or interest on any Security), then, anything herein contained to the contrary notwithstanding but without limiting the rights and remedies of the holders of Senior Indebtedness or any trustee, fiduciary or agent thereof, 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 within one Business Day prior to such date; nor shall the Trustee be charged with knowledge of the curing of any such default or the elimination of the act or condition preventing any such payment unless and until the Trustee shall have received an Officers' Certificate to such effect. (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 to a Responsible Officer of the Trustee, on behalf of the Trustee, 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 XIII, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such person is entitled to participate in such payment or distribution and 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. Section 13.10 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article XIII, the Trustee, subject to TIA Sections 315(a) through 315(d), and the Holders, shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding-up or similar case or 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, 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 thereof, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XIII. Section 13.11 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XIII with respect to any Senior Indebtedness which may at any time be held by it, to the 113 122 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 XIII shall apply to claims of, or payments to, the Trustee under or pursuant to Section 5.6 hereof. Section 13.12 Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article XIII 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 XIII in addition to or in place of the Trustee; provided, however, that Section 13.11 hereof shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. Section 13.13 No Suspension of Remedies. Nothing contained in this Article XIII 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 IV hereof or to pursue any rights or remedies hereunder or under applicable law, subject to the rights, if any, under this Article XIII of the holders, from time to time, of Senior Indebtedness. ARTICLE XIV MISCELLANEOUS Section 14.1 Compliance Certificates and Opinions. Upon any application or request by the Company and/or any Subsidiary Guarantor to the Trustee to take any action under any provision of this Indenture, the Company and/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: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 114 123 (c) 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 (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. The certificates and opinions provided pursuant to this Section 14.1 and the statements required by this Section 14.1 shall comply in all respects with TIA Sections 314(c) and (e). Section 14.2 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 of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such Opinion of Counsel may be based, insofar as it relates to factual matters, upon an Officers' Certificate of an Officer or Officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate 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 14.3 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 115 124 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. (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 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. 116 125 Section 14.4 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, (a) the Trustee by any Holder or by the Company or any Subsidiary Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing and delivered in person or mailed by certified or registered mail (return receipt requested) to the Trustee at its Corporate Trust Office; or (b) 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 and delivered in person or mailed by certified or registered mail (return receipt requested) to the Company addressed to it or a Subsidiary Guarantor, as applicable, at the Company's principal office located at 5 Greenway Plaza, Suite 2700, Houston, Texas 77046- 2504, or at any other address otherwise furnished in writing to the Trustee by the Company. Section 14.5 Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, 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. 117 126 Section 14.6 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 14.7 Successors and Assigns. All covenants and agreements in this Indenture by the Company and any Subsidiary Guarantors 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 14.8 Separability Clause. In case any provision in this Indenture or in the Securities or the Subsidiary Guarantees 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 therefore against any party hereto. Section 14.9 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 Security Registrar and their successors hereunder, the Holders, the holders of Senior Indebtedness, the holders of Guarantor Senior Indebtedness and, to the extent set forth in Section 12.4 hereof, creditors of Subsidiary Guarantors) any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 14.10 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 IRREVOCABLY SUBMITS AND WILL CAUSE EACH SUBSIDIARY GUARANTOR TO 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 A SUBSIDIARY GUARANTEE, AND THE COMPANY IRREVOCABLY AGREES AND WILL CAUSE EACH SUBSIDIARY GUARANTOR TO IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED BY ANY SUCH COURT. (b) This Indenture shall be subject to the provisions of the Trust Indenture Act that are required to be part of an indenture qualified thereunder and shall, to the extent applicable, 118 127 be governed by such provisions. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 and 318, inclusive, 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 sections, such imposed duties or incorporated provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. Section 14.11 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 Guarantees) 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, that no additional interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be, by reason of such delay. Section 14.12 No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder, by accepting any of the Securities, waives and releases all such liability to the extent permitted by applicable law. Section 14.13 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 14.14 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. 119 128 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. ISSUER: POGO PRODUCING COMPANY a Delaware corporation By: /s/ JOHN W. ELSENHANS ------------------------------------ Name: John W. Elsenhans Title: Vice President and Chief Financial Officer TRUSTEE: STATE STREET BANK AND TRUST COMPANY as Trustee By: /s/ PHILIP G. KANE, JR. ------------------------------------ Name: Philip G Kane, Jr. Title: Vice President 120 129 EXHIBIT A FORM OF SECURITY POGO PRODUCING COMPANY 10 3/8% SERIES [A/B] SENIOR SUBORDINATED NOTE DUE 2009 [FORM OF FACE] No. _____ $__________ CUSIP No. Series A: 730448-AK3 Series B: 730448-AL1 Pogo Producing 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 other amount as may be shown on the Schedule of Exchanges on the reverse hereof) on February 15, 2009, at the office or agency of the Company referred to below, and to pay interest thereon, commencing on August 15, 1999 and continuing semiannually thereafter, on February 15 and August 15 of each year, from January 15, 1999, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 103/8% 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 interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the February 1 or August 1 (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 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 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. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 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, or at such other office or agency of the Company as may be maintained for such purpose; provided, A-1 130 however, at the option of the Company, interest may be paid (i) by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Security Register, or (ii) with respect to any Holder owning Securities in the aggregate principal amount of $500,000 or more, by wire transfer to an account maintained by the Holder located in the City of New York, as specified in a written notice to the Trustee, received prior to the relevant Regular Record Date, by any such Holder requesting payment by wire transfer and specifying the account to which transfer is requested. [Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. The Depository Trust Company shall act as the Depositary until a successor shall be appointed by the Company and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be 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.]* THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DAY ON WHICH POGO PRODUCING COMPANY (THE "COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" - -------- *This paragraph should be included only if the Security is issued in global form. A-2 131 AS DEFINED IN RULE 144A THAT IS ACQUIRING SUCH SECURITY 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) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT ("INSTITUTIONAL ACCREDITED INVESTOR") THAT IS ACQUIRING SUCH SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF ANOTHER INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. 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. A-3 132 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. POGO PRODUCING COMPANY [SEAL] By: --------------------------------- Name: Title: Attest: - ----------------------------------- Secretary Dated: ------------- TRUSTEE'S CERTIFICATE OF AUTHENTICATION State Street Bank and Trust Company, as Trustee, certifies that this is one of the 103/8% Series [A/B] Senior Subordinated Notes due 2009 referred to in the within-mentioned Indenture. STATE STREET BANK AND TRUST COMPANY By: --------------------------------- Authorized Signatory A-4 133 FORM OF REVERSE OF SECURITY POGO PRODUCING COMPANY 10 3/8% SERIES [A/B] SENIOR SUBORDINATED NOTE DUE 2009 This Security is one of a duly authorized issue of securities of the Company designated as its 103/8% Series [A/B] Senior Subordinated Notes due 2009 (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $150,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of January 15, 1999, between the Company and State Street Bank and Trust Company, as trustee (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, the Trustee and the Holders of the 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, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) 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 February 15, 2004, 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 on February 15 of the years indicated below:
Year Price ---- ----- 2004....................... 105.188% 2005....................... 103.458% 2006....................... 101.729% 2007 and thereafter........ 100.000%
together in the case of any such redemption with accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date that is on or prior to the Redemption Date), all as provided in the Indenture. 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 the Holders of such Securities, or one A-5 134 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. In the event of redemption or purchase of this Security in part only, a new Security or Securities for the unredeemed or unpurchased portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. The Securities do not have the benefit of any sinking fund obligations. 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 75 or less than 30 days following the occurrence of a Change of Control of the Company, all of the then outstanding Securities validly tendered 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. As set forth in the Indenture, an Event of Default is generally (a) failure to pay principal upon maturity, redemption or otherwise (including pursuant to a Change of Control Offer or a Net Proceeds Offer); (b) default for 30 days in payment of interest on any of the Securities; (c) 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; (d) failure for 45 days after notice to comply with any other covenants in the Indenture or the Securities; (e) certain payment defaults under, the acceleration prior to the maturity of, and the exercise of certain enforcement rights with respect to, certain Indebtedness of the Company or any Restricted Subsidiary in an aggregate principal amount in excess of $12,000,000; (f) the failure of any Subsidiary Guarantee to be in full force and effect or otherwise to be enforceable (except as permitted by the Indenture); (g) certain events giving rise to ERISA liability; (h) certain final judgments against any Restricted Subsidiary in an aggregate amount of $12,000,000 or more which remain unsatisfied and either become subject to commencement or enforcement proceedings or remain unstayed for a period of 60 days; and (i) certain events of bankruptcy, insolvency or reorganization of the Company or any Material Restricted 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 Restricted 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, acceleration or the A-6 135 exercise of certain enforcement rights with respect to certain Indebtedness, any 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 or if in certain circumstances the proceedings or enforcement action with respect to the Indebtedness that is the subject of such Event of Default is terminated or rescinded. No Holder may pursue any remedy under the Indenture unless the Trustee shall have failed to act after notice of an Event of Default and written request by Holders of at least 25% in principal amount of the Outstanding Securities, and the offer to the Trustee of indemnity reasonably satisfactory to it; provided, 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 limitations, Holders of a majority in 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 quarterly reports with the Trustee as to the absence or existence of defaults. The Indenture contains provisions for defeasance at any time of (i) the entire indebtedness of the Company on this Security and (ii) 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, any 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 provide for uncertificated Securities in addition to or in place of Definitive Securities and to make certain other specified changes and other changes that do not adversely affect the rights of any Holder. 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 A-7 136 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 in the City of New York, 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 authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1,000 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 aggregate principal amount of Securities 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, incorporator, or stockholder of the Company or any Subsidiary Guarantor, as such, shall not have any personal liability under this Security or the Indenture by reason of his or its status as such director, officer, incorporator or stockholder. Each Holder, by accepting this Security with or without 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, the Subsidiary Guarantors, if any, the Trustee nor any agent shall be affected by notice to the contrary. In addition to the rights provided to Holders of Securities under the Indenture, Holders of Transfer Restricted Securities shall have the rights set forth in the Registration Rights Agreement, including the right to receive additional interest on their Securities as provided therein. 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 A-8 137 and without charge a copy of the Indenture. Requests may be made to the Company, Attention: Corporate Secretary, at 5 Greenway Plaza, Suite 2700, Houston, Texas 77046-2504. 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. This Security shall be governed by and construed in accordance with the laws of the State of New York. A-9 138 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to ______________________________________________________ (Insert assignee's social security or tax I.D. number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ as agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: Your Signature: ----------------- -------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee:------------------------------------------------------------ (Participant in a Recognized Signature Guaranty Medallion Program) A-10 139 FORM OF OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 9.15 or Section 9.16 of the Indenture, check the appropriate box: Section 9.15 [ ] Section 9.16 [ ] If you want to have only part of this Security purchased by the Company pursuant to Section 9.15 or Section 9.16 of the Indenture, state the amount in integral multiples of $1,000: $------------ Date: Signature: ----------------- ------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------------------------------------------ (Participant in a Recognized Signature Guaranty Medallion Program) A-11 140 SCHEDULE OF EXCHANGES* The following exchanges redemptions or repurchases of a part of this Global Security have been made:
Principal Amount Amount of Amount of of this Global Signature of decrease in increase in Security following authorized signatory Principal Amount Principal Amount such decrease of Trustee or Date of Exchange of this Global Security of this Global Security (or increase) Security Custodian ---------------- ----------------------- ----------------------- ------------------ --------------------
- -------------------------------------------------------------- * This should be included only if the Security is issued in global form. A-12 141 EXHIBIT B FORM OF NOTATION RELATING TO SUBSIDIARY GUARANTEES The form of notation to be set forth on each Security relating to the Subsidiary Guarantees shall be in substantially the following form: SUBSIDIARY GUARANTEE Subject to the limitations set forth in the Indenture, the Subsidiary Guarantors (as defined in the Indenture referred to in the Security upon which this notation is endorsed and each hereinafter referred to as a "Subsidiary Guarantor," which term includes any successor or additional Subsidiary Guarantor under the Indenture) 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 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. The obligations of the Subsidiary Guarantors to the Holders or the Trustee pursuant to the Subsidiary Guarantee and the Indenture are expressly subordinate to all Guarantor Senior Indebtedness to the extent set forth in Article XII of the Indenture and reference is made to such Indenture for the precise terms of such subordination. No stockholder, officer, director or incorporator, as such, past, present or future, of the Subsidiary Guarantors shall have any personal liability under the Subsidiary Guarantee by reason of his or its status as such stockholder, officer, director or incorporator. B-1 142 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 Guarantee is endorsed shall have the meanings assigned to them in such Indenture. The Subsidiary Guarantee shall be binding upon each Subsidiary Guarantor and its successors and assigns 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, 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 Guarantee shall not be valid or obligatory for any purpose until it has been executed by the manual or facsimile signature of an authorized officer of each Subsidiary Guarantor and the certificate of authentication on the Security upon which this Subsidiary Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. [SUBSIDIARY GUARANTOR] Date: By: ---------------- -------------------------------------- Name: --------------------------------- Title: -------------------------------- Attest: ------------------------- Secretary B-2 143 EXHIBIT C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF SECURITIES Re: 10 3/8% Series [A/B] Senior Subordinated Notes due 2009 of Pogo Producing Company (the "Company") This Certificate relates to $_____ principal amount of Securities held in definitive form by _____________________ (the "Transferor"). The Transferor has requested the Trustee by written order to exchange or register the transfer of a Security or 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 relative to the above captioned Securities and that the transfer of this Security does not require registration under the Securities Act (as defined below) because:* [ ] Such Security is being acquired for the Transferor's own account without transfer (in satisfaction of Section 2.07(a)(ii)(A) of the Indenture). [ ] Such Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), in reliance on Rule 144A under the Securities Act. [ ] Such Security is being transferred (i) in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if the Company so requests) or (ii) pursuant to an effective registration statement under the Securities Act. [ ] Such Security is being transferred to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests) together with a certification in substantially the form of Exhibit D to the Indenture and, to the knowledge of the Transferor, such institutional accredited investor to whom such Security is to be transferred is not an "affiliate" (as defined in Rule 144 under the Securities Act) of the Company. [ ] Such Security is being transferred in reliance on and in compliance with another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests). C-1 144 ----------------------------------------- [INSERT NAME OF TRANSFEROR] By: -------------------------------------- Name: Title: Address: Date: -------------------- C-2 145 EXHIBIT D TRANSFEREE LETTER OF REPRESENTATIONS Pogo Producing Company c/o State Street Bank and Trust Company Goodwin Square 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Attn: Corporate Trust Administration Dear Sirs and Madams: In connection with our proposed purchase of $_________ aggregate principal amount of 10 3/8% Senior Subordinated Notes due 2009 (the "Securities") of Pogo Producing Company, a Delaware corporation (the "Company"): 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or under any other applicable securities laws, and may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Securities to offer, sell or otherwise transfer such Securities prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities, or any predecessor, thereto (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement that has been declared effective by the Securities and Exchange Commission (the "SEC"), (c) for so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act (an "Institutional Accredited Investor") that is acquiring the Securities for its own account or for the account of another Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the regulations of the Securities Act and any other applicable securities laws or (e) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property and the property of such investor account or accounts be at all times within our or their control. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (d) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee D-1 146 substantially in the form of this letter to the Trustee, which shall provide, among other things, that the transferee is an Institutional Accredited Investor and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. We acknowledge that the Company and the Trustee reserve the right prior to any offer, sale or other transfer pursuant to clauses (d) or (e) prior to the Resale Restriction Termination Date of the Securities to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. 2. We are an Institutional Accredited Investor purchasing for our own account or for the account of another Institutional Accredited Investor. 3. We are acquiring the Securities purchased by us for our own account, or for one or more accounts 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. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of investment in the Securities, we invest in securities similar to the Securities in the normal course of our business and we, and all accounts for which we are acting, are able to bear the economic risks of investment in the Securities. 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy thereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: -------------------------------------- (Name of Purchaser) Upon transfer, the Securities should be registered in the name of the new beneficial owner as follows: Name: ------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Taxpayer ID No: ---------------------------------- D-2 EX-4.3 4 REGISTRATION RIGHTS AGREEMENT, DATED 01/15/99 1 EXHIBIT 4.3 POGO PRODUCING COMPANY REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of January 15, 1999, among Pogo Producing Company, a Delaware corporation (the "Company"), Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Goldman, Sachs & Co., as the initial purchasers (the "Initial Purchasers"), under the Purchase Agreement (as defined herein), of the 10 3/8% Senior Subordinated Notes due 2009, of the Company. The Company proposes to issue and sell the Securities (as defined herein) to the Initial Purchasers upon the terms set forth in the Purchase Agreement. As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to the obligations of the Initial Purchasers thereunder, the Company agrees with the Initial Purchasers for the benefit of holders (as defined herein) from time to time of the Registrable Securities (as defined herein) as follows: 1. Certain Definitions. For purposes of this Registration Rights Agreement, the following terms shall have the following respective meanings: "Base Interest" shall mean the interest that would otherwise accrue on the Securities under the terms thereof and the Indenture, without giving effect to the provisions of this Agreement. "broker-dealer" shall mean any broker or dealer registered with the Commission under the Exchange Act. "Closing Time" shall have the meaning set forth in the Purchase Agreement. "Commission" shall mean the United States Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose. "Effective Time," in the case of (i) an Exchange Registration, shall mean the time and date as of which the Commission declares the Exchange Registration Statement effective or as of which the Exchange Registration Statement otherwise becomes effective and (ii) a Shelf Registration, shall mean the time and date as of which the Commission declares the Shelf Registration Statement effective or as of which the Shelf Registration Statement otherwise becomes effective. "Electing Holder" shall mean any holder of Registrable Securities that has returned a completed and signed Notice and Questionnaire to the Company in accordance with Section 3(d)(ii) or 3(d)(iii) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, or any successor thereto, as the same shall be amended from time to time. "Exchange Offer" shall have the meaning assigned thereto in Section 2(a) hereof. "Exchange Registration" shall have the meaning assigned thereto in Section 3(c) hereof. 2 "Exchange Registration Statement" shall have the meaning assigned thereto in Section 2(a) hereof. "Exchange Securities" shall have the meaning assigned thereto in Section 2(a) hereof. "holder" shall mean each of the Initial Purchasers and other persons who acquire Registrable Securities from time to time (including any successors or assigns), in each case for so long as such person owns any Registrable Securities. "Indenture" shall mean the Indenture, dated as of January 15, 1999, among the Company and State Street Bank and Trust Company, as Trustee, as the same shall be amended from time to time. "Purchase Agreement" shall mean the Purchase Agreement, dated as of January 12, 1999, between the Initial Purchasers and the Company relating to the Securities. "Notice and Questionnaire" means a Notice of Registration Statement and Selling Securityholder Questionnaire substantially in the form of Exhibit A hereto. The term "person" shall mean a corporation, association, partnership, limited liability company, organization, business, individual, government or political subdivision thereof or governmental agency. "Registrable Securities" shall mean the Securities; provided, however, that a Security shall cease to be a Registrable Security when (i) in the circumstances contemplated by Section 2(a) hereof, the Security has been exchanged for an Exchange Security in an Exchange Offer as contemplated in Section 2(a) hereof (provided that any Exchange Security received by a broker-dealer in an Exchange Offer in exchange for a Registrable Security that was not acquired by the broker-dealer directly from the Company will also be a Registrable Security through and including the earlier of the 90th day after the Exchange Offer is completed or such time as such broker-dealer no longer owns such Security); (ii) in the circumstances contemplated by Section 2(b) hereof, a Shelf Registration Statement registering such Security under the Securities Act has been declared or becomes effective and such Security has been sold or otherwise transferred by the holder thereof pursuant to and in a manner contemplated by such effective Shelf Registration Statement; (iii) such Security is sold pursuant to Rule 144 (or any similar provisions then in force, but not Rule 144A) under circumstances in which any legend borne by such Security relating to restrictions on transferability thereof, under the Securities Act or otherwise, is removed by the Company or pursuant to the Indenture; (iv) such Security is eligible to be sold pursuant to paragraph (k) of Rule 144; or (v) such Security shall cease to be outstanding. "Registration Default" shall have the meaning assigned thereto in Section 2(d) hereof. "Registration Expenses" shall have the meaning assigned thereto in Section 4 hereof. "Resale Period" shall have the meaning assigned thereto in Section 2(a) hereof. "Restricted Holder" shall mean (i) a holder that is an affiliate of the Company within the meaning of Rule 405, (ii) a holder who acquires Exchange Securities outside the ordinary course of such holder's business, (iii) a holder who has arrangements or understandings with any person to 2 3 participate in the Exchange Offer for the purpose of distributing Exchange Securities and (iv) a holder that is a broker-dealer, but only with respect to Exchange Securities received by such broker-dealer pursuant to an Exchange Offer in exchange for Registrable Securities acquired by the broker-dealer directly from the Company. "Rule 144," "Rule 144A," "Rule 405" and "Rule 415" shall mean, in each case, such rule promulgated under the Securities Act (or any successor provision), as the same shall be amended from time to time. "Securities" shall mean, collectively, the 103/8% Senior Subordinated Notes due 2009 of the Company to be issued and sold to the Initial Purchasers, and securities issued in exchange therefor or in lieu thereof pursuant to the Indenture. Under certain circumstances specified in the Indenture, each Security will entitled to the benefit of certain guarantees by one or more subsidiaries of the Company (the "Guarantees") and, unless the context otherwise requires, any reference herein to a "Security," an "Exchange Security" or a "Registrable Security" shall include a reference to any such related Guarantees. "Securities Act" shall mean the Securities Act of 1933, or any successor thereto, as the same shall be amended from time to time. "Shelf Registration" shall have the meaning assigned thereto in Section 2(b) hereof. "Shelf Registration Statement" shall have the meaning assigned thereto in Section 2(b) hereof. "Shelf Registration Suspension" shall have the meaning assigned thereto in Section 2(c) hereof. "Special Interest" shall have the meaning assigned thereto in Section 2(d) hereof. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, or any successor thereto, and the rules, regulations and forms promulgated thereunder, all as the same shall be amended from time to time. Unless the context otherwise requires, any reference herein to a "Section" or "clause" refers to a Section or clause, as the case may be, of this Registration Rights Agreement, and the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Registration Rights Agreement as a whole and not to any particular Section or other subdivision. 2. Registration Under the Securities Act. (a) Except as set forth in Section 2(b) below, the Company agrees to use its reasonable best efforts to file under the Securities Act, no later than 60 days after the Closing Time, a registration statement relating to an offer to exchange (such registration statement, the "Exchange Registration Statement", and such offer, the "Exchange Offer") any and all of the then outstanding Registrable Securities (except Registrable Securities held by an Initial Purchaser and acquired directly from the Company if such Initial Purchaser is not permitted, in the reasonable opinion of counsel to the Initial Purchasers, pursuant to applicable law or Commission interpretation, to participate in the Exchange Offer) for a like aggregate principal amount of debt securities issued by the Company (and, if applicable, guarantees issued by 3 4 subsidiaries of the Company as may be required pursuant to the Indenture), which are substantially identical to the Securities (and are entitled to the benefits of a trust indenture which is substantially identical to the Indenture or is the Indenture and which has been qualified under the Trust Indenture Act), except that (i) they have been registered pursuant to an effective registration statement under the Securities Act, (ii) interest thereon shall accrue from the last date on which interest was paid or duly provided for on the Securities in exchange for which such new debt securities are issued in the Exchange Offer, or, if no interest has been paid, from January 15, 1999, and (iii) they do not contain provisions for the additional interest contemplated in Section 2(d) below (such new debt securities, together with any guarantees thereof, as applicable, are hereinafter called "Exchange Securities"). The Company agrees to use its reasonable best efforts to cause the Exchange Registration Statement to become effective under the Securities Act no later than 135 days after the Closing Time. The Exchange Offer will be registered under the Securities Act on an appropriate form and will comply with all applicable tender offer rules and regulations under the Exchange Act. The Company further agrees to use its reasonable best efforts to commence and complete the Exchange Offer no later than 180 days after the Closing Time, hold the Exchange Offer open for at least 30 days (or longer if required by law) after notice of the Exchange Offer is sent to holders of Registrable Securities, and issue Exchange Securities for all Registrable Securities that have been properly tendered and not withdrawn on or prior to the expiration of the Exchange Offer. The Exchange Offer will be deemed to have been "completed" only if the debt securities and related guarantees received by holders other than Restricted Holders in the Exchange Offer for Registrable Securities are, upon receipt, transferable by each such holder without need for further compliance with Section 5 of the Securities Act and the Exchange Act (except for the requirement to deliver a prospectus included in the Exchange Registration Statement applicable to resales by broker-dealers of Exchange Securities received by such broker-dealer pursuant to an Exchange Offer in exchange for Registrable Securities other than those acquired by the broker-dealer directly from the Company), and without material restrictions under the blue sky or securities laws of a substantial majority of the States of the United States of America. The Exchange Offer shall be deemed to have been completed upon the Company having exchanged, pursuant to the Exchange Offer, Exchange Securities for all Registrable Securities that may legally be exchanged in the Exchange Offer and that have been properly tendered and not withdrawn before the expiration of the Exchange Offer, which shall be on a date that is at least 30 days following the commencement of the Exchange Offer. The Company agrees (x) to include in the Exchange Registration Statement a prospectus for use in connection with any resales of Exchange Securities by a broker-dealer, other than resales of Exchange Securities received by a broker-dealer pursuant to an Exchange Offer in exchange for Registrable Securities acquired by the broker-dealer directly from the Company, and (y) to keep such Exchange Registration Statement effective for a period (the "Resale Period") beginning when Exchange Securities are first issued in the Exchange Offer and ending upon the earlier of the expiration of the 90th day after the Exchange Offer has been completed or such time as such broker-dealers no longer own any Registrable Securities. With respect to such Exchange Registration Statement, each broker-dealer that holds Exchange Securities received in an Exchange Offer in exchange for Registerable Securities not acquired by it directly from the Company shall have the benefit of the rights of indemnification and contribution set forth in Section 6 hereof. (b) Subject to Section 2(c), (i) if, prior to the time the Exchange Offer is completed, existing Commission interpretations are changed such that the Exchange Offer cannot be completed as contemplated by Section 2(a), (ii) if the Exchange Registration Statement is not declared effective under the Securities Act within 135 days after the Closing Time, or (iii) if, for any other reason the Exchange Offer is not consummated within 180 days of the Closing Time, then in lieu of conducting the Exchange Offer contemplated by Section 2(a) the Company shall use its reasonable best efforts to file under the Securities Act as soon as practicable, but no later than 30 days after the time such obligation to file arises, a registration statement providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities, pursuant to Rule 415 or any similar rule that may be adopted by the 4 5 Commission (such filing, the "Shelf Registration" and such registration statement, the "Shelf Registration Statement"). In addition, in the event that the Initial Purchasers shall not have resold all of the Registrable Securities initially purchased by them from the Company pursuant to the Purchase Agreement prior to the consummation of the Exchange Offer, the Company shall use its reasonable best efforts to file under the Securities Act as soon as practicable after a request therefor a Shelf Registration Statement. The Company agrees to use its reasonable best efforts (i) to cause the Shelf Registration Statement to become or be declared effective no later than 180 days after the Closing Time (or promptly in the event of a Shelf Registration effected at the request of the Initial Purchasers pursuant to the preceding sentence) and, subject to Section 2(c), to keep such Shelf Registration Statement continuously effective in order to permit the prospectus forming a part thereof to be usable by holders for resales of Registrable Securities for a period (the "Effective Period") ending on the earlier of the second anniversary of the Effective Time (or one year in the case of a Shelf Registration Statement filed at the request of an Initial Purchaser) or such time as there are no longer any Registrable Securities outstanding, provided, however, that no holder shall be entitled to be named as a selling securityholder in the Shelf Registration Statement or to use the prospectus forming a part thereof for resales of Registrable Securities unless such holder is an Electing Holder, and (ii) after the Effective Time of the Shelf Registration Statement, promptly upon the request of any holder of Registrable Securities that is not then an Electing Holder, to take any action reasonably necessary to enable such holder to use the prospectus forming a part thereof for resales of Registrable Securities, including, without limitation, any action necessary to identify such holder as a selling securityholder in the Shelf Registration Statement, provided, however, that nothing in this clause (ii) shall relieve any such holder of the obligation to return a completed and signed Notice and Questionnaire to the Company in accordance with Section 3(d)(iii) hereof. The Company further agrees to supplement or make amendments to the Shelf Registration Statement, as and when required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or rules and regulations thereunder for shelf registration, and the Company agrees to furnish to each Electing Holder copies of any such supplement or amendment prior to its being used or promptly following its filing with the Commission. (c) Notwithstanding anything in Section 2(b) or 3(d) to the contrary, if the Company determines in its good faith judgment that the filing of any supplement or amendment to the Shelf Registration Statement to keep such Shelf Registration Statement continuously effective under the Securities Act and usable by Electing Holders for resales of Registrable Securities on a particular date would require the disclosure of material information that the Company has a bona fide business purpose for preserving as confidential, or the disclosure of which would materially adversely affect the Company's ability to consummate a significant transaction, then upon written notice of such determination by the Company to the Electing Holders, the obligation of the Company to supplement or amend the Shelf Registration Statement (including any action with respect thereto contemplated by Section 3(d) hereof) will be suspended until the Company notifies the Electing Holders in writing that the reasons for suspension of such obligations on the part of the Company as set forth in Section 2(b) no longer exist and the Company amends or supplements the Shelf Registration Statement as may be required (such suspension, a "Shelf Registration Suspension"); provided that the aggregate number of days (whether or not consecutive) during which the Company may delay the filing of any such supplement or amendment shall in no event exceed 60 days during any period of 12 consecutive months and the right of the Company to suspend its obligation to supplement or amend the Shelf Registration Statement under the preceding sentence shall not limit any obligation of the Company to pay Special Interest pursuant to Section 2(d). (d) In the event that (i) the Exchange Registration Statement is not filed with the Commission on or prior to the 60th day following the Closing Time, (ii) the Exchange Registration Statement is not declared effective on or prior to the 135th day following the Closing Time or (iii) the Exchange Offer (if then required to be made) is not consummated or a Shelf Registration Statement (if required pursuant to Section 5 6 2(b)) with respect to the Notes is not declared effective on or prior to the 180th day following the Closing Time, (iv) any Exchange Registration Statement or Shelf Registration Statement required by Section 2(a) or 2(b) hereof is filed and declared effective but shall thereafter either be withdrawn by the Company or shall become subject to an effective stop order issued pursuant to Section 8(d) of the Securities Act suspending the effectiveness of such registration statement (except as specifically permitted herein) without being succeeded immediately by an additional registration statement filed and declared effective, or (v) the Company effects a Shelf Registration Suspension for more than 60 days, whether or not consecutive, within any period of 12 consecutive months (each such event referred to in clauses (i) through (v), a "Registration Default") then, as liquidated damages for such Registration Default, subject to the provisions of Section 9(b), special interest ("Special Interest"), in addition to the Base Interest, shall accrue on the Securities at a per annum rate of 0.50% from and including the day following such Registration Default to but excluding the date on which the Registration default is cured or ceases as described below (such period being the "Registration Default Period"); provided, that if the Exchange Registration Statement is not declared effective on or prior to the 135th day after the Closing Time and the Company sends the Notice and Questionnaire to holders of Registrable Securities in accordance with Section 3(d)(ii), then no holder who is not an Electing Holder shall be entitled to Special Interest after the 180th day after the Closing Time. Special Interest shall be paid in the same manner as interest is paid on the Securities pursuant to the Indenture. Upon (A) the filing of the Exchange Registration Statement after the 60th day described in clause (i) above, (B) the effectiveness of the Exchange Registration Statement after the 135th day described in clause (ii) above, (C) the consummation of the Exchange Offer or the effectiveness of the Shelf Registration Statement, as the case may be, after the 180th day described in clause (iii) above, (D) removal of the suspension or stop order referred to in clause (iv) above or the filing and effectiveness of a new registration statement in respect thereof, (E) cessation of the Shelf Registration Suspension referred to in clause (v) above or (F) expiration of the Effective Period, Special Interest shall cease to accrue unless a new Registration Default shall occur. (e) The Company shall take all reasonable actions necessary or advisable to be taken by it to ensure that the transactions contemplated herein are effected as so contemplated. (f) Any reference herein to a registration statement as of any time shall be deemed to include any document incorporated, or deemed to be incorporated, therein by reference as of such time and any reference herein to any post-effective amendment to a registration statement as of any time shall be deemed to include any document incorporated, or deemed to be incorporated, therein by reference as of such time. 3. Registration Procedures. If the Company files a registration statement pursuant to Section 2(a) or Section 2(b), the following provisions shall apply: (a) At or before the Effective Time of the Exchange Offer or the Shelf Registration, as the case may be, the Company shall qualify the Indenture under the Trust Indenture Act of 1939. (b) In the event that such qualification would require the appointment of a new trustee under the Indenture, the Company shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (c) In connection with the Company's obligations with respect to the registration of Exchange Securities as contemplated by Section 2(a) (the "Exchange Registration"), if applicable, the Company shall, as soon as practicable (or as otherwise specified): 6 7 (i) use its reasonable best efforts to prepare and file with the Commission, no later than 60 days after the Closing Time, an Exchange Registration Statement on any form which may be utilized by the Company and which shall permit the Exchange Offer and resales of Exchange Securities by broker-dealers during the Resale Period to be effected as contemplated by Section 2(a), and use its reasonable best efforts to cause such Exchange Registration Statement to become effective as soon as practicable thereafter, but no later than 135 days after the Closing Time; (ii) as soon as practicable prepare and file with the Commission such amendments and supplements to such Exchange Registration Statement and the prospectus included therein as may be necessary to effect and maintain the effectiveness of such Exchange Registration Statement for the periods and purposes contemplated in Section 2(a) hereof and as may be required by the applicable rules and regulations of the Commission and the instructions applicable to the form of such Exchange Registration Statement, and promptly provide each broker-dealer holding Exchange Securities with such number of copies of the prospectus included therein (as then amended or supplemented), in conformity in all material respects with the requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder, as such broker-dealer reasonably may request prior to the expiration of the Resale Period, for use in connection with resales of Exchange Securities; (iii) promptly notify each broker-dealer that has requested or received copies of the prospectus included in such registration statement, and confirm such advice in writing, (A) when such Exchange Registration Statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such Exchange Registration Statement or any post-effective amendment, when the same has become effective, (B) of any comments are made to the Company or its counsel by the Commission and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request is made to the Company or its counsel by the Commission for amendments or supplements to such Exchange Registration Statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such Exchange Registration Statement or the initiation or threatening of any proceedings for that purpose, (D) if at any time the Company becomes aware that the representations and warranties of the Company contemplated by Section 5 cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Exchange Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (F) at any time during the Resale Period when a prospectus is required to be delivered under the Securities Act, that such Exchange Registration Statement, prospectus, prospectus amendment or supplement or post-effective amendment does not conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder or contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (iv) in the event that the Company would be required, pursuant to Section 3(c)(iii)(F) above, to notify any broker-dealers holding Exchange Securities, without unreasonable delay prepare and furnish to each such holder a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to purchasers of such Exchange Securities during the Resale Period, such prospectus shall conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder and shall not contain an untrue statement of a material fact or omit to state a material fact 7 8 required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (v) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of such Exchange Registration Statement or any post-effective amendment thereto at the earliest practicable date; (vi) use its reasonable best efforts to (A) register or qualify the Exchange Securities under the securities laws or blue sky laws of such jurisdictions as are contemplated by Section 2(a) no later than the commencement of the Exchange Offer, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions until the expiration of the Resale Period and (C) take any and all other actions as may be reasonably necessary or advisable to enable each broker-dealer holding Exchange Securities to consummate the disposition thereof in such jurisdictions; provided, however, that the Company shall not be required for any such purpose to (1) qualify as a foreign corporation or as a dealer in securities in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(c)(vi), (2) consent to general service of process, or take any action that would subject it to general service of process or taxation, in any such jurisdiction if it is not then so subject or (3) make any changes to its certificate of incorporation or by-laws or any agreement between it and its stockholders; (vii) use its reasonable best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Exchange Registration, the Exchange Offer and the offering and sale of Exchange Securities by broker-dealers during the Resale Period; (viii) provide a CUSIP number for all Exchange Securities, not later than the applicable Effective Time; (ix) comply with all applicable rules and regulations of the Commission, and make generally available to its securityholders as soon as practicable but no later than eighteen months after the effective date of such Exchange Registration Statement, an earning statement complying with Section 11(a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder). (d) In connection with the Company's obligations with respect to the Shelf Registration, if applicable, the Company shall, subject to Section 2(c), as soon as practicable (or as otherwise specified): (i) use its reasonable best efforts to prepare and file with the Commission, as soon as practicable but in any case within the time periods specified in Section 2(b), a Shelf Registration Statement on any form which may be utilized by the Company and which shall register all of the Registrable Securities for resale by the holders thereof in accordance with such method or methods of disposition as may be specified by such of the holders as, from time to time, may be Electing Holders and use its reasonable best efforts to cause such Shelf Registration Statement to become effective as soon as practicable but in any case within the time periods specified in Section 2(b); (ii) not less than 30 calendar days prior to the Effective Time of the Shelf Registration Statement, mail the Notice and Questionnaire to the holders of Registrable Securities; no holder shall be entitled to be named as a selling securityholder in the Shelf Registration Statement as of the 8 9 Effective Time, and no holder shall be entitled to use the prospectus forming a part thereof for resales of Registrable Securities at any time, unless such holder has returned a completed and signed Notice and Questionnaire to the Company by the deadline for response set forth therein; provided, however, holders of Registrable Securities shall have at least 28 calendar days from the date on which the Notice and Questionnaire is first mailed to such holders to return a completed and signed Notice and Questionnaire to the Company; (iii) after the Effective Time of the Shelf Registration Statement, upon the request of any holder of Registrable Securities that is not then an Electing Holder, promptly send a Notice and Questionnaire to such holder; provided that the Company shall not be required to take any action to name such holder as a selling securityholder in the Shelf Registration Statement or to enable such holder to use the prospectus forming a part thereof for resales of Registrable Securities until such holder has returned a completed and signed Notice and Questionnaire to the Company; (iv) as soon as practicable prepare and file with the Commission such amendments and supplements to such Shelf Registration Statement and the prospectus included therein as may be necessary to effect and maintain the effectiveness of such Shelf Registration Statement for the period specified in Section 2(b) hereof and as may be required by the applicable rules and regulations of the Commission and the instructions applicable to the form of such Shelf Registration Statement, and furnish to the Electing Holders copies of any such supplement or amendment simultaneously with or prior to its being used or filed with the Commission; (v) comply with the provisions of the Securities Act with respect to the disposition of all of the Registrable Securities covered by such Shelf Registration Statement in accordance with the intended methods of disposition by the Electing Holders provided for in such Shelf Registration Statement; (vi) provide (A) the Electing Holders, (B) the underwriters (which term, for purposes of this Registration Rights Agreement, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, thereof, (C) any sales or placement agent therefor, (D) not more than one counsel for all such underwriters and agents and (E) not more than one counsel for all the Electing Holders the opportunity to participate in the preparation of such Shelf Registration Statement, each prospectus included therein or filed with the Commission and each amendment or supplement thereto; (vii) for a reasonable period prior to the filing of such Shelf Registration Statement, and throughout the period specified in Section 2(b), make available (solely for the purpose of verifying the accuracy of information contained in the Shelf Registration Statement) at reasonable times at the Company's principal place of business or such other reasonable place as the Company shall determine for inspection by the persons referred to in Section 3(d)(vi) who shall certify to the Company that they have a current intention to sell the Registrable Securities pursuant to the Shelf Registration such relevant financial and other information and books and records of the Company, and cause the officers, employees, counsel and independent certified public accountants of the Company to respond to such inquiries, as shall be reasonably necessary, in the judgment of the respective counsel referred to in such Section, to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; provided, however, that each such party shall be required to maintain in confidence and not to disclose to any other person any information or records reasonably designated by the Company as being confidential, until such time as (A) such information becomes a matter of public record (whether by virtue of its inclusion in such registration 9 10 statement or otherwise), or (B) such person shall be required so to disclose such information pursuant to a subpoena or order of any court or other governmental agency or body having jurisdiction over the matter (subject to the requirements of such order, and only after such person shall have given the Company prompt prior written notice of such requirement); (viii) promptly notify each of the Electing Holders, any sales or placement agent therefor and any underwriter thereof (which notification may be made through any managing underwriter that is a representative of such underwriter for such purpose) and confirm such advice in writing, (A) when such Shelf Registration Statement or the prospectus included therein or any prospectus amendment or supplement or post-effective amendment has been filed, and, with respect to such Shelf Registration Statement or any post-effective amendment, when the same has become effective, (B) of any comments made to the Company or its counsel by the Commission and by the blue sky or securities commissioner or regulator of any state with respect thereto or any request made to the Company or its counsel by the Commission for amendments or supplements to such Shelf Registration Statement or prospectus or for additional information, (C) of the issuance by the Commission of any stop order suspending the effectiveness of such Shelf Registration Statement or the initiation or threatening of any proceedings for that purpose, (D) if at any time the Company becomes aware that representations and warranties of the Company contemplated by Section 3(d)(xvii) or Section 5 cease to be true and correct in all material respects, (E) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or (F) if at any time when a prospectus is required to be delivered under the Securities Act, such Shelf Registration Statement, prospectus, prospectus amendment or supplement or post-effective amendment does not conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder or contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (ix) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement or any post-effective amendment thereto at the earliest practicable date; (x) if requested by any managing underwriter or underwriters, any placement or sales agent or any Electing Holder, promptly incorporate in a prospectus supplement or post-effective amendment such information as is required by the applicable rules and regulations of the Commission and as such managing underwriter or underwriters, such agent or such Electing Holder specifies should be included therein relating to the terms of the sale of such Registrable Securities, including information with respect to the principal amount of Registrable Securities being sold by such Electing Holder or agent or to any underwriters, the name and description of such Electing Holder, agent or underwriter, the offering price of such Registrable Securities and any discount, commission or other compensation payable in respect thereof, the purchase price being paid therefor by such underwriters and with respect to any other terms of the offering of the Registrable Securities to be sold by such Electing Holder or agent or to such underwriters; and make all required filings of such prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus supplement or post-effective amendment; (xi) furnish to each Electing Holder, each placement or sales agent, if any, therefor, each underwriter, if any, thereof and the respective counsel referred to in Section 3(d)(vi) a copy of such 10 11 Shelf Registration Statement, each such amendment and supplement thereto (in each case including all exhibits thereto (in the case of an Electing Holder of Registrable Securities, upon request) and documents incorporated by reference therein) and such number of copies of such Shelf Registration Statement (excluding exhibits thereto and documents incorporated by reference therein unless specifically so requested by such Electing Holder, agent or underwriter, as the case may be) and of the prospectus included in such Shelf Registration Statement (including each preliminary prospectus and any summary prospectus), in conformity in all material respects with the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder, and such other documents, as such Electing Holder, agent, if any, and underwriter, if any, may reasonably request in order to facilitate the offering and disposition of the Registrable Securities owned by such Electing Holder, offered or sold by such agent or underwritten by such underwriter and to permit such Electing Holder, agent and underwriter to satisfy the prospectus delivery requirements of the Securities Act; and the Company hereby consents to the use of such prospectus (including such preliminary and summary prospectus) and any amendment or supplement thereto by each such Electing Holder and by any such agent and underwriter, in each case in the form most recently provided to such person by the Company, in connection with the offering and sale of the Registrable Securities covered by the prospectus (including such preliminary and summary prospectus) or any supplement or amendment thereto; (xii) use its reasonable best efforts to (A) register or qualify the Registrable Securities to be included in such Shelf Registration Statement under such securities laws or blue sky laws of such jurisdictions as any Electing Holder and each placement or sales agent, if any, therefor and underwriter, if any, thereof shall reasonably request, (B) keep such registrations or qualifications in effect and comply with such laws so as to permit the continuance of offers, sales and dealings therein in such jurisdictions during the period the Shelf Registration is required to remain effective under Section 2(b) above and for so long as may be necessary to enable any such Electing Holder, agent or underwriter to complete its distribution of Securities pursuant to such Shelf Registration Statement and (C) take any and all other actions as may be reasonably necessary or advisable to enable each such Electing Holder, agent, if any, and underwriter, if any, to consummate the disposition in such jurisdictions of such Registrable Securities; provided, however, that the Company shall not be required for any such purpose to (1) qualify as a foreign corporation or as a dealer in securities in any jurisdiction wherein it would not otherwise be required to qualify but for the requirements of this Section 3(d)(xii), (2) consent to general service of process or take any action that would subject it to general service of process or taxation, in any such jurisdiction if it is not then so subject or (3) make any changes to its certificate of incorporation or by-laws or any agreement between it and its stockholders; (xiii) use its reasonable best efforts to obtain the consent or approval of each governmental agency or authority, whether federal, state or local, which may be required to effect the Shelf Registration or the offering or sale in connection therewith or to enable the selling holder or holders to offer, or to consummate the disposition of, their Registrable Securities; (xiv) cooperate with the Electing Holders and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be printed, lithographed or engraved, or produced by any combination of such methods, and which shall not bear any restrictive legends; and, in the case of an underwritten offering, enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of the Registrable Securities; 11 12 (xv) provide a CUSIP number for all Registrable Securities, not later than the applicable Effective Time; (xvi) enter into one or more underwriting agreements, engagement letters, agency agreements, "best efforts" underwriting agreements or similar agreements, as appropriate, in each case, that are satisfactory to the Company, including customary provisions relating to indemnification and contribution, and take such other actions in connection therewith as any Electing Holders shall reasonably request and as are customarily taken in order to expedite or facilitate the disposition of such Registrable Securities; (xvii) whether or not an agreement of the type referred to in Section 3(d)(xvi) hereof is entered into and whether or not any portion of the offering contemplated by the Shelf Registration is an underwritten offering or is made through a placement or sales agent or any other entity, (A) make such representations and warranties to the Electing Holders and the placement or sales agent, if any, therefor and the underwriters, if any, thereof in form, substance and scope as are customarily made in connection with a similar offering of debt securities pursuant to any appropriate agreement or to a registration statement filed on the form applicable to the Shelf Registration; (B) obtain an opinion of counsel to the Company in customary form and covering such matters, of the type customarily covered by such an opinion, as the managing underwriters, if any, or as any Electing Holders may reasonably request, addressed to such Electing Holder or Electing Holders and the placement or sales agent, if any, therefor and the underwriters, if any, thereof, dated the effective date of such Shelf Registration Statement (and if such Shelf Registration Statement contemplates an underwritten offering of a part or all of the Registrable Securities, dated the date of the closing under the underwriting agreement relating thereto) (it being agreed that the matters to be covered by such opinion shall include the due incorporation and good standing of the Company and its significant subsidiaries; the qualification of the Company and its significant subsidiaries to transact business as foreign corporations; the due authorization, execution and delivery of the relevant agreement of the type referred to in Section 3(d)(xvi) hereof; the due authorization, execution, authentication and issuance, and the validity and enforceability, of the Securities; the absence of material legal or governmental proceedings involving the Company; the absence of governmental approvals required to be obtained in connection with the Shelf Registration, the offering and sale of the Registrable Securities, this Registration Rights Agreement or any agreement of the type referred to in Section 3(d)(xvi) hereof, except such approvals as may be required under state securities or blue sky laws; the material compliance as to form of such Shelf Registration Statement and any documents incorporated by reference therein and of the Indenture with the requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder, respectively; and, as of the date of the opinion and of the Shelf Registration Statement or most recent post-effective amendment thereto, as the case may be, the absence from such Shelf Registration Statement and the prospectus included therein, as then amended or supplemented, and from the documents incorporated by reference therein (in each case other than the financial statements and other financial information contained therein) of an untrue statement of a material fact or the omission to state therein a material fact necessary to make the statements therein not misleading (in the case of such documents, in the light of the circumstances existing at the time that such documents were filed with the Commission under the Exchange Act)); (C) obtain a "cold comfort" letter or letters from the independent certified public accountants of the Company addressed to the placement or sales agent, if any, or the underwriters, if any, and use its reasonable best efforts to have such letter also addressed to the selling Electing Holders (provided, however, that such letter need not be addressed to any person to whom, in the reasonable opinion of the Company's public accountants, addressing such letter is not permissible under applicable accounting 12 13 standards) dated (i) the effective date of such Shelf Registration Statement and (ii) the effective date of any prospectus supplement to the prospectus included in such Shelf Registration Statement or post-effective amendment to such Shelf Registration Statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus (and, if such Shelf Registration Statement contemplates an underwritten offering pursuant to any prospectus supplement to the prospectus included in such Shelf Registration Statement or post-effective amendment to such Shelf Registration Statement which includes unaudited or audited financial statements as of a date or for a period subsequent to that of the latest such statements included in such prospectus, dated the date of the closing under the underwriting agreement relating thereto), such letter or letters to be in customary form and covering such matters of the type customarily covered by letters of such type; (D) deliver such documents and certificates, including officers' certificates, as may be reasonably requested by any Electing Holders or the placement or sales agent, if any, therefor and the managing underwriters, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above or those contained in Section 5(a) hereof and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by the Company; and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in Section 6 hereof; (xviii) notify in writing each holder of Registrable Securities of any proposal by the Company to amend or waive any provision of this Registration Rights Agreement pursuant to Section 9(h) hereof and of any amendment or waiver effected pursuant thereto, each of which notices shall contain the text of the amendment or waiver proposed or effected, as the case may be; (xix) in the event that any broker-dealer registered under the Exchange Act shall underwrite any Registrable Securities or participate as a member of an underwriting syndicate or selling group or "assist in the distribution" (within the meaning of the Rules of Fair Practice and the By-Laws of the National Association of Securities Dealers, Inc. ("NASD") or any successor thereto, as amended from time to time) thereof, whether as a holder of such Registrable Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, assist such broker-dealer in complying with the requirements of such Rules and By-Laws, including by (A) if such Rules or By-Laws shall so require, engaging a "qualified independent underwriter" (as defined in such Schedule (or any successor thereto)) to participate in the preparation of the Shelf Registration Statement relating to such Registrable Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by such Shelf Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Registrable Securities, (B) indemnifying any such qualified independent underwriter to the extent of the indemnification of underwriters provided in Section 6 hereof, and (C) providing such information to such broker-dealer as may be required in order for such broker-dealer to comply with the requirements of the Rules of Fair Practice of the NASD; and (xx) comply with all applicable rules and regulations of the Commission, and make generally available to its securityholders as soon as practicable but in any event not later than eighteen months after the effective date of such Shelf Registration Statement, an earning statement complying with Section 11(a) of the Securities Act (including, at the option of the Company, Rule 158 thereunder). (e) In the event that the Company would be required, pursuant to Section 3(d)(viii)(F) above, to notify the Electing Holders, the placement or sales agent, if any, therefor and the managing underwriters, 13 14 if any, thereof, the Company shall without delay prepare and furnish to each of the Electing Holders, to each placement or sales agent, if any, and to each such underwriter, if any, a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to purchasers of Registrable Securities, such prospectus shall conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder and shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Each Electing Holder agrees that upon receipt of any notice from the Company pursuant to Section 3(d)(viii)(F) hereof, such Electing Holder shall forthwith discontinue the disposition of Registrable Securities pursuant to the Shelf Registration Statement applicable to such Registrable Securities until such Electing Holder shall have received copies of such amended or supplemented prospectus, and if so directed by the Company, such Electing Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Electing Holder's possession of the prospectus covering such Registrable Securities at the time of receipt of such notice. (f) In the event of a Shelf Registration, in addition to the information required to be provided by each Electing Holder in its Notice Questionnaire, the Company may require such Electing Holder to furnish to the Company such additional information regarding such Electing Holder and such Electing Holder's intended method of distribution of Registrable Securities as may be required in order to comply with the Securities Act. Each such Electing Holder agrees to notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Electing Holder to the Company or of the occurrence of any event in either case as a result of which any prospectus relating to such Shelf Registration contains or would contain an untrue statement of a material fact regarding such Electing Holder or such Electing Holder's intended method of disposition of such Registrable Securities or omits to state any material fact regarding such Electing Holder or such Electing Holder's intended method of disposition of such Registrable Securities required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading, and promptly to furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain, with respect to such Electing Holder or the disposition of such Registrable Securities, 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, in light of the circumstances in which they are made, not misleading. 4. Registration Expenses. The Company agrees to bear and to pay or cause to be paid promptly upon request being made therefor all expenses incident to the Company's performance of or compliance with this Registration Rights Agreement, including (a) all Commission and any NASD registration, filing and review fees and expenses including fees and disbursements of counsel for the placement or sales agent or underwriters in connection with such registration, filing and review, (b) all fees and expenses in connection with the qualification of the Securities for offering and sale under the State securities and blue sky laws referred to in Section 3(d)(xii) hereof and determination of their eligibility for investment under the laws of such jurisdictions as any managing underwriters or the Electing Holders may designate, including any fees and disbursements of counsel for the Electing Holders (subject to the limitations of Clause (i) below) or underwriters in connection with such qualification and determination, (c) all expenses relating to the preparation, printing, production, distribution and reproduction of each registration statement required to be filed hereunder, each prospectus included therein or prepared for distribution pursuant hereto, each amendment or supplement to the foregoing, the expenses of preparing the Securities for delivery and preparation and printing of certificates representing the Securities or delivery of Securities to be disposed of (including certificates representing the 14 15 Securities), (d) messenger, telephone and delivery expenses relating to the offering, sale or delivery of Securities and the preparation of documents referred in clause (c) above, (e) fees and expenses of the Trustee under the Indenture, any agent of the Trustee and any counsel for the Trustee and of any collateral agent or custodian, (f) internal expenses (including all salaries and expenses of the Company's officers and employees performing legal or accounting duties), (g) fees, disbursements and expenses of counsel and independent certified public accountants of the Company (including the expenses of any opinions or "cold comfort" letters required by or incident to such performance and compliance), (h) fees, disbursements and expenses of one counsel for the Electing Holders retained in connection with a Shelf Registration, as selected by the Electing Holders of at least a majority in aggregate principal amount of the Registrable Securities held by Electing Holders (which counsel shall be reasonably satisfactory to the Company), (i) any fees charged by securities rating services for rating the Securities, and (j) fees, expenses and disbursements of any other persons, including special experts, retained by the Company in connection with such registration (collectively, the "Registration Expenses"). To the extent that any Registration Expenses are incurred, assumed or paid by any holder of Registrable Securities or any placement or sales agent therefor or underwriter thereof, the Company shall reimburse such person for the full amount of the Registration Expenses so incurred, assumed or paid promptly after receipt of a request therefor. Notwithstanding the foregoing, the holders of the Registrable Securities being registered shall pay all agency fees and commissions and underwriting discounts and commissions attributable to the sale of such Registrable Securities and the fees and disbursements of any counsel, any "qualified independent underwriter" engaged pursuant to Section 3(d)(xix) hereof, or other advisors or experts retained by such holders (severally or jointly), other than the counsel and experts specifically referred to above. 5. Representations and Warranties. The Company represents and warrants to, and agrees with, each Purchaser and each of the holders from time to time of Registrable Securities that: (a) Each registration statement covering Registrable Securities and each prospectus (including any preliminary or summary prospectus) contained therein or furnished pursuant to Section 3(d) or Section 3(c) hereof and any further amendments or supplements to any such registration statement or prospectus, when it becomes effective or is filed with the Commission, as the case may be, and, in the case of an underwritten offering of Registrable Securities, at the time of the closing under the underwriting agreement relating thereto, will conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and at all times subsequent to the Effective Time when a prospectus would be required to be delivered under the Securities Act, other than from (i) such time as a notice has been given to holders of Registrable Securities pursuant to Section 3(d)(viii)(F) or Section 3(c)(iii)(F) hereof until (ii) such time as the Company furnishes an amended or supplemented prospectus pursuant to Section 3(e) or Section 3(c)(iv) hereof, each such registration statement, and each prospectus (including any summary prospectus) contained therein or furnished pursuant to Section 3(d) or Section 3(c) hereof, as then amended or supplemented, will conform in all material respects to the applicable requirements of the Securities Act and the Trust Indenture Act and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading; provided, however, that this representation and warranty shall not apply to any statements or 15 16 omissions made in reliance upon and in conformity with information furnished in writing to the Company by a holder of Registrable Securities expressly for use therein. (b) Any documents incorporated by reference in any prospectus referred to in Section 5(a) hereof, when they become or became effective or are or were filed with the Commission, as the case may be, will conform or conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and none of such documents will contain or contained an untrue statement of a material fact or will omit or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by a holder of Registrable Securities expressly for use therein. (c) The compliance by the Company with all of the provisions of this Registration Rights Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any subsidiary of the Company is a party or by which the Company or any subsidiary of the Company is bound or to which any of the property or assets of the Company or any subsidiary of the Company is subject, nor will such action result in any violation of the provisions of the certificate of incorporation, as amended, or the by-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any subsidiary of the Company or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by this Registration Rights Agreement, except the registration under the Securities Act of the Securities, qualification of the Indenture under the Trust Indenture Act and such consents, approvals, authorizations, registrations or qualifications as may be required under State securities or blue sky laws in connection with the offering and distribution of the Securities. (d) This Registration Rights Agreement has been duly authorized, executed and delivered by the Company. 6. Indemnification. (a) Indemnification by the Company. The Company shall indemnify and hold harmless each of the holders of Registrable Securities included in an Exchange Registration Statement, each of the Electing Holders of Registrable Securities included in a Shelf Registration Statement and each person who participates as a placement or sales agent or as an underwriter in any offering or sale of such Registrable Securities as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Exchange Registration Statement or Shelf Registration Statement, as the case may be, under which such Registrable Securities were registered under the Securities Act, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any such holder, Electing Holder, agent or underwriter, or any amendment or supplement thereto, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; 16 17 (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the holders of Registrable Securities), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that the Company shall not be liable to any such person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, or preliminary, final or summary prospectus, or amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by such person expressly for use therein; (b) Indemnification by the Holders and any Agents and Underwriters. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2(b) hereof and to entering into any underwriting agreement with respect thereto, that the Company shall have received an undertaking reasonably satisfactory to it from the Electing Holder of such Registrable Securities and from each underwriter named in any such underwriting agreement, severally and not jointly, to (i) indemnify and hold harmless the Company, and all other holders of Registrable Securities, against any losses, claims, damages or liabilities to which the Company or such other holders of Registrable Securities may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary, final or summary prospectus contained therein or furnished by the Company to any such Electing Holder, agent or underwriter, or any amendment 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, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Electing Holder or underwriter expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that no such Electing Holder shall be required to undertake liability to any person under this Section 6(b) for any amounts in excess of the dollar amount of the proceeds to be received by such Electing Holder from the sale of such Electing Holder's Registrable Securities pursuant to such registration. (c) Notices of Claims, Etc. Promptly after receipt by an indemnified party under subsection (a) or (b) above of written notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party pursuant to the indemnification provisions of or contemplated by this Section 6, notify such indemnifying party in writing of the commencement of such action; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party other than under the indemnification provisions of or contemplated by 17 18 Section 6(a) or 6(b) hereof. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by the holders of a majority of the Registrable Securities held by Electing Holders, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent the indemnifying party considers such request to be reasonable and (ii) provided written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. (e) Contribution. If for any reason the indemnification provisions contemplated by Section 6(a) or Section 6(b) are unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 6(e) were determined by pro rata allocation (even if the holders or any agents or underwriters or all of them were 18 19 treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(e), no holder shall be required to contribute any amount in excess of the amount by which the dollar amount of the proceeds received by such holder from the sale of any Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) exceeds the amount of any damages which such holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The holders' and any underwriters' obligations in this Section 6(e) to contribute shall be several in proportion to the principal amount of Registrable Securities registered or underwritten, as the case may be, by them and not joint. (f) The obligations of the Company under this Section 6 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each officer, director and partner of each holder, agent and underwriter and each person, if any, who controls any holder, agent or underwriter within the meaning of the Securities Act; and the obligations of the holders and any agents or underwriters contemplated by this Section 6 shall be in addition to any liability which the respective holder, agent or underwriter may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company (including any person who, with his consent, is named in any registration statement as about to become a director of the Company) and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. Underwritten Offerings. (a) Right to Effect Underwritten Offering. The holders of Registrable Securities covered by a Shelf Registration Statement filed pursuant to this Registration Rights Agreement may sell such Registrable Securities in an underwritten offering, provided that the holders of at least 20% in the aggregate principal amount of the Registrable Securities initially outstanding elect to participate in such offering and except that any such underwritten offering shall be suspended during any Shelf Registration Suspension. (b) Selection of Underwriters. If any of the Registrable Securities covered by the Shelf Registration are to be sold pursuant to an underwritten offering, the managing underwriter or underwriters thereof shall be designated by Electing Holders holding at least a majority in aggregate principal amount of the Registrable Securities to be included in such offering, provided that such designated managing underwriter or underwriters is or are reasonably acceptable to the Company. (c) Participation by Holders. Each holder of Registrable Securities hereby agrees with each other such holder that no such holder may participate in any underwritten offering hereunder unless such holder (i) agrees to sell such holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 19 20 8. Rule 144. The Company covenants to the holders of Registrable Securities that to the extent it shall be required to do so under the Exchange Act, the Company shall timely file the reports required to be filed by it under the Exchange Act or the Securities Act (including the reports under Section 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the Commission under the Securities Act) and the rules and regulations adopted by the Commission thereunder, and shall take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitations of the exemption provided by Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar or successor rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities in connection with that holder's sale pursuant to Rule 144, the Company shall deliver to such holder a written statement as to whether it has complied with such requirements. 9. Miscellaneous. (a) No Inconsistent Agreements. The Company represents, warrants, covenants and agrees that it has not granted, and shall not grant, registration rights with respect to Registrable Securities or any other securities which prevents the exercise of or otherwise conflicts with the terms contained in this Registration Rights Agreement. (b) Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law if the Company fails to perform any of its obligations hereunder and that the Initial Purchasers and the holders from time to time of the Registrable Securities may be irreparably harmed by any such failure, and accordingly agree that the Initial Purchasers and such holders, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of the respective obligations of the Company under this Registration Rights Agreement in accordance with the terms and conditions of this Registration Rights Agreement, in any court of the United States or any State thereof having jurisdiction. (c) Notices. All notices, requests, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, if delivered personally or by courier, or three days after being deposited in the mail (registered or certified mail, postage prepaid, return receipt requested) as follows: If to the Company, to it at Pogo Producing Company, 5 Greenway Plaza, Suite 2700, Houston, Texas 77046-0504, attention Corporate Secretary, and if to a holder, to the address of such holder set forth in the security register or other records of the Company, or to such other address as the Company or any such holder may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. For purposes of any notice to holders required hereunder, the Company, absent knowledge to the contrary, may presume that all holders are listed in the security register. (d) Parties in Interest. All the terms and provisions of this Registration Rights Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the parties hereto and the holders from time to time of the Registrable Securities and the respective successors and assigns of the parties hereto and such holders. In the event that any transferee of any holder of Registrable Securities shall acquire Registrable Securities, in any manner, whether by gift, bequest, purchase, operation of law or otherwise, such transferee shall, without any further writing or action of any kind, be deemed a beneficiary hereof for all purposes and such Registrable Securities shall be held subject to all of the terms of this Registration Rights 20 21 Agreement, and by taking and holding such Registrable Securities such transferee shall be entitled to receive the benefits of, and be conclusively deemed to have agreed to be bound by all of the applicable terms and provisions of this Registration Rights Agreement. If the Company shall so request, any such successor, assign or transferee shall agree in writing to acquire and hold the Registrable Securities subject to all of the applicable terms hereof. (e) Survival. The respective indemnities, agreements, representations, warranties and each other provision set forth in this Registration Rights Agreement or made pursuant hereto shall remain in full force and effect regardless of any investigation (or statement as to the results thereof) made by or on behalf of any holder of Registrable Securities, any director, officer or partner of such holder, any agent or underwriter or any director, officer or partner thereof, or any controlling person of any of the foregoing, and shall survive delivery of and payment for the Registrable Securities pursuant to the Purchase Agreement and the transfer and registration of Registrable Securities by such holder and the consummation of an Exchange Offer. (f) LAW GOVERNING. THIS REGISTRATION RIGHTS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. (g) Headings. The descriptive headings of the several Sections and paragraphs of this Registration Rights Agreement are inserted for convenience only, do not constitute a part of this Registration Rights Agreement and shall not affect in any way the meaning or interpretation of this Registration Rights Agreement. (h) Entire Agreement; Amendments. This Registration Rights Agreement and the other writings referred to herein (including the Indenture and the form of Securities) or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. This Registration Rights Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. This Registration Rights Agreement may be amended and the observance of any term of this Registration Rights Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a written instrument duly executed by the Company and the holders of at least a majority in aggregate principal amount of the Registrable Securities at the time outstanding. Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any amendment or waiver effected pursuant to this Section 9(h), whether or not any notice, writing or marking indicating such amendment or waiver appears on such Registrable Securities or is delivered to such holder. (i) Inspection. For so long as this Registration Rights Agreement shall be in effect, this Registration Rights Agreement and a complete list of the names and addresses of all the holders of Registrable Securities shall be made available upon reasonable prior written notice for inspection and copying on any business day by any holder of Registrable Securities for proper purposes only (which shall include any purpose related to the rights of the holders of Registrable Securities under the Securities, the Indenture and this Agreement) at the offices of the Company at the address thereof set forth in Section 9(c) above and at the office of the Trustee under the Indenture. (j) Counterparts. This agreement may be executed by the parties in counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 21 22 Agreed to and accepted as of the date referred to above. POGO PRODUCING COMPANY By: /s/ JOHN W. ELSENHANS ------------------------------------------------ Name: John W. Elsenhans Title: Vice President and Chief Financial Officer MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED GOLDMAN, SACHS & CO. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ MARISA D. DREW -------------------------------------------- Authorized signatory On behalf of each of the Initial Purchasers 22 23 EXHIBIT A POGO PRODUCING COMPANY. INSTRUCTION TO DTC PARTICIPANTS (Date of Mailing) URGENT - IMMEDIATE ATTENTION REQUESTED DEADLINE FOR RESPONSE: [DATE](1/) The Depository Trust Company ("DTC") has identified you as a DTC Participant through which beneficial interests in the Pogo Producing Company (the "Company") 10 3/8% Senior Subordinated Notes due 2009 (the "Securities") are held. The Company is in the process of registering the Securities under the Securities Act of 1933 for resale by the beneficial owners thereof. In order to have their Securities included in the registration statement, beneficial owners must complete and return the enclosed Notice of Registration Statement and Selling Securityholder Questionnaire. It is important that beneficial owners of the Securities receive a copy of the enclosed materials as soon as possible as their rights to have the Securities included in the registration statement depend upon their returning the Notice and Questionnaire by [DEADLINE FOR RESPONSE]. Please forward a copy of the enclosed documents to each beneficial owner that holds interests in the Securities through you. If you require more copies of the enclosed materials or have any questions pertaining to this matter, please contact Pogo Producing Company, 5 Greenway Plaza, Suite 2700, Houston, Texas 77046-0504, attention Corporate Secretary, (713) 297-5017. - ---------------------- (1/) Not less than 28 calendar days from date of mailing. 23 24 Pogo Producing Company Notice of Registration Statement and Selling Securityholder Questionnaire (Date) Reference is hereby made to the Registration Rights Agreement (the "Registration Rights Agreement") among Pogo Producing Company (the "Company") and the Initial Purchasers named therein. Pursuant to the Registration Rights Agreement, the Company has filed with the United States Securities and Exchange Commission (the "Commission") a registration statement on Form [___] (the "Shelf Registration Statement") for the registration and resale under Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), of the Company's 10 3/8% Senior Subordinated Notes due 2009 (the "Securities"). A copy of the Registration Rights Agreement is attached hereto. All capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement. Each beneficial owner of Registrable Securities (as defined below) is entitled to have the Registrable Securities beneficially owned by it included in the Shelf Registration Statement. In order to have Registrable Securities included in the Shelf Registration Statement, this Notice of Registration Statement and Selling Securityholder Questionnaire ("Notice and Questionnaire") must be completed, executed and delivered to the Company's counsel at the address set forth herein for receipt ON OR BEFORE [DEADLINE FOR RESPONSE]. Beneficial owners of Registrable Securities who do not complete, execute and return this Notice and Questionnaire by such date (i) will not be named as selling securityholders in the Shelf Registration Statement and (ii) may not use the Prospectus forming a part thereof for resales of Registrable Securities. Certain legal consequences arise from being named as a selling securityholder in the Shelf Registration Statement and related Prospectus. Accordingly, holders and beneficial owners of Registrable Securities are advised to consult their own securities law counsel regarding the consequences of being named or not being named as a selling securityholder in the Shelf Registration Statement and related Prospectus. The term "Registrable Securities" is defined in the Registration Rights Agreement. 24 25 ELECTION The undersigned holder (the "Selling Securityholder") of Registrable Securities hereby elects to include in the Shelf Registration Statement the Registrable Securities beneficially owned by it and listed below in Item (3). The undersigned, by signing and returning this Notice and Questionnaire, agrees to be bound with respect to such Registrable Securities by the terms and conditions of this Notice and Questionnaire and the Registration Rights Agreement, including, without limitation, Section 6 of the Registration Rights Agreement, as if the undersigned Selling Securityholder were an original party thereto. Upon any sale of Registrable Securities pursuant to the Shelf Registration Statement, the Selling Securityholder will be required to deliver to the Company and Trustee the Notice of Transfer set forth in Appendix A to the Prospectus and as Exhibit B to the Registration Rights Agreement. The Selling Securityholder hereby provides the following information to the Company and represents and warrants that such information is accurate and complete: 25 26 QUESTIONNAIRE (1) (a) Full Legal Name of Selling Securityholder: ------------------------------------------------------------- (b) Full Legal Name of Registered Holder (if not the same as in (a) above) of Registrable Securities Listed in Item (3) below: ------------------------------------------------------------- (c) Full Legal Name of DTC Participant (if applicable and if not the same as (b) above) Through Which Registrable Securities Listed in Item (3) below are Held: ------------------------------------------------------------- (2) Address for Notices to Selling Securityholder: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- Telephone: ----------------------------- Fax: ----------------------------- Contact Person: ----------------------------- (3) Beneficial Ownership of Securities: Except as set forth below in this Item (3), the undersigned does not beneficially own any Securities. (a) Principal amount of Registrable Securities beneficially owned: ------------------------------------------------------------ CUSIP No(s). of such Registrable Securities: ---------------------- (b) Principal amount of Securities other than Registrable Securities beneficially owned: ----------------------------------------------- CUSIP No(s). of such other Securities: ---------------------------- 26 27 (c) Principal amount of Registrable Securities which the undersigned wishes to be included in the Shelf Registration Statement: --------------------------------------------------- CUSIP No(s). of such Registrable Securities to be included in the Shelf Registration Statement: ---------------- (4) Beneficial Ownership of Other Securities of the Company: Except as set forth below in this Item (4), the undersigned Selling Securityholder is not the beneficial or registered owner of any other securities of the Company, other than the Securities listed above in Item (3). State any exceptions here: (5) Relationships with the Company: Except as set forth below, neither the Selling Securityholder nor any of its affiliates, officers, directors or principal equity holders (5% or more) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years. State any exceptions here: (6) Plan of Distribution: Except as set forth below, the undersigned Selling Securityholder intends to distribute the Registrable Securities listed above in Item (3) only as follows (if at all): Such Registrable Securities may be sold from time to time directly by the undersigned Selling Securityholder or, alternatively, through underwriters, broker-dealers or agents. Such Registrable Securities may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale, or at negotiated prices. Such sales may be effected in transactions (which may involve crosses or block transactions) (i) on any national securities exchange or quotation service on which the Registered Securities may be listed or quoted at the time of sale, (ii) in the over-the-counter market, (iii) in transactions otherwise than on such exchanges or services or in the over-the-counter market, or (iv) through the writing of options. In connection with sales of the Registrable Securities or otherwise, the Selling Securityholder may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Registrable Securities in the course of hedging the positions they assume. The Selling Securityholder may also sell Registrable Securities short and deliver Registrable Securities to close out such short positions, or loan or pledge Registrable Securities to broker-dealers that in turn may sell such securities. 27 28 State any exceptions here: (7) Specify the number of copies of the prospectus needed: ---------------- By signing below, the Selling Securityholder acknowledges that it understands its obligation to comply, and agrees that it will comply, with the provisions of the Exchange Act and the rules and regulations thereunder, particularly Regulation M thereunder. In the event that the Selling Securityholder transfers all or any portion of the Registrable Securities listed in Item (3) above after the date on which such information is provided to the Company, the Selling Securityholder agrees to notify the transferee(s) at the time of the transfer of its rights and obligations under this Notice and Questionnaire and the Registration Rights Agreement. By signing below, the Selling Securityholder consents to the disclosure of the information contained herein in its answers to Items (1) through (7) above and the inclusion of such information in the Shelf Registration Statement and related Prospectus. The Selling Securityholder understands that such information will be relied upon by the Company in connection with the preparation of the Shelf Registration Statement and related Prospectus. In accordance with the Selling Securityholder's obligation under Section 3(d) of the Registration Rights Agreement to provide such information as may be required by law for inclusion in the Shelf Registration Statement, the Selling Securityholder agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein which may occur subsequent to the date hereof at any time while the Shelf Registration Statement remains in effect. All notices hereunder and pursuant to the Exchange and Registration Rights Agreement shall be made in writing, by hand-delivery, first-class mail, or air courier guaranteeing overnight delivery to the Company as follows: Pogo Producing Company 5 Greenway Plaza, Suite 2700 Houston, Texas 77046-0504 Attention: Corporate Secretary (713) 297-5017 Once this Notice and Questionnaire is executed by the Selling Securityholder and received by the Company's counsel, the terms of this Notice and Questionnaire, and the representations and warranties contained herein, shall be binding on, shall inure to the benefit of and shall be enforceable by the respective successors, heirs, personal representatives, and assigns of the Company and the Selling Securityholder (with respect to the Registrable Securities beneficially owned by such Selling Securityholder and listed in Item (3) above. This Agreement shall be governed in all respects by the laws of the State of New York. 28 29 IN WITNESS WHEREOF, the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent. Dated: -------------------- -------------------------------------------------- Selling Securityholder (Print/type full legal name of beneficial owner of Registrable Securities) By: ----------------------------------------------- Name: Title: PLEASE RETURN THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE FOR RECEIPT ON OR BEFORE [DEADLINE FOR RESPONSE] TO THE COMPANY AT Pogo Producing Company 5 Greenway Plaza, Suite 2700 Houston, Texas 77046-0504 Attention: Corporate Secretary (713) 297-5017 29 30 EXHIBIT B [FORM OF REPRESENTATION LETTER TO TRANSFER NOTES TO UNRESTRICTED CUSIP] [DATE] Pogo Producing Company 5 Greenway Plaza, Suite 2700 Houston, TX 77046-0504 (713) 297-4970 (fax) Attention: Gerald Morton State Street Bank and Trust Company, as Trustee Goodwin Square 225 Asylum Street, 23rd Floor Hartford, CT 06103 (860) 244-1897 (fax) Attention: Phillip Kane Re: Pogo Producing Company 10 3/8% Senior Subordinated Notes due 2009 Gentlemen: We hereby certify that Pogo Producing Company (the "Company") and to State Street Bank and Trust Company, as Trustee, that [NAME OF SELLER] (the "Seller") sold $[AMOUNT SOLD] of the Company's 103/8% Series A Senior Subordinated Notes due 2009 (the "Notes") held on behalf of the Seller in the name of [DTC NOMINEE'S NAME] with The Depository Trust Company as a portion of the unregistered Global Security and representing a portion of the Notes (CUSIP No. 730448 AK 3). The Notes sold by the undersigned were sold pursuant to a prospectus for the Notes dated [DATE OF PROSPECTUS, AS SUPPLEMENTED] (the "Prospectus"). In connection with the sale of the Notes, Seller hereby represents and warrants to the Company and the Trustee that: (i) such Notes were sold in accordance with the section of the Prospectus entitled "Plan of Distribution", (ii) a copy of the Prospectus was delivered in connection with the sale, (iii) to Seller's knowledge, the purchaser was not an Affiliate (as such term is defined in the Securities Act of 1933, as amended (the "Act")) of the Company, and (iv) that all of the provisions of the Act were complied with in connection with such sale. The amount of Notes sold, and their trade date(s) is a follows:
TRADE DATE AMOUNT OF NOTES SOLD ---------- -------------------- [INSERT TRADE DATE] [AMOUNT SOLD]
The undersigned represents and warrants that he is a duly authorized officer or representative of Seller, with the full power and authority to make the representations and statements contained herein, and B-1 31 that such representations and statements are for the benefit of the Company and Trustee and may be relied upon by them in effecting the transfer of the amount of Notes sold from the Global Security representing the Notes (CUSIP No. 730448 AK 3) to the Global Security representing the 10 3/8% Series B Senior Subordinated Notes due 2009 of the Company (CUSIP No. 730448 AL 1). [SELLER] By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- B-2 EX-5.1 5 OPINION OF GERALD A. MORTON 1 EXHIBIT 5.1 February 10, 1999 Pogo Producing Company 5 Greenway Plaza, Suite 2700 Houston, Texas 77046 Ladies and Gentlemen: As set forth in the Registration Statement on Form S-4 ("Registration Statement"), filed by Pogo Producing Company, a Delaware corporation (the "Company"), under the Securities Act of 1933, as amended (the "Act"), relating to $150,000,000 aggregate principal amount of 10 3/8% Senior Subordinated Notes due 2009 of the Company (the "Notes"), certain legal matters in connection with the Notes are being passed upon for you by me. The Notes are to be issued under an indenture (the "Indenture") between the Company and State Street Bank and Trust Company, as successor in interest to Fleet National Bank, as trustee (the "Trustee"). At your request, this opinion is being furnished to you for filing as Exhibit 5.1 to the Registration Statement. I have acted as counsel for the Company in connection with the registration and sale of the Notes. In such capacity, I have examined the Company's Restated Certificate of Incorporation and Bylaws, each as amended to date, and have examined the originals, or copies certified or otherwise identified, of corporate records of the Company, certificates of public officials and of representatives of the Company, statutes and other records, instruments and documents as a basis for the opinions hereinafter expressed. Based upon our examination as aforesaid and subject to the assumptions, qualifications, limitations and exceptions set forth herein, I am of the opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of Delaware. 2. The Indenture constitutes a legal, valid and binding instrument of the Company, enforceable against the Company in accordance with its terms. 3. The Notes constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms. 2 FEBRUARY 9, 1999 PAGE 2 OF 2 The opinions as to enforceability of obligations set forth in paragraphs 2 and 3 above are each subject to the effect on such enforceability of (i) bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting creditors' rights and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). I hereby consent to the filing of this opinion as exhibit to the Registration Statement and to the use of my name under the caption "Legal Matters." Regards, Gerald A. Morton GAM/kbm EX-12.1 6 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 POGO PRODUCING COMPANY RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- -------- -------- EARNINGS: Income (loss) before taxes and extraordinary items .......... $ 40,042 $ 42,891 $ 14,121 $ 52,381 $ 55,207 $ 45,072 $(19,858) Add-- Fixed charges .................... 11,245 10,377 11,454 13,554 22,361 16,124 17,882 Less-- Capitalized interest ............. (451) (739) (1,834) (4,244) (6,175) (3,463) (6,540) -------- -------- -------- -------- -------- -------- -------- $ 50,836 $ 52,529 $ 23,741 $ 61,691 $ 71,393 $ 57,733 $ (8,516) ======== ======== ======== ======== ======== ======== ======== FIXED CHARGES: Interest expense ................... $ 10,956 $ 10,104 $ 11,167 $ 13,203 $ 21,886 $ 15,771 $ 17,513 Portion of rental expense representing interest ............ 289 273 287 351 475 353 369 -------- -------- -------- -------- -------- -------- -------- Total fixed charges .............. $ 11,245 $ 10,377 $ 11,454 $ 13,554 $ 22,361 $ 16,124 $ 17,882 ======== ======== ======== ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES: .................. 4.51 5.1 2.1 4.6 3.2 3.6 N/A* ======== ======== ======== ======== ======== ======== ========
* The ratio of earnings to fixed charges is not meaningful for periods in which losses are recorded. EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Registration on Form S-4 of our report dated February 13, 1998, included in Pogo Producing Company's Annual Report on Form 10-K for the year ended December 31, 1997, and to all references to our Firm included in this Registration Statement. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP Houston, Texas February 10, 1999 EX-23.2 8 CONSENT OF RYDER SCOTT COMANY PETROLEUM ENGINEERS 1 EXHIBIT 23.2 [RYDER SCOTT COMPANY LETTERHEAD] CONSENT OF INDEPENDENT PETROLEUM ENGINEERS We hereby consent to the use of our name in this Registration Statement on Form S-4 under the heading "Experts". We further consent to the incorporation by reference of our estimates of reserve and present value of future net reserves in such Registration Statement. /s/ RYDER SCOTT COMPANY PETROLEUM ENGINEERS RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas February 8, 1999 EX-24.1 9 POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY I, JERRY M. ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ JERRY M. ARMSTRONG ----------------------------------- Jerry M. Armstrong 2 POWER OF ATTORNEY I, TOBIN ARMSTRONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ TOBIN ARMSTRONG ----------------------------------- Tobin Armstrong 3 POWER OF ATTORNEY I, JACK S. BLANTON, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ JACK S. BLANTON ----------------------------------- Jack S. Blanton 4 POWER OF ATTORNEY WHEREAS, POGO PRODUCING COMPANY, a Delaware corporation (the "Company"), intends to file with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), a Registration Statement on Form S-4 (the "Registration Statement") in order to register certain securities pursuant to the Act as have been approved by the Board of Directors pursuant to resolutions adopted thereby, and also to file any and all exhibits and other documents relating to said Registration Statement that are necessary or advisable; NOW THEREFORE, I, W. M. Brumley, Jr., in my capacity as a director of the Company, do hereby appoint PAUL G. VAN WAGENEN, JOHN W. ELSENHANS, and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in my name, place and stead in my capacity as a director of the Company, said Registration Statement, any and all amendments to said Registration Statement and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf in my capacity as a director any act whatsoever that is necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 8th day of February, 1999. /s/ W. M. BRUMLEY, JR. ----------------------------------- W. M. Brumley, Jr. 5 POWER OF ATTORNEY I, JOHN B. CARTER, JR., in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ JOHN B. CARTER, JR. ----------------------------------- John B. Carter, Jr. 6 POWER OF ATTORNEY I, WILLIAM L. FISHER, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ WILLIAM L. FISHER ----------------------------------- William L. Fisher 7 POWER OF ATTORNEY I, GERRIT W. GONG, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 27th day of January, 1999. /s/ GERRIT W. GONG ----------------------------------- Gerrit W. Gong 8 POWER OF ATTORNEY I, J. STUART HUNT, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ J. STUART HUNT ----------------------------------- J. Stuart Hunt 9 POWER OF ATTORNEY I, FREDERICK A. KLINGENSTEIN, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ FREDERICK A. KLINGENSTEIN ----------------------------------- Frederick A. Klingenstein 10 POWER OF ATTORNEY I, JACK A. VICKERS, in my individual capacity and as a director of Pogo Producing Company (the "Company"), do hereby appoint PAUL G. VAN WAGENEN and THOMAS E. HART, and each of them severally, my true and lawful attorney or attorneys with power to act with or without the other, and with full power of substitution and resubstitution, to prepare, execute and file, in my name, place and stead in my individual capacity and as a director of the Company, such documents, reports and filings as may be necessary or advisable under the Securities Exchange Act of 1934, as amended (the "Act"), the Securities Act of 1933, as amended (the "Securities Act") or any other federal, state or local law regulating the Company including, without limitation, the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, as prescribed by the Securities and Exchange Commission (the "Commission") pursuant to the Act, and the rules and regulations promulgated thereunder, with any and all exhibits and other documents relating thereto, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of said attorneys shall have full power and authority to do and perform in my name and on my behalf any act whatsoever to accomplish the purpose and intent of the foregoing that said attorneys deem may be necessary or desirable to be done in the premises as fully and to all intents and purposes as I might or could do in person, and by my signature hereto, I hereby ratify and approve any and all of such acts of said attorneys and each of them. IN WITNESS WHEREOF, I have executed this instrument on this 26th day of January, 1999. /s/ JACK A. VICKERS ----------------------------------- Jack A. Vickers EX-25.1 10 STATEMENT OF ELIGIBILITY OF TRUSTEE 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) POGO PRODUCING COMPANY (NAME OF ISSUER) (Exact name of obligor as specified in its charter) DELAWARE (74-1659398 ) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (ADDRESS OF ISSUER) (Address of principal executive offices) (Zip Code) 5 GREENWAY PLAZA, SUITE 2700 HOUSTON, TEXAS 77252-2504 (TYPE OF SECURITIES) 10 3/8 % SENIOR SUBORDINATED NOTES DUE 2009 (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. 3 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. 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 February 1, 1999. STATE STREET BANK AND TRUST COMPANY By: /s/ PHILIP G. KANE, JR. -------------------------------- NAME PHILIP G. KANE, JR. TITLE VICE PRESIDENT 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 POGO PRODUCING COMPANY of its 10 3/8% Senior Subordinated Notes due 2009 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/ PHILIP G. KANE, JR. -------------------------------- NAME: PHILIP G. KANE, JR. TITLE: VICE PRESIDENT DATED: FEBRUARY 1, 1999 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 September 30, 1998, 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 ............................. 2,008,956 Interest-bearing balances ...................................................... 12,286,877 Securities .......................................................................... 9,654,241 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary ............................................ 10,922,779 Loans and lease financing receivables: Loans and leases, net of unearned income ....................................... 7,457,235 Allowance for loan and lease losses ............................................ 82,851 Allocated transfer risk reserve ................................................ 0 Loans and leases, net of unearned income and allowances ........................ 7,374,384 Assets held in trading accounts ..................................................... 1, 898,804 Premises and fixed assets ........................................................... 513,372 Other real estate owned ............................................................. 100 Investments in unconsolidated subsidiaries .......................................... 484 Customers' liability to this bank on acceptances outstanding ........................ 48,563 Intangible assets ................................................................... 220,613 Other assets ........................................................................ 1,333,210 ------------ Total assets ................................................................... 46,262,383 ============ LIABILITIES Deposits: In domestic offices ............................................................ 9,557,938 Noninterest-bearing ............................................................ 7,158,356 Interest-bearing ............................................................... 2,399,582 In foreign offices and Edge subsidiary ......................................... 18,451,054 Noninterest-bearing ............................................................ 429,797 Interest-bearing ............................................................... 18,021,257 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary ............................................ 12,023,438 Demand notes issued to the U.S. Treasury ............................................ 451,424 Trading liabilities ............................................................ 1,582,933 Other borrowed money ................................................................ 323,782 Subordinated notes and debentures ................................................... 0 Bank's liability on acceptances executed and outstanding ............................ 48,563 Other liabilities ................................................................... 1,226,129 Total liabilities .............................................................. 43,665,261 ------------ EQUITY CAPITAL Perpetual preferred stock and related surplus ....................................... 0 Common stock ........................................................................ 29,931 Surplus ............................................................................. 462,782 Undivided profits and capital reserves/Net unrealized holding gains (losses) ........ 2,080,148 Net unrealized holding gains (losses) on available-for-sale securities ......... 27,376 Cumulative foreign currency translation adjustments ................................. (3,115) Total equity capital ................................................................ 2,597,122 ------------ Total liabilities and equity capital ........................................... 46,262,383 ============
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 7 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 of the obligor, the trustee has relied upon the 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 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 duly 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 February 1, 1999. STATE STREET BANK AND TRUST COMPANY By: /s/ PHILIP G. KANE, JR. ---------------------------------- NAME PHILIP G. KANE, JR. TITLE VICE PRESIDENT 8 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 POGO PRODUCING COMPANY. of its 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, 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/ PHILIP G. KANE, JR. --------------------------------- NAME: PHILIP G. KANE, JR. TITLE: VICE PRESIDENT DATED: FEBRUARY 1, 1999 EX-99.1 11 FORM OF LETTER OF TRANSMITTAL 1 Exhibit 99.1 POGO PRODUCING COMPANY LETTER OF TRANSMITTAL FOR TENDER OF ALL OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A IN EXCHANGE FOR 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B ---------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ____________, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE") OUTSTANDING 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 THE EXCHANGE AGENT: STATE STREET BANK AND TRUST COMPANY By Hand/Overnight Courier: By Mail: Corporate Trust Department Corporate Trust Department Two International Place, 4th Floor P. O. Box 778 Boston, Massachusetts 02110 Boston, Massachusetts 02102-0078 By Facsimile: (617) 664-5739 Confirm by Telephone: (617) 664-5314 ------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned hereby acknowledges receipt and review of the Prospectus dated _________, 1999 (the "Prospectus") of Pogo Producing Company, a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which together describe the Company's offer (the "Exchange Offer") to exchange its 10 3/8% Senior Subordinated Notes due 2009, Series B (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for a like principal amount of its issued and outstanding 10 3/8% Senior Subordinated Notes due 2007, Series A (the "Outstanding Notes"). Capitalized terms used but not defined herein have the respective meaning given to them in the Prospectus. 1 2 The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. The Company shall notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter of Transmittal is to be used by a holder of Outstanding Notes (i) if certificates of Outstanding Notes are to be forwarded herewith or (ii) if delivery of Outstanding Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "DTC") pursuant to the procedures set forth in the Prospectus under the caption "The Exchange Offer -- Book-Entry Transfer." Holders of Outstanding Notes whose Outstanding Notes are not immediately available, or who are unable to deliver their Outstanding Notes and all other documents required by this Letter of Transmittal to the Exchange Agent on or prior to the Expiration Date, or who are unable to complete the procedure for book-entry transfer on a timely basis, must tender their Outstanding Notes according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer - --Guaranteed Delivery Procedures." See Instruction 2. Delivery of documents to the DTC does not constitute delivery to the Exchange Agent. The term "holder" with respect to the Exchange Offer means any person in whose name Outstanding Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Outstanding Notes must complete this Letter of Transmittal in its entirety. PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. List below the Outstanding Notes to which this Letter of Transmittal relates. If the space below is inadequate, list the registered numbers and principal amounts on a separate signed schedule and affix the list to this Letter of Transmittal.
- ------------------------------------------------------------------------------------------------------------------ DESCRIPTION OF OUTSTANDING NOTES TENDERED - ------------------------------------------------------------------------------------------------------------------ Name(s) and Address(es) of Registered Old Note(s) Tendered Holder(s) Exactly as Name(s) ------------------------------------------------------------ Appear(s) on Outstanding Notes (Please Fill In, If Blank) Aggregate Principal Principal Registered Amount Represented Amount Number(s)* by Note(s) Tendered** ------------------------------------- ----------- ------------------- ---------- ----------- ------------------- ---------- ----------- ------------------- ---------- Total - ------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders. ** Unless otherwise indicated, any tendering holder of Outstanding Notes will be deemed to have tendered the entire aggregate principal amount represented by such Outstanding Notes. All tenders must be in integral multiples of $1,000. 2 3 [ ] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE ENCLOSED HEREWITH. [ ] CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE DTC (FOR USE BY ELIGIBLE INSTITUTIONS ONLY): Name of Tendering Institution: ------------------------------------------------------------------- Account Number: ------------------------------------------------------------------------ Transaction Code Number: ------------------------------------------------------------------------ [ ] CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH (FOR USE BY ELIGIBLE INSTITUTIONS ONLY): Name(s) of Registered holder(s) of Outstanding Notes: ---------------------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: ----------------------------------------------------------- Window Ticket Number (if available): ---------------------------------------------------------------- Name of Eligible Institution that Guaranteed Delivery: ----------------------------------------------------------- Account Number (if delivered by book-entry transfer): ---------------------------------------------------------- [ ] CHECK HERE AND COMPLETE THE FOLLOWING IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO: Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- Number of Additional Copies: ---------------- 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 Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Outstanding Notes, it acknowledges that the Outstanding Notes were acquired as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 3 4 SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Company for exchange the principal amount of Outstanding Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Outstanding Notes tendered in accordance with this Letter of Transmittal, the undersigned hereby exchanges, assigns and transfers to the Company all right, title and interest in and to the Outstanding Notes tendered for exchange hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact for the undersigned (with full knowledge that said Exchange Agent also acts as the agent for the Company in connection with the Exchange Offer) with respect to the tendered Outstanding Notes with full power of substitution to (i) deliver such Outstanding Notes, or transfer ownership of such Outstanding Notes on the account books maintained by the DTC, to the Company and deliver all accompanying evidences of transfer and authenticity, and (ii) present such Outstanding Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Outstanding Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed to be irrevocable and coupled with an interest. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, exchange, assign and transfer the Outstanding Notes tendered hereby and to acquire the New Notes issuable upon the exchange of such tendered Outstanding Notes, and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are accepted for exchange by the Company. The undersigned acknowledge(s) that this Exchange Offer is being made in reliance upon interpretations contained in no-action letters issued to third parties by the staff of the Securities and Exchange Commission (the "SEC"), including Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989), Morgan Stanley Co. Inc., SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter (available June 5, 1991), that the New Notes issued in exchange for the Outstanding Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders are not engaging in and have no arrangement or understanding with any person to participate in a distribution of such New Notes. The undersigned hereby further represent(s) to the Company that (i) any New Notes acquired in exchange for Outstanding Notes tendered hereby are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not the undersigned, (ii) neither the undersigned nor any such other person is engaging in or intends to engage in a distribution of the New Notes, (iii) neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes, (iv) neither the holder nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company or, if it 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 undersigned is a broker-dealer, such person has acquired the Outstanding Notes as a result of market-making activities or other trading activities. If the undersigned or the person receiving the New Notes is a broker-dealer that is receiving New Notes for its own account in exchange for Outstanding Notes that were acquired as a result of market-making activities or other trading activities, the undersigned acknowledges that it or such other person will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that the undersigned or such other person is an "underwriter" within the meaning of the Securities Act. The undersigned acknowledges that if the undersigned is participating in the Exchange Offer for the purpose of distributing the New Notes (i) the undersigned cannot rely on the position of the staff of the SEC in certain 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 New Notes, in which case 4 5 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 SEC, and (ii) failure to comply with such requirements in such instance could result in the undersigned incurring liability under the Securities Act for which the undersigned is not indemnified by the Company. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of the Outstanding Notes tendered hereby, including the transfer of such Outstanding Notes on the account books maintained by the DTC. For purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange validly tendered Outstanding Notes when, as and if the Company gives oral or written notice thereof to the Exchange Agent. Any tendered Outstanding Notes that are not accepted for exchange pursuant to the Exchange Offer for any reason will be returned, without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under "Special Delivery Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned, and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned acknowledges that the Company's acceptance of properly tendered Outstanding 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. Unless otherwise indicated under "Special Issuance Instructions," please issue the New Notes issued in exchange for the Outstanding Notes accepted for exchange and return any Outstanding Notes not tendered or not exchanged, in the name(s) of the undersigned. Similarly, unless otherwise indicated under "Special Delivery Instructions," please mail or deliver the New Notes issued in exchange for the Outstanding Notes accepted for exchange and any Outstanding Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signatures). In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the New Notes issued in exchange for the Outstanding Notes accepted for exchange in the name(s) of, and return any Outstanding Notes not tendered or not exchanged to, the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Outstanding Notes from the name of the registered holder(s) thereof if the Company does not accept for exchange any of the Outstanding Notes so tendered for exchange. 5 6 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6) To be completed ONLY (i) if Outstanding Notes in a principal amount not tendered, or New Notes issued in exchange for Outstanding Notes accepted for exchange, are to be issued in the name of someone other than the other than the undersigned, or (ii) if Outstanding Notes tendered by book-entry transfer which are not exchanged are to be returned by credit to an account maintained at the DTC. Issue New Notes and/or Outstanding Notes to: Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- (include Zip Code) - -------------------------------------------------------------------------------- (Tax Identification or Social Security Number) (Please Type or Print) SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6) To be completed ONLY if Oustanding Notes in a principal amount not tendered, or New Notes Issued, in exchange for Outstanding Notes accepted for exchange, are to be mailed or delivered to someone other than the undersigned, or the undersigned at an address other than that shown below the undersigned's signature. Mail or deliver New Notes and/or Outstanding Notes to: Name: -------------------------------------------------------------------------- Address: ----------------------------------------------------------------------- (include Zip Code) - -------------------------------------------------------------------------------- (Tax Identification or Social Security Number) (Please Type or Print) [ ] Credit unexchanged Outstanding Notes delivered by book-entry transfer to the DTC set forth below: DTC Account Number: - -------------------------------------------------------------------------------- IMPORTANT PLEASE SIGN HERE WHETHER OR NOT OUTSTANDING NOTES ARE BEING PHYSICALLY TENDERED HEREBY (Complete Accompanying Substitute Form W-9 Below) X - -------------------------------------------------------------------------------- X - -------------------------------------------------------------------------------- (Signature(s) of Registered Holders of Outstanding Notes) Dated , 1999 ---------------------------------------------------------- (The above lines must be signed by the registered holder(s) of Outstanding Notes as your name(s) appear(s) on the Outstanding Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by a properly completed bond power from the registered holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Outstanding Notes to which this Letter of Transmittal relate are held of record by two or more joint holders, then all such holders must sign this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, then such person must (i) set forth his or her full title below and (ii) unless waived by the Company, submit evidence satisfactory to the Company of such person's authority so to act. See Instruction 5 regarding the completion of this Letter of Transmittal, printed below.) 6 7 Name(s): ----------------------------------------------------------------------- (Please Type or Print) Capacity: ---------------------------------------------------------------------- Address: ----------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone Number: ------------------------------------------------ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MEDALLION SIGNATURE GUARANTEE (If Required by Instruction 5) Certain signatures must be Guaranteed by an Eligible Institution. Signature(s) Guaranteed by an Eligible Institution: ---------------------------------------------------------- (Authorized Signature) - ------------------------------------------------------------------------------- (Title) - ------------------------------------------------------------------------------- (Name of Firm) - ------------------------------------------------------------------------------- (Address, Include Zip Code) - ------------------------------------------------------------------------------- (Area Code and Telephone Number) Dated: , 1999 ------------------------------------------------------------------ 7 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OUTSTANDING NOTES OR BOOK-ENTRY CONFIRMATIONS. All physically delivered Outstanding Notes or any confirmation of a book-entry transfer to the Exchange Agent's account at the DTC of Outstanding Notes tendered by book-entry transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF THE TENDERED OUTSTANDING NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE COMPANY. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Outstanding Notes and (a) whose Outstanding Notes are not immediately available, or (b) who cannot deliver their Outstanding Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date or (c) who are unable to comply with the applicable procedures under DTC's Automated Tender Offer Program on a timely basis, must tender their Outstanding Notes according to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made by or through a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or a 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 (an "Eligible Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) or a properly transmitted agent's message and Notice of Guaranteed Delivery setting forth the name and address of the holder of the Outstanding Notes, the registration number(s) of such Outstanding Notes and the total principal amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, this Letter of Transmittal (or facsimile hereof) together with the Outstanding Notes in proper form for transfer (or a Book-Entry Confirmation) and any other documents required hereby, will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates for all physically tendered shares of Outstanding Notes, in proper form for transfer (or Book-Entry Confirmation, as the case may be) and all other documents required hereby are received by the Exchange Agent within five business days after the Expiration Date. Any holder of Outstanding Notes who wishes to tender Outstanding Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Outstanding Notes according to the guaranteed delivery procedures set forth above. See "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. 3. TENDER BY HOLDER. Only a holder of Outstanding Notes may tender such Outstanding Notes in the Exchange Offer. Any beneficial holder of Outstanding Notes who is not the registered holder and who wishes to tender should arrange with the registered holder to execute and deliver this Letter of Transmittal on his behalf or must, prior to completing and executing this Letter of Transmittal and delivering his Outstanding Notes, either make appropriate arrangements to register ownership of the Outstanding Notes in such holder's name or obtain a properly completed bond power from the registered holder. 4. PARTIAL TENDERS. Tenders of Outstanding Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Outstanding Notes is tendered, the tendering holder should fill in the 8 9 principal amount tendered in the fourth column of the box entitled "Description of Outstanding Notes Tendered" above. The entire principal amount of Outstanding Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Outstanding Notes is not tendered, then Outstanding Notes for the principal amount of Outstanding Notes not tendered and New Notes issued in exchange for any Outstanding Notes accepted will be sent to the holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal, promptly after the Outstanding Notes are accepted for exchange. 5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; MEDALLION GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile hereof) is signed by the record holder(s) of the Outstanding Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the Outstanding Notes without alteration, enlargement or any change whatsoever. If this Letter of Transmittal (or facsimile hereof) is signed by a participant in the DTC, the signature must correspond with the name as it appears on the security position listing as the holder of the Outstanding Notes. If this Letter of Transmittal (or facsimile hereof) is signed by the registered holder or holders of Outstanding Notes listed and tendered hereby and the New Notes issued in exchange therefor are to be issued (or any untendered principal amount of Outstanding Notes is to be reissued) to the registered holder, the said holder need not and should not endorse any tendered Outstanding Notes, nor provide a separate bond power. In any other case, such holder must either properly endorse the Outstanding Notes tendered or transmit a properly completed separate bond power with this Letter of Transmittal, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal (or facsimile hereof) is signed by a person other than the registered holder or holders of any Outstanding Notes listed, such Outstanding Notes must be endorsed or accompanied by appropriate bond powers, in each case signed as the name of the registered holder or holders appears on the Outstanding Notes. If this Letter of Transmittal (or facsimile hereof) or any Outstanding Notes 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, evidence satisfactory to the Company of their authority to act must be submitted with this Letter of Transmittal. Endorsements on Outstanding Notes or signatures on bond powers required by this Instruction 5 must be guaranteed by an Eligible Institution. NO SIGNATURE GUARANTEE IS REQUIRED IF (I) THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF) IS SIGNED BY THE REGISTERED HOLDER(S) OF THE OUTSTANDING NOTES TENDERED HEREIN (OR BY A PARTICIPANT IN THE DTC WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE OWNER OF THE TENDERED OUTSTANDING NOTES) AND THE NEW NOTES ARE TO BE ISSUED DIRECTLY TO SUCH REGISTERED HOLDER(S) (OR, IF SIGNED BY A PARTICIPANT IN THE DTC, DEPOSITED TO SUCH PARTICIPANT'S ACCOUNT AT SUCH DTC) AND NEITHER THE BOX ENTITLED "SPECIAL DELIVERY INSTRUCTIONS" NOR THE BOX ENTITLED "SPECIAL REGISTRATION INSTRUCTIONS" HAS BEEN COMPLETED, OR (II) SUCH OUTSTANDING NOTES ARE TENDERED FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. IN ALL OTHER CASES, ALL SIGNATURES ON THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF) MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. 6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the applicable box or boxes, the name and address (or account at the DTC) to which New Notes or substitute Outstanding Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. 7. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer. If, however, New Notes or Outstanding Notes for principal amounts not tendered or accepted for exchange 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 Outstanding Notes tendered hereby, or if tendered Outstanding Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is 9 10 imposed for any reason other than the exchange of Outstanding Notes pursuant to the Exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder of any Outstanding Notes or New Notes must provide the Company (as payer) with its correct taxpayer identification number ("TIN"), which, in the case of a holder who is an individual is his or her social security number. If the Company is not provided with the correct TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service and backup withholding of 31% on interest payments on the New Notes. To prevent backup withholding, each tendering holder must provide such holder's correct TIN by completing the Substitute Form W-9 set forth herein, certifying that the TIN provided is correct (or that such holder is awaiting a TIN), and that (i) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of failure to report all interest or dividends or (ii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the New Notes will be registered in more than one name or will not be in the name of the actual owner, consult the instructions on Internal Revenue Service Form W-9, which may be obtained from the Exchange Agent, for information on which TIN to report. Certain foreign individuals and entities will not be subject to backup withholding or information reporting if they submit a Form W-8, signed under penalties of perjury, attesting to their foreign status. A Form W-8 can be obtained from the Exchange Agent. The Company reserves the right in its sole discretion to take whatever steps are necessary to comply with the Company's obligations regarding backup withholding. 9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Outstanding Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Outstanding Notes not properly tendered or any Outstanding Notes the Company's acceptance of which would, in the opinion of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any conditions of the Exchange Offer or defects or irregularities of tenders as to particular Outstanding Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including this Letter of Transmittal and the instructions hereto) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any person shall be under any duty to give notification of defects or irregularities with regard to tenders of Outstanding Notes nor shall any of them incur any liability for failure to give such notification. 10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive, in whole or part, any of the conditions to the Exchange Offer set forth in the Prospectus. 11. NO CONDITIONAL TENDER. No alternative, conditional, irregular or contingent tender of Outstanding Notes on transmittal of this Letter of Transmittal will be accepted. 12. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES. Any holder whose Outstanding Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance or for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address or telephone number set forth on the cover page of this Letter of Transmittal. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. 10 11 14. ACCEPTANCE OF TENDERED OUTSTANDING NOTES AND ISSUANCE OF NEW NOTES; RETURN OF OUTSTANDING NOTES. Subject to the terms and conditions of the Exchange Offer, the Company will accept for exchange all validly tendered Outstanding Notes as soon as practicable after the Expiration Date and will issue New Notes therefor as soon as practicable thereafter. For purposes of the Exchange Offer, the Company shall be deemed to have accepted tendered Outstanding Notes when the Company has given written or oral notice thereof to the Exchange Agent and complied with the applicable provisions of the Registration Rights Agreement. If any tendered Outstanding Notes are not exchanged pursuant to the Exchange Offer for any reason, such unexchanged Outstanding Notes will be returned, without expense, to the undersigned at the address shown above (or credited to the undersigned's account at The Depository Trust Company designated above) or at a different address as may be indicated under the box entitled "Special Delivery Instructions." 15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited withdrawal rights set forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of Tenders." IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF (TOGETHER WITH THE OUTSTANDING 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. 11 12 - ---------------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT ------------------------------ FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW SOCIAL SECURITY NUMBER OR ------------------------------ EMPLOYER IDENTIFICATION NUMBER - ---------------------------------------------------------------------------------------------------------------------------------- PART 2 -- CERTIFICATION -- UNDER PENALTIES OF PART 3 -- PERJURY, I CERTIFY THAT: (1) THE NUMBER SHOWN ON THIS FOR AWAITING TIN [ ] CORRECT TAXPAYER IDENTIFICATION NUMBER (OR I HAVE CHECKED THE BOX IN PART 3 AND EXECUTED THE CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW) AND (2) I AM NOT SUBJECT TO BACK WITHHOLDING PLEASE COMPLETE THE CERTIFICATE OF - ------------------------------- BECAUSE I HAVE NOT BEEN NOTIFIED BY THE AWAITING TAXPAYER IDENTIFICATION NAME INTERNAL REVENUE SERVICE ("IRS") THAT I AM NUMBER BELOW. - ------------------------------- SUBJECT TO BACKUP WITHHOLDING AS A RESULT ADDRESS (NUMBER AND STREET) OF FAILURE TO REPORT ALL INTEREST OR - ------------------------------- DIVIDENDS, OR THE IRS HAS NOTIFIED ME THAT I CITY, STATE AND ZIP CODE AM NO LONGER SUBJECT TO BACKUP WITHHOLDING. --------------------------------------------------------------------------------------- DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE PAYOR'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) CERTIFICATE 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 UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN. HOWEVER, IF AFTER BEING NOTIFIED BY THE IRS THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING YOU RECEIVED ANOTHER NOTIFICATION FROM THE IRS STATING THAT YOU ARE NO LONGER SUBJECT TO BACKUP WITHHOLDING, DO NOT CROSS OUT ITEM (2). SIGNATURE DATE , 1999 --------------------------------- ------------------------ - ----------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO THE NEW NOTES. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 12 13 - -------------------------------------------------------------------------------- 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, WITH CERTAIN LIMITED EXCEPTIONS FOR PAYMENTS MADE WITHIN 60 DAYS HEREOF, 31% OF ALL REPORTABLE PAYMENTS MADE TO ME BEFORE I PROVIDE A NUMBER THEREAFTER WILL BE WITHHELD. , 1999 - ------------------------------------- ----------------------------- SIGNATURE DATE - -------------------------------------------------------------------------------- 13 EX-99.2 12 FORM OF NOTICE OF GUARANTEED DELIVERY 1 Exhibit 99.2 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF ALL OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A IN EXCHANGE FOR 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B This form, or one substantially equivalent hereto, must be used by a holder to accept the Exchange Offer of Pogo Producing Company, a Delaware corporation (the "Company"), and to tender 10 3/8% Senior Subordinated Notes due 2009, Series A (the "Outstanding Notes") to the Exchange Agent pursuant to the guaranteed delivery procedures described in "The Exchange Offer -- Guaranteed Delivery Procedures" of the Company's Prospectus, dated _____________ ___, 1999 (the "Prospectus") and in Instruction 2 to the related Letter of Transmittal. Any holder who wishes to tender Outstanding Notes pursuant to such guaranteed delivery procedures must ensure that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the Expiration Date (as defined below) of the Exchange Offer. Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus or the Letter of Transmittal. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _______________ ___, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). OUTSTANDING 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. - -------------------------------------------------------------------------------- The Exchange Agent for the Exchange Offer is: State Street Bank and Trust Company By Hand/Overnight Courier: By Mail: Corporate Trust Department Corporate Trust Department Two International Place, 4th Floor P. O. Box 778 Boston, Massachusetts 02110 Boston, Massachusetts 02102-0078 By Facsimile: (617) 664-5739 Confirm by Telephone: (617) 664-5314 --------------------- DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE IN THE BOX PROVIDED ON THE LETTER OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES. 2 Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of Outstanding Notes set forth below pursuant to the guaranteed delivery procedures set forth in the Prospectus and in Instruction 2 of the Letter of Transmittal. The undersigned hereby tenders the Outstanding Notes listed below:
- ------------------------------------------------------------------------------------------------------------------ Certificate Number(s) (if known) of Outstanding Aggregate Principal Amount Aggregate Principal Amount Notes Represented Tendered or Account Number at the DT C - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ PLEASE SIGN AND COMPLETE Names of Record Holder(s): Signature(s): -------------------------------------- ------------------------------ Address: -------------------------------------------------------- ------------------------------------------- Dated: , 1997 - ---------------------------------------------------------------- ------------------------------- Area Code and Telephone Number(s): ------------------------------ - ---------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------
THIS NOTICE OF GUARANTEED DELIVERY MUST BE SIGNED BY THE HOLDER(S) EXACTLY AS THEIR NAME(S) APPEAR ON CERTIFICATES FOR OUTSTANDING NOTES OR ON A SECURITY POSITION LISTING AS THE OWNER OF OUTSTANDING NOTES, OR BY PERSON(S) AUTHORIZED TO BECOME HOLDER(S) BY ENDORSEMENTS AND DOCUMENTS TRANSMITTED WITH THIS NOTICE OF GUARANTEED DELIVERY. IF SIGNATURE IS BY A TRUSTEE, EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OR OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, SUCH PERSON MUST PROVIDE THE FOLLOWING INFORMATION. 2 3 PLEASE PRINT NAME(S) AND ADDRESS(ES) Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Capacity: - -------------------------------------------------------------------------------- Address(es): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 4 GUARANTEE (Not to be used for signature guarantee) The undersigned, a firm which is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or is a commercial bank or trust company having an office or correspondent in the United States, or is otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, guarantees deposit with the Exchange Agent of the Letter of Transmittal (or facsimile thereof), together with the Outstanding Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Outstanding Notes into the Exchange Agent's account at the DTC described in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures" and in the Letter of Transmittal) and any other required documents, all by 5:00 p.m., New York City time, within five business days following the Expiration Date. Name of Firm: --------------------------- ------------------------------------- (AUTHORIZED SIGNATURE) Address: -------------------------------- (INCLUDE ZIP CODE) Name: -------------------------------- Area Code and Tel. Number: Title: ------------------------------- - ---------------------------------------- (PLEASE TYPE OR PRINT) Date: , 1999 -------------------------- DO NOT SEND OUTSTANDING NOTES WITH THIS FORM. ACTUAL SURRENDER OF OUTSTANDING NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS. 4 5 INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY 1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and any other required documents to the Exchange Agent is at the election and sole risk of the holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, the holders may wish to consider using an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. For a description of the guaranteed delivery procedures, see Instruction 2 of the Letter of Transmittal. 2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Outstanding Notes referred to herein, the signature(s) must correspond with the name(s) written on the face of the Outstanding Notes without alteration, enlargement, or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of the DTC whose name appears on a security position listing as the owner of the Outstanding Notes, the signature must correspond with the name shown on the security position listing as the owner of the Outstanding Notes. If this Notice of Guaranteed Delivery is signed by a person other than the registered holder(s) of any Outstanding Notes listed or a participant of the DTC, this Notice of Guaranteed Delivery must be accompanied by appropriate bond powers, signed as the name of the registered holder(s) appears on the Outstanding Notes or signed as the name of the participant shown on the DTC's security position listing. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and submit with the Letter of Transmittal evidence satisfactory to the Exchange Agent of such person's authority to so act. 3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer. 5 EX-99.3 13 FORM OF LETTER TO REGISTERED PARTICIPANTS 1 Exhibit 99.3 POGO PRODUCING COMPANY LETTER TO DEPOSITORY TRUST COMPANY PARTICIPANTS FOR TENDER OF ALL OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A, IN EXCHANGE FOR 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B - ------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ____________ ___, 1999. UNLESS EXTENDED (THE "EXPIRATION DATE"). - ------------------------------------------------------------------------------- OUTSTANDING NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE. To Depository Trust Company Participants: We are enclosing herewith the material listed below relating to the offer by Pogo Producing Company, a Delaware corporation (the "Company"), to exchange its 10 3/8% Senior Subordinated Notes due 2009, Series B (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of its issued and outstanding 10 3/8% Senior Subordinated Notes due 2009, Series A (the "Outstanding Notes"), upon the terms and subject to the conditions set forth in the Company's Prospectus, dated ___________ ___, 1999, and the related Letter of Transmittal (which together constitute the "Exchange Offer"). 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; and 4. Letter that may be sent to your clients for whose account you hold Outstanding Notes in your name or in the name of your nominee, with space provided for obtaining 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. 2 The Exchange Offer is not conditioned upon any minimum number of Outstanding Notes being tendered. Pursuant to the Letter of Transmittal, each holder of Outstanding Notes will represent to the Company that (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not the undersigned, (ii) neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution within the meaning of the Securities Act of such New Notes, (iii) if the undersigned is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, neither the undersigned nor any such other person is engaged in or intends to participate in the distribution of such New Notes and (iv) neither the undersigned nor any such other person is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or, if the undersigned is an "affiliate," that the undersigned will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the undersigned is a broker-dealer (whether or not it is also an "affiliate") that will receive New Notes for its own account in exchange for Outstanding Notes, it represents that such Outstanding Notes were acquired as a result of market-making activities or other trading activities, and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes, the undersigned is not deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The enclosed Letter to Clients contains an authorization by the beneficial owners of the Outstanding Notes for you to make the foregoing representations. The Company will not pay any fee or commission to any broker or dealer to any other persons (other than the Exchange Agent) in connection with the solicitation of tenders of Outstanding Notes pursuant to the Exchange Offer. The Company will pay or cause to be paid any transfer taxes payable on the transfer of Outstanding Notes to it, except as otherwise provided in Instruction 7 of the enclosed Letter of Transmittal. Additional copies of the enclosed material may be obtained from the undersigned. Very truly yours, STATE STREET BANK AND TRUST COMPANY 2 EX-99.4 14 FORM OF LETTER TO CLIENTS 1 Exhibit 99.4 POGO PRODUCING COMPANY LETTER TO CLIENTS FOR TENDER OF ALL OUTSTANDING 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A, IN EXCHANGE FOR 10 3/8% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____________ ___, 1999 UNLESS EXTENDED (THE "EXPIRATION DATE"). NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE. - -------------------------------------------------------------------------------- To Our Clients: We are enclosing herewith a Prospectus, dated ____________ ___, 1999, of Pogo Producing Company, a Delaware corporation (the "Company"), and a related Letter of Transmittal, which together constitute (the "Exchange Offer") relating to the offer by the Company, to exchange its 10 3/8% Senior Subordinated Notes due 2009, Series B (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for a like principal amount of its issued and outstanding 10 3/8% Senior Subordinated Notes due 2009, Series A (the "Outstanding Notes"), upon the terms and subject to the conditions set forth in the Exchange Offer. The Exchange Offer is not conditioned upon any minimum number of Outstanding Notes being tendered. We are the holder of record of Outstanding Notes held by us for your own account. A tender of such Outstanding 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 Outstanding Notes held by us for your account. We request instructions as to whether you wish to tender any or all of the Outstanding Notes held by us for your account pursuant to the terms and conditions of the Exchange Offer. We also request that you confirm that we may on your behalf make the representations contained in the Letter of Transmittal. Pursuant to the Letter of Transmittal, each holder of Outstanding Notes will represent to the Company that (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the undersigned, (ii) neither the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution within 2 the meaning of the Securities Act of such New Notes, (iii) if the undersigned is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, neither the undersigned nor any such other person is engaged in or intends to participate in the distribution of such New Notes and (iv) neither the undersigned nor any such other person is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or, if the undersigned is an "affiliate," that the undersigned will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the undersigned is a broker-dealer (whether or not it is also an "affiliate") that will receive New Notes for its own account in exchange for Outstanding Notes, it represents that such Outstanding Notes were acquired as a result of market-making activities or other trading activities, and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes, the undersigned is not deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Very truly yours, 2 3 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. INSTRUCTION TO BOOK ENTRY TRANSFER PARTICIPANT To Participant of the DTC: The undersigned hereby acknowledges receipt of the Prospectus dated ____________ ___, 1999 (the "Prospectus") of Pogo Producing Company, a Delaware corporation (the "Company"), and the accompanying Letter of Transmittal (the "Letter of Transmittal"), that together constitute the Company's offer (the "Exchange Offer") to exchange its 10 3/8% Senior Subordinated Notes due 2009, Series B (the "New Notes"), for all of its outstanding 10 3/8% Senior Subordinated Notes due 2009, Series A (the "Outstanding Notes"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus or the Letter of Transmittal. This will instruct you, the DTC participant, as to the action to be taken by you relating to the Exchange Offer with respect to the Outstanding Notes held by you for the account of the undersigned. The aggregate face amount of the Outstanding Notes held by you for the account of the undersigned is (FILL IN AMOUNT): $__________________ of the 10 3/8% Senior Subordinated Notes due 2009, Series A. WITH RESPECT TO THE EXCHANGE OFFER, THE UNDERSIGNED HEREBY INSTRUCTS YOU (CHECK APPROPRIATE BOX): [ ] TO TENDER THE FOLLOWING AMOUNT OF OUTSTANDING NOTES HELD BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED (INSERT PRINCIPAL AMOUNT OF OUTSTANDING NOTES TO BE TENDERED) (IF ANY): $_____________________. [ ] NOT TO TENDER ANY OUTSTANDING NOTES HELD BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED. If the undersigned instructs you to tender the Outstanding 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 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 New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the undersigned, (ii) neither 3 4 the undersigned nor any such other person has an arrangement or understanding with any person to participate in the distribution within the meaning of the Securities Act of 1933, as amended (the "Securities Act") of such New Notes, (iii) if the undersigned is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, neither the undersigned nor any such other person is engaged in or intends to participate in the distribution of such New Notes and (iv) neither the undersigned nor any such other person is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or, if the undersigned is an "affiliate," that the undersigned will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the undersigned is a broker-dealer (whether or not it is also an "affiliate") that will receive New Notes for its own account in exchange for Outstanding Notes, it represents that such Outstanding Notes were acquired as a result of market-making activities or other trading activities, and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. By acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes, the undersigned is not deemed to admit that it is an "underwriter" within the meaning of the Securities Act. SIGN HERE Name of beneficial owner(s): -------------------------------------------------- Signature(s): ----------------------------------------------------------------- Name(s) (please print): ------------------------------------------------------- Address: ---------------------------------------------------------------------- Telephone Number: ------------------------------------------------------------- Taxpayer Identification or Social Security Number: ---------------------------- Date: ------------------------------------------------------------------------- 4 -----END PRIVACY-ENHANCED MESSAGE-----