<PAGE>
Filed pursuant to Rule 424(b)(4)
SEC File No. 333-19569
PROSPECTUS
$100,000,000 [LOGO OF VINTAGE PETROLEUM
APPEARS HERE]
VINTAGE PETROLEUM, INC.
8 5/8% SENIOR SUBORDINATED NOTES DUE 2009
The 8 5/8% Senior Subordinated Notes Due 2009 (the "Notes") of Vintage
Petroleum, Inc. (the "Company") are being offered (this "Offering" or the
"Note Offering") by the Company. The Notes will mature on February 1, 2009.
Interest on the Notes will be payable semiannually on February 1 and August 1
of each year, beginning on August 1, 1997. The Notes will be redeemable at the
option of the Company, in whole or in part, at any time on or after February
1, 2002, at the redemption prices set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. See "Description of Notes--
Optional Redemption." Upon a Change of Control (as defined), holders of the
Notes may require the Company to repurchase all or a portion of the Notes at a
purchase price equal to 101 percent of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase. See
"Description of Notes--Repurchase at the Option of Holders Upon a Change of
Control."
Concurrent with this Offering, the Company is offering 1,500,000 shares
(1,725,000 shares if the underwriters' over-allotment option is exercised in
full) of Common Stock of the Company (the "Common Stock") to the public (the
"Common Stock Offering"). See "Common Stock Offering." Consummation of this
Offering is not contingent upon consummation of the Common Stock Offering, and
there can be no assurance that the Common Stock Offering will be consummated.
The Notes will be unsecured senior subordinated obligations of the Company.
The Notes will rank subordinate in right of payment to all existing and future
Senior Indebtedness (as defined), pari passu with existing and any future
senior subordinated indebtedness and senior to any future junior subordinated
indebtedness of the Company. On an as adjusted combined basis (which gives
effect to debt incurred for certain acquisitions and the application of the
net proceeds of this Offering and the Common Stock Offering), Senior
Indebtedness at September 30, 1996, would have been $108 million ($155 million
if the Common Stock Offering is not consummated). See "Use of Proceeds." The
Company also has $150 million of outstanding 9% Senior Subordinated Notes Due
2005 (the "9% Notes") which will rank pari passu with the Notes. The Notes
will be structurally subordinated to the indebtedness and other liabilities of
the Company's subsidiaries. The total liabilities of the Company's
subsidiaries included $73.3 million of liabilities at September 30, 1996.
The Notes will be represented by a Global Security registered in the name of
the nominee of The Depository Trust Company, which will act as the depository
(the "Depositary"). Beneficial interests in the Global Security will be shown
on, and transfers thereof will be effected only through, records maintained by
the Depositary and its participants. Except as described herein, Notes in
definitive form will not be issued. See "Description of Notes--Book-Entry
System."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
<S> <C> <C> <C>
Per Note................................. 99.158% 2.500% 96.658%
Total.................................... $99,158,000 $2,500,000 $96,658,000
- -------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from February 5, 1997.
(2) Before deducting expenses payable by the Company estimated to be $250,000.
The Notes are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or
in part and to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the Notes will be made through the facilities of The
Depository Trust Company, on or about February 5, 1997.
SALOMON BROTHERS INC
DILLON, READ & CO. INC.
LEHMAN BROTHERS
NESBITT BURNS SECURITIES INC.
The date of this Prospectus is January 30, 1997.
<PAGE>
CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this Prospectus to
"Vintage" or the "Company" include Vintage Petroleum, Inc., its consolidated
subsidiaries and its proportionately consolidated general partner interests in
various limited partnerships and joint ventures.
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, "MMBbls" means million barrels, "BOE" means
equivalent barrels of oil, "MBOE" means thousand equivalent barrels of oil and
"MMBOE" means million equivalent barrels of oil. Unless otherwise indicated in
this Prospectus, gas volumes are stated at the legal pressure base of the
state or area in which the reserves are located and at 60(degrees) Fahrenheit.
Equivalent barrels of oil are determined using the ratio of six Mcf of gas to
one Bbl of oil. The term "gross" refers to the total acres or wells in which
the Company has a working interest, and "net" refers to gross acres or wells
multiplied by the percentage working interest owned by the Company. "Net
production" means production that is owned by the Company less royalties and
production due others. The terms "net" and "net production" include 100
percent of the Company's subsidiary Cadipsa S.A. ("Cadipsa") and do not
reflect reductions for minority interest ownership. The term "oil" includes
crude oil, condensate and natural gas liquids. "Finding cost" means an amount
per BOE equal to the sum of all costs incurred relating to oil and gas
property acquisition, exploration and development activities divided by the
sum of all additions and revisions to estimated proved reserves, including
reserve purchases.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Securities
and Exchange Commission (the "Commission") (File No. 1-10578) are hereby
incorporated by reference in this Prospectus: (a) the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995; (b) the Company's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, June 30,
1996, and September 30, 1996; (c) the Company's Current Report on Form 8-K
dated July 5, 1995, and Amendment No. 1 thereto dated September 18, 1995; (d)
the Company's Current Report on Form 8-K dated December 28, 1995; and (e) the
Company's Current Report on Form 8-K dated January 10, 1997.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of this
Offering shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the date of filing of such document. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained in this Prospectus or
in any other subsequently filed document which also is or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, on written or oral request of such person, a
copy (without exhibits, unless such exhibits are specifically incorporated by
reference into such documents) of any or all documents incorporated by
reference in this Prospectus. Requests for such copies should be directed to
William C. Barnes, Secretary, at the Company's principal executive offices,
4200 One Williams Center, Tulsa, Oklahoma 74172, telephone number (918) 592-
0101.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) included
elsewhere in this Prospectus or incorporated by reference herein. Certain terms
used herein are defined under "Certain Definitions."
THE COMPANY
Vintage Petroleum, Inc. ("Vintage" or the "Company") is an independent oil
and gas company focused on the acquisition of producing oil and gas properties
which contain the potential for increased value through exploitation and
development. The Company, through its experienced management and engineering
staff, has been successful in realizing such potential on prior acquisitions
through workovers, recompletions, secondary recovery operations, operating cost
reductions, and the drilling of development or infill wells. The Company
believes that its primary strengths are its ability to add reserves at
attractive prices through property acquisitions and subsequent exploitation,
and its low cost operating structure. These strengths have allowed the Company
to substantially increase reserves, production and cash flow during the last
five years. As the Company has grown its cash flow and added to its technical
staff, exploration has become a larger focus for its future growth. Planned
exploration expenditures for 1997 of approximately $43 million represent 37
percent of the Company's capital budget, excluding acquisitions.
At September 30, 1996, the Company owned and operated producing properties in
11 states, with its domestic proved reserves located primarily in four core
areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas of the
United States. During 1996, the Company expanded its Gulf Coast area through
the acquisitions of certain oil and gas properties from Exxon Company, U.S.A.
and Conoco Inc. In addition, the Company established a new core area in 1995 by
acquiring 12 oil concessions, 11 of which are producing and operated by the
Company, in the south flank of the San Jorge Basin in southern Argentina. The
Company recently expanded its South American operations into Bolivia through
the acquisition of Shamrock Ventures Boliviana Ltd. which owns and operates
three blocks covering approximately 570,000 net acres in the Chaco Plains area
of southern Bolivia. See "Recent Acquisitions."
Vintage owned interests in 3,053 gross (1,934 net) producing wells in the
United States as of September 30, 1996, of which approximately 81 percent are
operated by the Company. Vintage owned interests in 610 gross (597 net)
producing wells in Argentina as of September 30, 1996, of which approximately
97 percent are operated by the Company. As of December 31, 1995, the Company's
properties had proved reserves of 199.7 MMBOE, comprised of 147.9 MMBbls of oil
and 310.8 Bcf of gas, with a present value of estimated future net revenues
before income taxes (utilizing a 10 percent discount rate) of $894 million and
a standardized measure of discounted future net cash flows of $737 million.
Since that date, acquisitions have added 28.4 MMBOE of proved reserves, as
estimated by the Company as of the date of each acquisition.
The Company has consistently achieved growth in proved reserves, production
and revenues and has been profitable every full year since its founding in
1983. From the first quarter of 1993 through the third quarter of 1996, the
Company increased its average net daily production from 11,200 Bbls of oil to
32,900 Bbls of oil and from 60,000 Mcf of gas to 86,300 Mcf of gas. For the
year ended December 31, 1995, the Company generated revenues of $195 million
and EBITDA (as defined herein under "Selected Financial and Operating Data") of
$88 million. For the nine months ended September 30, 1996, the Company
generated revenues of $223 million and EBITDA of $111 million.
3
<PAGE>
BUSINESS STRATEGY
Vintage's overall goal is to maximize its value through profitable growth in
its oil and gas reserves and production. The Company has been successful at
achieving this goal through its ongoing strategy of (a) acquiring producing oil
and gas properties, at favorable prices, with significant exploitation
potential, (b) focusing on low risk exploitation and development activities to
maximize production and ultimate reserve recovery, (c) exploring non-producing
properties, (d) maintaining a low cost operating structure, and (e) maintaining
financial flexibility.
Key elements of the Company's strategy include:
. Acquisitions of Producing Properties. The Company has an experienced
management and engineering team which focuses on acquisitions of
operated producing properties that meet its selection criteria which
include (a) significant potential for increasing reserves and production
through low risk exploitation and development, (b) attractive purchase
price, and (c) opportunities for improved operating efficiency. The
Company's emphasis on property acquisitions reflects its belief that
continuing consolidation and restructuring activities on the part of
major integrated and large independent oil companies has afforded in
recent years, and should afford in the future, attractive opportunities
to purchase domestic and international producing properties. This
acquisition strategy has allowed the Company to rapidly grow its
reserves at favorable acquisition prices. From January 1, 1993, through
September 30, 1996, the Company acquired 140.1 MMBOE of proved oil and
gas reserves at an average acquisition cost of $2.78 per BOE, which is
significantly below the industry average. The Company replaced through
acquisitions approximately 3.1 times its production of 45.5 MMBOE during
the same period.
. Exploitation and Development. The Company pursues workovers,
recompletions, secondary recovery operations and other production
optimization techniques on its properties, as well as development and
infill drilling, to offset normal production declines and replace the
Company's annual production. From January 1, 1993, through December 31,
1995, the Company spent approximately $83.9 million on exploitation and
development activities. During this period, the Company's recompletion
and workover activities resulted in improved production or operating
efficiencies in approximately 75 percent of these operations, and the
result of all of its exploitation activities, including development and
infill drilling, succeeded in replacing more than 78 percent of
production during this period. The Company has an extensive inventory of
exploitation and development opportunities including identified projects
which represent approximately a 10 year inventory at current activity
levels. The Company anticipates spending approximately $33 million in
the United States and approximately $40 million in Argentina during 1997
on exploitation and development projects.
. Exploration. The Company's overall exploration strategy balances high
potential international prospects with lower risk drilling in known
formations in the United States and Argentina. This prospect mix and the
Company's practice of risk-sharing with industry partners is intended to
lower the incidence and costs of dry holes. The Company makes extensive
use of geophysical studies, including 3-D seismic, which further reduce
the cost and increase the success of its exploration program. From
January 1, 1993, through September 30, 1996, the Company spent
approximately $39.8 million on exploration activities including the
drilling of 75 gross (32.65 net) exploration wells, of which
approximately 69 percent gross (58 percent net) were productive. The
Company has increased its 1997 exploration budget by 79 percent over
1996 to approximately $43 million with spending planned in its core
areas in the United States and Argentina as well as in Block 19 of
Ecuador and the Chaco Block in Bolivia.
4
<PAGE>
. Low Cost Structure. The Company is an efficient operator and capitalizes
on its low cost structure in evaluating acquisition opportunities. The
Company generally achieves substantial reductions in labor and other
field level costs from those experienced by the previous operators. In
addition, the Company targets acquisition candidates which are located
in its core areas and provide opportunities for cost efficiencies
through consolidation with other Vintage operations. The lower cost
structure has generally allowed the Company to substantially improve the
cash flow of newly acquired properties.
. Financial Flexibility. The Company is committed to maintaining
substantial financial flexibility, which management believes is
important for the successful execution of its acquisition, exploitation
and exploration strategy. In conjunction with the purchase of
substantial oil and gas assets in 1990, 1992 and 1995, the Company
completed three public equity offerings, as well as a public debt
offering in 1995, which provided the Company with aggregate net proceeds
of approximately $272 million. Upon consummation of the Note Offering
and the Common Stock Offering and the application of the net proceeds
therefrom, and after giving effect to the related borrowing base
reduction, the unused portion of the Company's revolving credit facility
as of January 30, 1997, would have been approximately $167.8 million
($120.7 million if only the Note Offering is consummated).
RECENT ACQUISITIONS
Since December 31, 1995, the Company has acquired, through several
transactions, oil and gas properties for an aggregate purchase price of
approximately $89.7 million. Most of these properties were acquired subsequent
to September 30, 1996. Based on estimates prepared by the Company, proved
reserves as of the dates of the various acquisitions aggregated 16.0 MMBbls of
oil and 74.0 Bcf of gas, or a total of 28.4 MMBOE. These reserves were acquired
at an average cost of $3.16 per BOE.
The two most significant acquisitions made subsequent to September 30, 1996,
are described below. If these properties had been acquired on January 1, 1996,
these properties would have increased the Company's revenues by approximately
$13.5 million, EBITDA by approximately $8.5 million and production by
approximately 302 MBbls of oil and 4.0 Bcf of gas for the nine months ended
September 30, 1996.
On November 20, 1996, the Company purchased certain producing oil and gas
properties and facilities from Exxon Company, U.S.A. located in south Alabama
for approximately $28.2 million in cash (the "Exxon Properties"). Funds were
provided by advances under the Company's revolving credit facility. The Exxon
Properties include an interest in two fields totaling approximately 5,000 net
acres with a total of 17 gross (9.9 net) productive wells with current net
daily production of approximately 1,450 Bbls of oil and liquids and 2,800 Mcf
of gas. All of the wells are now operated by the Company.
Also during November 1996, the Company agreed to purchase 100 percent of the
outstanding common stock of Shamrock Ventures Boliviana Ltd. ("Shamrock") from
affiliates of Ultramar Diamond Shamrock Corporation for approximately $29.0
million in cash. In addition, at closing on January 7, 1997, the Company repaid
all of Shamrock's existing bank debt (approximately $9.2 million). Funds for
the purchase of the stock and the repayment of debt were provided by advances
under the Company's revolving credit facility. Shamrock's assets include (a)
oil and gas properties valued at $35.5 million (including the effect of
approximately $6.6 million of deferred income taxes recorded under the purchase
method of accounting), and (b) inventory, receivables, cash and other assets
net
5
<PAGE>
of liabilities (other than bank debt repaid at closing) of approximately $9.3
million. The oil and gas properties of Shamrock consist of three blocks,
totaling approximately 570,000 net acres, in the Chaco Plains area of southern
Bolivia. The properties consist of a 100 percent interest in the Chaco and
Porvenir blocks, and a 50 percent interest in the Nupuco block. Proved reserves
at the time of acquisition, as estimated by the Company, were 53.2 Bcf of gas
and 5.1 MMBbls of oil. Current net daily production is approximately 14,500 Mcf
of gas and 230 Bbls of condensate. Recent realized prices on the properties
were $1.23 per Mcf of gas and $21.00 per Bbl of condensate. The purchase also
included a 29 mile gas pipeline and an interest in a gas processing plant with
a capacity of 110 MMcf per day. The Company believes that the Shamrock
properties contain substantial upside potential which may be realized through
exploitation and future exploration. See "Recent Acquisitions."
6
<PAGE>
THE OFFERING
Securities Offered.......... $100,000,000 principal amount of 8 5/8% Senior
Subordinated Notes Due 2009 (the "Notes").
Maturity Date............... February 1, 2009.
Interest Payment Dates...... February 1 and August 1 of each year, commencing
August 1, 1997.
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 1, 2002, at the redemption prices
set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. See
"Description of Notes--Optional Redemption."
Ranking..................... The Notes will be unsecured senior subordinated
obligations of the Company. The Notes will rank
subordinate in right of payment to all existing
and future Senior Indebtedness (as defined), pari
passu with existing and any future senior
subordinated indebtedness and senior to any
future junior subordinated indebtedness of the
Company. On an as adjusted combined basis, Senior
Indebtedness at September 30, 1996, would have
been $108 million ($155 million if the Common
Stock Offering is not consummated). The Company
also has $150 million of outstanding 9% Senior
Subordinated Notes Due 2005 which will rank pari
passu with the Notes. The Notes will be
structurally subordinated to the indebtedness and
other liabilities of the Company's subsidiaries.
The total liabilities of the Company's
subsidiaries included $73.3 million of
liabilities at September 30, 1996.
Change of Control........... Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an
offer to repurchase the Notes at 101 percent of
the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
repurchase. See "Description of Notes--Repurchase
at the Option of Holders Upon a Change of
Control."
Certain Covenants........... The Indenture for the Notes will contain
limitations on, among other things, (a) the
ability of the Company to Incur additional
Indebtedness, (b) the payment of dividends and
other distributions with respect to the Capital
Stock of the Company and the purchase, redemption
or retirement of Capital Stock of the Company,
(c) the making of certain Investments, (d) the
Incurrence of certain Liens, (e) Asset Sales, (f)
the issuance and sale of Capital Stock of
Restricted Subsidiaries, (g) transactions with
Affiliates, (h) payment restrictions affecting
Restricted Subsidiaries, and (i) certain
consolidations, mergers and transfers of assets.
All of these limitations will be subject to a
number of important qualifications. See
"Description of Notes."
7
<PAGE>
Use of Proceeds............. The net proceeds to the Company from the sale of
the Notes offered hereby are estimated to be
approximately $96.4 million. Such net proceeds
will be used to repay a portion of existing
indebtedness under the Company's revolving credit
facility (the "Bank Facility"). See "Use of
Proceeds."
Common Stock Offering....... Concurrent with this Offering, the Company is
offering 1,500,000 shares (1,725,000 shares if
the underwriters' over-allotment option is
exercised in full) of Common Stock to the public.
This Offering is not contingent upon consummation
of the Common Stock Offering, and there can be no
assurance that the Common Stock Offering will be
consummated. The net proceeds to the Company from
the Common Stock Offering will be used to repay a
portion of existing indebtedness under the
Company's Bank Facility. See "Common Stock
Offering" and "Use of Proceeds." Unless otherwise
indicated, all data in this Prospectus with
respect to the Common Stock Offering assumes no
exercise of the underwriters' over-allotment
option.
8
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents summary financial information for the periods
indicated and should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Significant acquisitions of producing oil and gas
properties affect the comparability of the financial data for the periods
presented below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales...... $ 185,847 $ 112,809 $ 160,254 $ 141,357 $ 113,259
Oil and gas gathering.. 15,310 8,472 12,380 14,635 7,861
Gas marketing.......... 21,519 13,631 20,912 27,285 36,175
Other income........... 659 1,461 1,251 2,375 2,732
---------- ---------- ---------- ---------- ----------
223,335 136,373 194,797 185,652 160,027
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Lease operating,
including production
taxes................. 67,606 47,520 66,771 59,292 44,930
Oil and gas gathering.. 12,838 6,636 9,511 12,294 5,869
Gas marketing.......... 19,885 12,210 18,839 24,963 34,406
General and
administrative........ 12,026 8,258 11,601 8,889 6,066
Depreciation, depletion
and amortization...... 51,313 36,875 52,257 45,774 33,335
Interest............... 22,467 13,379 20,178 12,002 6,943
---------- ---------- ---------- ---------- ----------
186,135 124,878 179,157 163,214 131,549
---------- ---------- ---------- ---------- ----------
Income before income
taxes, minority
interest and cumulative
effect of accounting
change................. 37,200 11,495 15,640 22,438 28,478
Provision (benefit) for
income taxes:
Current................ 2,061 687 (955) 1,576 3,962
Deferred............... 7,982 3,895 6,034 6,933 7,727
Minority interest in
(income) loss of
subsidiary(a).......... (361) 662 800 -- --
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of accounting
change................. 26,796 7,575 11,361 13,929 16,789
Cumulative effect of
accounting change(b)... -- -- -- -- 1,725
---------- ---------- ---------- ---------- ----------
Net income.............. $ 26,796 $ 7,575 $ 11,361 $ 13,929 $ 18,514
========== ========== ========== ========== ==========
Weighted average common
shares outstanding..... 24,454 21,322 21,276 21,174 20,830
EARNINGS PER SHARE:
Income before cumulative
effect of accounting
change................. $ 1.10 $ .36 $ .53 $ .66 $ .81
Net income.............. 1.10 .36 .53 .66 .89
CASH FLOW DATA:
Cash provided (used) by:
Operating activities... $ 82,947 $ 48,904 $ 54,199 $ 58,670 $ 52,219
Investing activities... (100,699) (120,925) (187,251) (70,668) (146,126)
Financing activities... 20,546 73,134 135,166 11,867 93,900
BALANCE SHEET DATA (end
of period):
Property, plant and
equipment, net......... $ 623,092 $ 521,751 $ 577,746 $ 366,665 $ 346,034
Total assets............ 701,358 572,143 647,539 407,752 384,461
Total debt.............. 344,309 309,140 323,776 193,864 181,480
Minority interest(a).... 2,286 11,618 3,922 -- --
Stockholders' equity.... 251,232 169,702 223,960 155,993 143,392
OTHER FINANCIAL DATA:
Dividends declared per
share.................. $ .08 $ .07 $ .09 $ .07 $ .05
EBITDA(c)............... 110,980 61,749 88,075 80,214 68,756
Ratio of EBITDA to
interest expense....... 4.9x 4.6x 4.4x 6.7x 9.9x
Ratio of earnings to
fixed charges(d)....... 2.7x 1.9x 1.8x 2.9x 5.0x
</TABLE>
(see notes on following page)
9
<PAGE>
- --------
(a) Reflects the minority interest in Cadipsa S.A. See consolidated financial
statements and the notes thereto of the Company included elsewhere in this
Prospectus.
(b) Represents the cumulative effect on prior years of adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(c) EBITDA has the same meaning as in the Indenture except that EBITDA as
presented in the table for the nine months ended September 30, 1996,
includes the EBITDA of Cadipsa S.A. which is excluded from the definition
in the Indenture due to restrictions in the Amended and Restated Investment
Agreement dated April 28, 1994, as amended, between the International
Finance Corporation and Cadipsa S.A. EBITDA as defined in the Indenture
would have been $97.5 million for the nine months ended September 30, 1996.
See "Description of Notes--Certain Definitions." EBITDA is included as a
supplemental disclosure because it is commonly accepted as providing useful
information regarding a company's ability to service and incur debt and
certain covenants contained in the Indenture are based in part on EBITDA.
EBITDA, however, should not be considered in isolation or as a substitute
for net income, cash flow provided by operating activities or other income
or cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. If
the Exxon Properties and Shamrock had been acquired on January 1, 1996,
these properties would have increased the Company's EBITDA by approximately
$8.5 million for the nine months ended September 30, 1996. See "Recent
Acquisitions."
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings are defined as income of the Company and its subsidiaries before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of financing costs and any discount or premium
related to any indebtedness.
10
<PAGE>
SUMMARY OPERATING AND RESERVE DATA (A)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Production:
Oil (MBbls)................ 8,649 5,310 7,608 6,657 4,785
Gas (MMcf)................. 24,535 22,489 30,610 28,884 22,504
Oil equivalent (MBOE)...... 12,738 9,058 12,710 11,471 8,536
Average sales prices:
Oil (per Bbl).............. $ 16.66(b) $ 15.33 $15.26 $13.53 $14.14
Gas (per Mcf).............. 1.70 1.42 1.46 1.78 2.03
Production costs (per
BOE)(c).................... 5.31 5.25 5.25 5.17 5.26
Three-year average finding
cost (per BOE)(d).......... N/A N/A 2.98 3.23 3.34
Proved reserves (end of
period):
Oil (MBbls)................ N/A N/A 147,871 70,789 63,277
Gas (MMcf)................. N/A N/A 310,762 281,638 273,142
Total proved reserves
(MBOE).................... N/A N/A 199,665 117,729 108,801
Proved developed reserves
(MBOE).................... N/A N/A 145,790 91,722 88,976
Annual reserve replacement
ratio(e)................... N/A N/A 747% 179% 504%
Estimated reserve life (in
years)(f).................. N/A N/A 15.7 10.3 12.7
Present value of estimated
future net revenues before
income taxes (discounted at
10%) (in thousands)........ N/A N/A $894,249 $446,987 $359,978
Standardized measure of
discounted future net cash
flows (in thousands)....... N/A N/A 736,546 385,721 339,701
</TABLE>
- --------
(a) Significant acquisitions of producing oil and gas properties affect the
comparability of the operating data for the periods presented.
(b) During the first nine months of 1996, the impact of oil hedges reduced the
Company's overall average oil price $1.17 to $16.66 per Bbl.
(c) Includes lease operating costs and production and ad valorem taxes.
(d) Represents the average finding cost per BOE during the three years ended
December 31 of the year shown in the column. See "Certain Definitions."
(e) The annual reserve replacement ratio is a percentage determined on a BOE
basis by dividing the estimated reserves added during a year from
exploitation, development and exploration activities, acquisitions of
proved reserves and revisions of previous estimates, excluding property
sales, by the oil and gas volumes produced during that year.
(f) Estimated reserve life is calculated on a BOE basis by dividing the total
estimated proved reserves at year-end by the total production during the
year. This calculation can be affected by the timing of major acquisitions.
For example, major acquisitions were made during the second half of 1995
which resulted in an estimated reserve life of 15.7 years for 1995. This
compares to an estimated reserve life of 12.0 years for 1995 based on
annualized first quarter 1996 production.
11
<PAGE>
SUMMARY OIL AND GAS RESERVE DATA
The following table sets forth summary information with respect to the
estimates of the Company's proved oil and gas reserves at December 31, 1995, as
evaluated by Netherland, Sewell & Associates, Inc. For additional information
relating to the Company's oil and gas reserves, see "Business--Reserves,"
"Recent Acquisitions" and Note 9 "Supplementary Financial Information for Oil
and Gas Producing Activities" to the Company's consolidated financial
statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PROVED RESERVES AT
DECEMBER 31, 1995
-----------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
<S> <C> <C> <C>
United States:
Oil (MBbls)..................................... 63,791 16,436 80,227
Gas (MMcf)...................................... 270,427 40,335 310,762
MBOE............................................ 108,862 23,159 132,021
Argentina:
Oil (MBbls)..................................... 36,928 30,716 67,644
Total:
Oil (MBbls)..................................... 100,719 47,152 147,871
Gas (MMcf)...................................... 270,427 40,335 310,762
MBOE............................................ 145,790 53,875 199,665
</TABLE>
12
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes offered hereby should carefully consider
the following risk factors, as well as the other information set forth in this
Prospectus.
INDUSTRY CONDITIONS; IMPACT ON COMPANY'S OPERATING RESULTS
The Company's revenues, operating results and future rate of growth are
substantially dependent upon prevailing prices for oil and gas. Historically,
oil and gas prices and markets have been volatile, and they are likely to
continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuations in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include political
conditions in oil producing regions, including the Middle East, the domestic
and foreign supply of oil and gas, the level of consumer demand, weather
conditions, domestic and foreign government regulations, the price and
availability of alternative fuels and overall economic conditions. In
addition, various factors, including the capacity and availability of oil and
gas gathering systems and pipelines, the effect of federal and state
regulation of production and transportation, general economic conditions,
changes in supply due to drilling by other producers and changes in demand,
may adversely affect the Company's ability to market its oil and gas
production.
SUBSTANTIAL LEVERAGE
At September 30, 1996, on an as adjusted combined basis, the Company would
have had long-term debt of $358.4 million as compared to stockholders' equity
of $298.3 million ($405.5 million and $251.2 million, respectively, if the
Common Stock Offering is not consummated) resulting in a long-term debt to
total capitalization ratio of 54 percent (62 percent if the Common Stock
Offering is not consummated). See "Capitalization." Following this Offering,
the Company will have the ability to incur additional indebtedness under the
Indenture governing the Notes and the indenture governing the 9% Notes and
will have significant borrowing capacity under its revolving credit facility
(the "Bank Facility"). The Company's ability to meet its debt service
obligations and reduce total indebtedness will be dependent not only upon its
future drilling and production performance, but also on oil and gas prices,
general economic conditions and financial, business and other factors
affecting its operations, many of which are beyond its control. The Company's
historical focus has been and is expected to continue to be the acquisition,
exploitation, development and exploration of producing oil and gas properties.
Each of these activities requires substantial capital. The Company may finance
such capital expenditures in the future through the incurrence of additional
indebtedness. The degree to which the Company is leveraged could have
important consequences to holders of the Notes, including (a) the ability of
the Company to obtain any necessary financing in the future for working
capital, capital expenditures, acquisitions, debt service requirements or
other purposes may be limited; (b) a portion of the Company's cash flow from
operations must be dedicated to the payment of interest on its indebtedness
and will not be available for other purposes; (c) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to
changes in, its business; (d) the Company is more highly leveraged than some
of its competitors, which may place it at a competitive disadvantage; (e) the
Company's level of indebtedness may make it more vulnerable in the event of a
downturn in its business; and (f) the terms of certain of the Company's
indebtedness permit its creditors to accelerate payments upon certain events
of default or a change of control of the Company.
SUBORDINATION OF NOTES; HOLDING COMPANY STRUCTURE
The Indenture governing the Notes limits, but does not prohibit, the
incurrence by the Company of additional indebtedness that is senior in right
of payment to the Notes (including by reason of structural subordination of
the Notes to the indebtedness and other liabilities of the Company's
subsidiaries). In the event of bankruptcy, liquidation, reorganization or
other winding up of the Company, the assets of the Company will be available
to pay the Company's obligations on the Notes
13
<PAGE>
offered hereby only after all Senior Indebtedness has been paid in full, and
there may not be sufficient assets remaining to pay amounts due on the Notes.
In addition, under certain circumstances, no payments may be made with respect
to principal of, premium, if any, or interest on the Notes if a default exists
with respect to any Senior Indebtedness. See "Description of Notes--
Subordination."
Obligations of the Company's subsidiaries will represent prior claims with
respect to the assets and earnings of such subsidiaries. The Notes, therefore,
are structurally subordinated to all current and future liabilities (including
trade payables and accrued liabilities) of the Company's subsidiaries. The
Company's subsidiaries also may have contingent liabilities, which could be
substantial. The rights of the Company's creditors, including the holders of
the Notes, to realize upon the assets of any subsidiary upon such subsidiary's
liquidation or reorganization will be subject to the prior claims of such
subsidiary's creditors.
In the event that as a result of an Asset Sale (as defined) the Company was
required to apply any portion of the proceeds thereof to redeem the Notes or
to make an offer to repurchase the Notes, the Company would be required to
first redeem or repurchase the 9% Notes. In addition, the Company would be
required to make any such redemption of, or offer to repurchase, the Notes on
a pro rata basis with all then outstanding indebtedness that is pari passu
with the Notes (other than the 9% Notes). See "Description of Notes--Certain
Covenants--Limitation on Asset Sales."
In addition, an instrument of indebtedness of one of the Company's foreign
subsidiaries restricts its ability to pay dividends to the Company, and the
Indenture permits foreign subsidiaries of the Company to agree to similar
restrictions in the future. See "Description of Notes--Certain Covenants--
Limitation on Restricted Payments" and "--Limitation on Restrictions on
Distributions from Restricted Subsidiaries."
RELIANCE ON DEVELOPMENT OF ADDITIONAL RESERVES; ACQUISITION RISKS
The Company's future performance is dependent upon its ability to find or
acquire additional oil and gas reserves that are economically recoverable.
Unless the Company successfully replaces the reserves that it produces, the
Company's reserves will decline, resulting eventually in a decrease in oil and
gas production and lower revenues and cash flow from operations.
The Company in the past has focused, and expects to continue to focus, on
acquiring producing oil and gas properties to replace reserves. Although the
Company performs a review of the acquired properties that it believes is
consistent with industry practice, such reviews are inherently incomplete. In
general, it is not feasible to review in-depth each individual property being
acquired. Ordinarily, the Company will focus its review efforts on the higher-
valued properties and will sample the remainder. However, even an in-depth
review of all properties and records may not necessarily reveal existing or
potential problems nor will it permit the Company to become sufficiently
familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not always be performed on each well included in
an acquisition, and environmental problems, such as ground water
contamination, are not necessarily observable even when an inspection is
performed. In addition, competition for producing oil and gas properties is
intense and many of the Company's competitors have financial and other
resources substantially in excess of those available to the Company.
Therefore, no assurance can be given that the Company will be able to acquire
producing oil and gas properties that contain economically recoverable
reserves or that it will make such acquisitions at acceptable prices.
The Company historically has succeeded in replacing reserves through
exploitation, development and exploration. The Company has conducted such
activities on its existing oil and gas properties as well as on newly acquired
properties. However, no assurance can be given that the Company will continue
to replace reserves from such activities at acceptable costs. In addition,
exploitation, development and exploration involve numerous risks, including
depositional or trapping uncertainties or other conditions that may result in
dry holes, the failure to produce oil and gas in commercial quantities and the
inability to fully produce discovered reserves.
14
<PAGE>
UNCERTAINTIES IN ESTIMATING RESERVES AND FUTURE NET REVENUES; IMPAIRMENT OF
OIL AND GAS ASSETS
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and timing of
developmental expenditures, including many factors beyond the control of the
producer. The reserve data set forth in this Prospectus or incorporated by
reference herein represent only estimates. In addition, the estimates of
future net revenues from proved reserves of the Company and the present value
thereof are based upon certain assumptions about future production levels,
prices and costs that may not prove to be correct over time. The level of
future oil and gas production is subject to a number of uncertainties
including the degree to which the Company is successful in acquiring or
developing additional reserves. See "--Reliance on Development of Additional
Reserves; Acquisition Risks."
The Company accounts for its oil and gas producing activities under the full
cost method. This method imposes certain limitations on the carrying (book)
value of proved oil and gas properties and requires a writedown of such assets
for accounting purposes if such limits are exceeded. The risk that the Company
will be required to write down the carrying value of its oil and gas
properties increases as oil and gas prices decline or remain depressed. If a
writedown is required, it would result in a non-cash charge to earnings. If
declines in oil and gas prices are severe, the Company's borrowing base under
the Bank Facility may be reduced. In the event debt outstanding under the Bank
Facility exceeds the amount of the revised borrowing base, the Company would
be required to make a principal repayment to bring the total amount of debt
outstanding in compliance with the revised borrowing base. In the past, the
Company has not been required to writedown its oil and gas properties or make
a mandatory prepayment under the Bank Facility. However, no assurance can be
given that the Company will not be required to make such a writedown or make
such a mandatory prepayment in the future.
RISKS OF INTERNATIONAL OPERATIONS
International investments represent approximately 34 percent of the
Company's total proved reserves at December 31, 1995, and are expected to
represent a significant portion of the Company's total assets in the future.
The Company continues to evaluate international investment opportunities but
currently has no binding agreements or commitments to make any material
international acquisitions.
The Company's foreign properties, operations or investments may be adversely
affected by local political and economic developments, exchange controls,
currency fluctuations, royalty and tax increases, retroactive tax claims,
expropriation, import and export regulations and other foreign laws or
policies as well as by laws and policies of the United States affecting
foreign trade, taxation and investment. In addition, in the event of a dispute
arising from foreign operations, the Company may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the courts in the United States. The Company
may also be hindered or prevented from enforcing its rights with respect to a
governmental instrumentality because of the doctrine of sovereign immunity.
RISKS OF HEDGING TRANSACTIONS
The Company has previously engaged in oil and gas hedging activities and
intends to continue to consider various hedging arrangements to realize
commodity prices which it considers favorable. Currently, oil hedges for the
calendar year 1997 cover 2.738 MMBbls at an average NYMEX reference price of
$19.26. The impact of changes in the market prices for oil and gas on the
Company's average realized prices may be reduced from time to time based on
the level of the Company's hedging activities. These hedging arrangements may
limit potential gains by the Company if the market prices for oil and gas were
to rise substantially over the price established by the hedge. In addition,
the Company's hedging arrangements expose the Company to the risk of financial
loss in certain circumstances, including instances in which (a) production is
less than expected, (b) there is a
15
<PAGE>
widening of price differentials between delivery points for the Company's
production and the NYMEX reference price or (c) the counterparties to the
Company's hedging arrangements fail to honor their financial commitments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
RISKS RELATING TO A CHANGE OF CONTROL
In the event of a Change of Control, holders of the Notes, the 9% Notes and
all then outstanding indebtedness pari passu with the Notes that contains
similar change of control provisions will have the right to require the
Company, subject to certain conditions, to repurchase all or any part of such
holders' notes at a price equal to 101 percent of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
See "Description of Notes--Repurchase at the Option of Holders Upon a Change
of Control" and "Description of Certain Indebtedness--9% Senior Subordinated
Notes Due 2005." Existing Senior Indebtedness and existing senior subordinated
indebtedness includes, and future Indebtedness may include, change of control
provisions pursuant to which the Company would be required to repurchase, or
the lender could demand repayment of, upon a change of control (as defined
thereunder), the Indebtedness due thereunder. Upon such an occurrence, the
Company would be required to redeem or repay such Senior Indebtedness before
repurchasing the Notes, the 9% Notes and all then outstanding indebtedness
pari passu with the Notes that contains similar change of control provisions.
Furthermore, no assurance can be given that the Company would have sufficient
funds available or could obtain the financing required to repurchase the
Notes, the 9% Notes and such other outstanding indebtedness that is pari passu
with the Notes tendered by holders following a Change of Control. If a Change
of Control occurred and the Company had inadequate funds or financing
available to pay for Notes, 9% Notes and such other outstanding indebtedness
that is pari passu with the Notes tendered for repurchase, an Event of Default
(as defined) would be triggered under the Indenture and under the indentures
governing the 9% Notes and such other outstanding indebtedness that is pari
passu with the Notes, each of which could have adverse consequences for the
Company and the holders of the Notes.
OPERATING HAZARDS; UNINSURED RISKS
The Company's operations are subject to all of the risks and hazards
typically associated with the exploitation, development and exploration for,
the production of, and the transportation of oil and gas. Operating risks
include but are not limited to fires, explosions, formations with abnormal
pressures, blowouts, cratering and oil spills and other natural disasters, any
of which could result in loss to human life, significant damage to property,
environmental pollution, impairment of the Company's operations and
substantial losses to the Company. In accordance with customary industry
practice, the Company maintains insurance against some, but not all, of such
risks and some, but not all, of such losses. The occurrence of such an event
not fully covered by insurance could have a material adverse effect on the
financial position and operations of the Company.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's business is subject to certain foreign, federal, state and
local laws and regulations relating to the exploration for and development,
production and marketing of oil and gas, including environmental and safety
matters. Such laws and regulations have generally become more stringent in
recent years, often imposing greater liability on a larger number of
potentially responsible parties. Such laws and regulations have increased the
costs of planning, designing, drilling, installing, operating and abandoning
the Company's oil and gas wells and other facilities.
The Company has expended significant resources to comply with certain laws
and environmental regulations and anticipates that it will continue to do so
in the future. Because the requirements imposed by such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
compliance with such requirements. There can be no assurance given that laws
and regulations enacted in the future, including changes to existing laws and
regulations, will not adversely affect the Company's business.
16
<PAGE>
COMPETITION
The oil and gas industry is highly competitive. The Company competes in the
areas of property acquisitions and the development, production and marketing
of oil and natural gas with major oil companies, other independent oil and
natural gas concerns and individual producers and operators. The Company also
competes with major and independent oil and natural gas concerns in recruiting
and retaining qualified employees. Many of these competitors have
substantially greater financial and other resources than the Company.
CONTROL BY CERTAIN STOCKHOLDERS
Upon the completion of the Common Stock Offering, the current officers and
directors of the Company as a group, will own at least 32 percent of the
outstanding Common Stock (or 34 percent if the Common Stock Offering is not
consummated). Consequently, these stockholders may be in a position to
effectively control the affairs of the Company, including the election of all
of the Company's directors and the approval or prevention of certain corporate
transactions which require majority stockholder approval.
ABSENCE OF A PREVIOUS MARKET FOR THE NOTES
The Notes are a new issue of securities with no established trading market
and the Company does not intend to apply for listing of the Notes on any
securities exchange. The Company has been advised by the Underwriters that,
subject to applicable laws and regulations, each of them currently intends to
make a market in the Notes; however, they are not obligated to do so and may
discontinue any such market making at any time without notice. No assurance
can be given as to the development or liquidity of any trading market in the
Notes. If an active market does not develop, the market price and liquidity of
the Notes may be adversely affected.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Prospectus which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things
as future capital expenditures (including the amount and nature thereof),
wells to be drilled or reworked, oil and gas prices and demand, exploitation
and exploration prospects, development and infill potential, drilling
prospects, expansion and other development trends of the oil and gas industry,
business strategy, production of oil and gas reserves, expansion and growth of
the Company's business and operations, and other such matters are forward-
looking statements. These statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with the Company's
expectations and predictions is subject to a number of risks and
uncertainties, including the risk factors discussed in this Prospectus;
general economic, market or business conditions; the business opportunities
(or lack thereof) that may be presented to and pursued by the Company; changes
in laws or regulations; and other factors, most of which are beyond the
control of the Company. Consequently, all of the forward-looking statements
made in this Prospectus are qualified by these cautionary statements and there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company or its business or
operations. The Company assumes no obligation to update any such forward-
looking statements.
17
<PAGE>
COMMON STOCK OFFERING
Concurrent with this Offering, the Company is offering 1,500,000 shares of
Common Stock to the public. In addition, the Company has granted the
underwriters an option to purchase up to 225,000 additional shares of Common
Stock to cover over-allotments, if any. This Offering and the Common Stock
Offering are not contingent upon each other and there can be no assurance that
the Common Stock Offering will be consummated.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $96.4 million. Such net proceeds will be
used to reduce a portion of existing indebtedness under the Company's Bank
Facility. At January 30, 1997, the outstanding balance under the Bank Facility
totaled approximately $238.0 million, with an average interest rate of
approximately 6.6 percent. The Company's indebtedness under the Bank Facility
was incurred, in part, to finance the Company's acquisitions of oil and gas
reserves, including the acquisitions of Shamrock and the Exxon Properties. For
additional information regarding the term and the interest rate of the
indebtedness under the Bank Facility, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity."
If the concurrent Common Stock Offering is consummated, the net proceeds
from that offering to the Company are estimated to be approximately $47.1
million. Such net proceeds will also be used to reduce a portion of existing
indebtedness under the Bank Facility.
18
<PAGE>
CAPITALIZATION
The following table sets forth at September 30, 1996: (a) the historical
capitalization of the Company, (b) the as adjusted capitalization of the
Company after giving effect to the debt incurred to purchase the Exxon
Properties and the acquisition of Shamrock (see "Recent Acquisitions"), and
the Note Offering and the application of the estimated net proceeds therefrom
as set forth in "Use of Proceeds," and (c) the as adjusted combined
capitalization of the Company after giving effect to (b) above and the Common
Stock Offering and the application of the estimated net proceeds therefrom as
set forth in "Use of Proceeds." This table should be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------
AS ADJUSTED
NOTE
OFFERING AND AS ADJUSTED
HISTORICAL ACQUISITIONS COMBINED
---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........ $ 7,929 $ 7,929 $ 7,929
======== ======== ========
Long-term debt:
Bank Revolving Loan Facility........... $164,800 $134,793(a) $ 87,710(b)
9% Senior Subordinated Notes Due 2005,
net of discount....................... 149,623 149,623 149,623
Notes offered hereby, net of discount.. -- 99,158 99,158
International Finance Corporation Note. 21,957 21,957 21,957
-------- -------- --------
Total long-term debt................. 336,380 405,531 358,448
-------- -------- --------
Minority interest........................ 2,286 2,286 2,286
-------- -------- --------
Stockholders' equity:
Common stock........................... 120 120 128(b)
Capital in excess of par value......... 152,121 152,121 199,196(b)
Retained earnings...................... 98,991 98,991 98,991
-------- -------- --------
Total stockholders' equity........... 251,232 251,232 298,315
-------- -------- --------
Total capitalization..................... $589,898 $659,049 $659,049
======== ======== ========
</TABLE>
- --------
(a) Reflects the reduction in borrowings resulting from the application of the
estimated $96.4 million net proceeds from the Note Offering as well as
additional borrowings of $66.4 million to fund the acquisitions of the
Exxon Properties and Shamrock.
(b) Reflects the issuance of 1,500,000 shares of Common Stock by the Company
at the public offering price of $33.125 per share, resulting in estimated
net proceeds of $47.1 million, of which $7,500 (equal to the par value of
the shares issued) is reflected in Common Stock and $47.1 million is
reflected in Capital in excess of par value. Net proceeds from the Common
Stock Offering are applied to reduce borrowings under the Bank Facility.
See "Use of Proceeds."
19
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The financial data presented in the table below for and at the end of each
of the years in the five-year period ended December 31, 1995, are derived from
the consolidated financial statements of the Company audited by Arthur
Andersen LLP, independent public accountants. The financial data presented in
the table below for and at the end of each of the nine-month periods ended
September 30, 1996 and 1995, are derived from the unaudited consolidated
financial statements of the Company. In the opinion of management of the
Company, such unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial data for such periods. The results for the
nine months ended September 30, 1996, are not necessarily indicative of the
results to be achieved for the full year.
The data presented below should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Significant acquisitions of producing
oil and gas properties affect the comparability of the financial and operating
data for the periods presented below.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS, OPERATING DATA AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas sales...... $ 185,847 $ 112,809 $ 160,254 $ 141,357 $ 113,259 $ 61,194 $ 43,392
Oil and gas gathering.. 15,310 8,472 12,380 14,635 7,861 7,775 9,013
Gas marketing.......... 21,519 13,631 20,912 27,285 36,175 31,097 17,221
Other income........... 659 1,461 1,251 2,375 2,732 1,384 4,353
--------- --------- --------- --------- --------- -------- --------
223,335 136,373 194,797 185,652 160,027 101,450 73,979
--------- --------- --------- --------- --------- -------- --------
Costs and expenses:
Lease operating,
including production
taxes................. 67,606 47,520 66,771 59,292 44,930 26,334 19,146
Oil and gas gathering.. 12,838 6,636 9,511 12,294 5,869 5,901 6,894
Gas marketing.......... 19,885 12,210 18,839 24,963 34,406 29,536 16,652
General and
administrative........ 12,026 8,258 11,601 8,889 6,066 4,064 3,168
Depreciation, depletion
and amortization...... 51,313 36,875 52,257 45,774 33,335 17,374 12,927
Interest............... 22,467 13,379 20,178 12,002 6,943 4,497 4,244
--------- --------- --------- --------- --------- -------- --------
186,135 124,878 179,157 163,214 131,549 87,706 63,031
--------- --------- --------- --------- --------- -------- --------
Income before income
taxes, minority
interest and cumulative
effect of accounting
change................. 37,200 11,495 15,640 22,438 28,478 13,744 10,948
Provision (benefit) for
income taxes:
Current................ 2,061 687 (955) 1,576 3,962 1,650 2,367
Deferred............... 7,982 3,895 6,034 6,933 7,727 3,441 1,793
Minority interest in
(income) loss of
subsidiary(a).......... (361) 662 800 -- -- -- --
--------- --------- --------- --------- --------- -------- --------
Income before cumulative
effect of accounting
change................. 26,796 7,575 11,361 13,929 16,789 8,653 6,788
Cumulative effect of
accounting change(b)... -- -- -- -- 1,725 -- --
--------- --------- --------- --------- --------- -------- --------
Net income.............. $ 26,796 $ 7,575 $ 11,361 $ 13,929 $ 18,514 $ 8,653 $ 6,788
========= ========= ========= ========= ========= ======== ========
Weighted average common
shares outstanding..... 24,454 21,322 21,276 21,174 20,830 16,861 16,720
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS, OPERATING DATA AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE:
Income before cumulative
effect of accounting
change................. $ 1.10 $ .36 $ .53 $ .66 $ .81 $ .51 $ .41
Net income.............. 1.10 .36 .53 .66 .89 .51 .41
CASH FLOW DATA:
Cash provided (used) by:
Operating activities... $ 82,947 $ 48,904 $ 54,199 $ 58,670 $ 52,219 $ 28,949 $ 19,393
Investing activities... (100,699) (120,925) (187,251) (70,668) (146,126) (122,637) (30,882)
Financing activities... 20,546 73,134 135,166 11,867 93,900 93,923 11,345
BALANCE SHEET DATA (end
of period):
Property, plant and
equipment, net......... $ 623,092 $ 521,751 $ 577,746 $ 366,665 $ 346,034 $ 228,778 $ 126,286
Total assets............ 701,358 572,143 647,539 407,752 384,461 259,887 143,897
Total debt.............. 344,309 309,140 323,776 193,864 181,480 133,375 41,957
Minority interest(a).... 2,286 11,618 3,922 -- -- -- --
Stockholders' equity.... 251,232 169,702 223,960 155,993 143,392 78,696 69,828
OTHER FINANCIAL DATA:
Dividends declared per
share.................. $ .08 $ .07 $ .09 $ .07 $ .05 $ .02 $ --
EBITDA(c)............... 110,980 61,749 88,075 80,214 68,756 35,615 28,119
Ratio of EBITDA to
interest expense....... 4.9x 4.6x 4.4x 6.7x 9.9x 7.9x 6.6x
Ratio of earnings to
fixed charges(d)....... 2.7x 1.9x 1.8x 2.9x 5.0x 4.0x 3.6x
SELECTED OPERATING DATA
(Unaudited):
Production:
Oil (MBbls)............ 8,649 5,310 7,608 6,657 4,785 1,978 1,388
Gas (MMcf)............. 24,535 22,489 30,610 28,884 22,504 14,592 11,411
Oil equivalent (MBOE).. 12,738 9,058 12,710 11,471 8,536 4,410 3,290
Average sales prices:
Oil (per Bbl).......... $ 16.66(e) $ 15.33 $ 15.26 $ 13.53 $ 14.14 $ 17.88 $ 19.39
Gas (per Mcf).......... 1.70 1.42 1.46 1.78 2.03 1.77 1.44
Production costs (per
BOE)(f)................ 5.31 5.25 5.25 5.17 5.26 5.97 5.82
Three-year average
finding cost
(per BOE)(g)........... N/A N/A 2.98 3.23 3.34 3.39 4.06
Proved reserves (end of
period):
Oil (MBbls)............ N/A N/A 147,871 70,789 63,277 40,209 17,061
Gas (MMcf)............. N/A N/A 310,762 281,638 273,142 206,582 137,712
Total proved reserves
(MBOE)................ N/A N/A 199,665 117,729 108,801 74,639 40,013
Proved developed
reserves (MBOE)....... N/A N/A 145,790 91,722 88,976 61,581 31,620
Annual reserve
replacement ratio(h)... N/A N/A 747% 179% 504% 891% 215%
Estimated reserve life
(in years)(i).......... N/A N/A 15.7 10.3 12.7 11.5 12.2
Present value of
estimated future net
revenues before income
taxes (discounted at
10%)
(in thousands)......... N/A N/A $ 894,249 $ 446,987 $ 359,978 $ 335,941 $ 160,021
Standardized measure of
discounted future net
cash flows
(in thousands)......... N/A N/A 736,546 385,721 339,701 274,443 131,533
</TABLE>
- --------
(a) Reflects the minority interest in Cadipsa. See the consolidated financial
statements and the notes thereto of the Company included elsewhere in this
Prospectus.
(b) Represents the cumulative effect on prior years of adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
(c) EBITDA has the same meaning as in the Indenture except that EBITDA as
presented in the table for the nine months ended September 30, 1996,
includes the EBITDA of Cadipsa which is excluded from the definition in
the Indenture due to restrictions in the Amended and Restated Investment
Agreement dated April 28, 1994, as amended, between the International
Finance Corporation and Cadipsa. EBITDA as defined in the Indenture would
have been $97.5 million for
21
<PAGE>
the nine months ended September 30, 1996. See "Description of Notes--
Certain Definitions." EBITDA is included as a supplemental disclosure
because it is commonly accepted as providing useful information regarding a
company's ability to service and incur debt and certain covenants contained
in the Indenture are based in part on EBITDA. EBITDA, however, should not
be considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity. If the Exxon Properties and
Shamrock had been acquired on January 1, 1996, these properties would have
increased the Company's EBITDA by approximately $8.5 million for the nine
months ended September 30, 1996. See "Recent Acquisitions."
(d) For purposes of calculating the ratio of earnings to fixed charges,
earnings are defined as income of the Company and its subsidiaries before
income taxes and fixed charges. Fixed charges consist of interest expense,
including amortization of financing costs and any discount or premium
related to any indebtedness.
(e) During the first nine months of 1996, the impact of oil hedges reduced the
Company's overall average oil price $1.17 to $16.66 per Bbl.
(f) Includes lease operating costs and production and ad valorem taxes.
(g) Represents the average finding cost per BOE during the three years ended
December 31 of the year shown in the column. See "Certain Definitions."
(h) The annual reserve replacement ratio is a percentage determined on a BOE
basis by dividing the estimated reserves added during a year from
exploitation, development and exploration activities, acquisitions of
proved reserves and revisions of previous estimates, excluding property
sales, by the oil and gas volumes produced during that year.
(i) Estimated reserve life is calculated on a BOE basis by dividing the total
estimated proved reserves at year-end by the total production during the
year. This calculation can be affected by the timing of major
acquisitions. For example, major acquisitions were made during the second
half of 1995 which resulted in an estimated reserve life of 15.7 years for
1995. This compares to an estimated reserve life of 12.0 years for 1995
based on annualized first quarter 1996 production.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's results of operations have been significantly affected by its
success in acquiring oil and gas properties and its ability to maintain or
increase production through its exploitation and exploration activities.
Fluctuations in oil and gas prices have also significantly affected the
Company's results. Principally through acquisitions, the Company has achieved
significant increases in its oil and gas production. The following table
reflects the Company's average oil and gas prices and its oil and gas
production for the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average prices:
Oil (per Bbl)--
U.S.............................. $ 17.08 $ 15.42 $ 15.44 $ 13.53 $ 14.14
Argentina........................ 15.87 14.20 13.98 -- --
Total............................ 16.66 15.33 15.26 13.53 14.14
Gas, all U.S. (per Mcf)........... $ 1.70 $ 1.42 $ 1.46 $ 1.78 $ 2.03
Production:
Oil (MBbls)--
U.S.............................. 5,683 4,933 6,647 6,657 4,785
Argentina........................ 2,966 377 961 -- --
Total............................ 8,649 5,310 7,608 6,657 4,785
Gas, all U.S. (MMcf).............. 24,535 22,489 30,610 28,884 22,504
</TABLE>
Average U.S. oil prices received by the Company fluctuate generally with
changes in the West Texas Intermediate ("WTI") posted prices for oil. The
Company's Argentina oil production is sold at WTI spot prices less a specified
differential. The Company experienced a nine percent increase in its average
oil price in the first nine months of 1996 compared to the same period in
1995. During the first nine months of 1996, the impact of oil hedges reduced
the Company's overall average oil price $1.17 to $16.66 per Bbl. The Company's
average U.S. oil price was reduced 79 cents to $17.08 per Bbl while its
average Argentina oil price was reduced $1.89 to $15.87 per Bbl. Approximately
58 percent of the Company's Argentina oil production and 32 percent of its
U.S. oil production (a combined 3.561 MMBbls) were covered by oil hedges in
the first nine months of 1996.
The Company experienced a 13 percent increase in its average oil price in
1995 compared to 1994. Higher prices relative to WTI posted prices for the
Company's California oil production and the impact of one hedge (swap
agreement) which expired December 31, 1995, combined with higher WTI posted
prices to account for the increase. The Company's average realized oil price
declined four percent in 1994 compared to 1993. The Company's average realized
oil price has increased from 84 percent of WTI posted prices in 1993 to 91
percent for the first nine months of 1996.
Average gas prices received by the Company fluctuate generally with changes
in spot market prices for gas, which may vary significantly by region. The
Company's average gas price for the first nine months of 1996, including the
impact of hedging, was 20 percent higher than the same period of 1995. For the
first nine months of 1996, the average gas price was negatively impacted by
six cents per Mcf as a result of certain gas hedges that were in place for
40,000 Mcf of gas per day for the period January through March 1996. The
Company experienced an 18 percent decline in average gas prices in 1995
compared to 1994 and a 12 percent decline in 1994 compared to 1993.
23
<PAGE>
The Company has previously engaged in oil and gas hedging activities and
intends to continue to consider various hedging arrangements to realize
commodity prices which it considers favorable. The Company had oil hedges
(swap agreements) in place for the fourth quarter of 1996 covering 2.204
MMBbls at an average NYMEX reference price of $18.27 per Bbl. Before the
impact of oil hedges, the Company's average realized oil price for the first
nine months of 1996 was $17.83 per Bbl, or approximately 84 percent of the
average NYMEX reference price. The actual NYMEX reference price in the fourth
quarter of 1996 was $24.52 per Bbl. Currently, oil hedges for the calendar
year 1997 cover 2.738 MMBbls at an average NYMEX reference price of $19.26.
Relatively modest changes in either oil or gas prices significantly impact
the Company's results of operations and cash flow. However, the impact of
changes in the market prices for oil and gas on the Company's average realized
prices may be reduced from time to time based on the level of the Company's
hedging activities. Based on 1996 first nine months oil and gas production, a
change in the average oil price realized by the Company of $1.00 per Bbl would
result in a change in net income and cash flow before income taxes on a nine
month basis of approximately $6.3 million and $8.5 million, respectively. A 10
cent per Mcf change in the average price realized by the Company for gas would
result in a change in net income and cash flow before income taxes on a nine
month basis of approximately $1.4 million and $2.4 million, respectively.
PERIOD TO PERIOD COMPARISONS
During 1995, the Company made various acquisitions which significantly
impacted the period to period comparison for the first nine months of 1996.
These acquisitions (the "1995 Acquisitions") include the purchase of certain
oil and gas properties from Texaco Exploration and Production, Inc. ("Texaco")
(the "Texaco Properties") in May 1995, the acquisition of a controlling
interest in Cadipsa in July 1995, the acquisition of Vintage Oil Argentina,
Inc., formerly BG Argentina, S.A. ("Vintage Argentina"), in September 1995,
and the acquisition of certain Argentina oil and gas properties from Astra
Compania Argentina de Petroleo S.A. and Shell Compania Argentina de Petroleo
S.A. (collectively, the "Astra/Shell Properties") in November 1995 and
December 1995, respectively.
The Company's consolidated revenues and expenses for 1996 and 1995 include
the consolidation of 100 percent of Cadipsa from the date of acquisition under
the purchase method of accounting. The minority interest in income/(loss) of
subsidiary reflects the portion of Cadipsa's income/(loss) attributable to the
minority ownership during the nine months ended September 30, 1996 and 1995,
and the year ended December 31, 1995. At September 30, 1996, the Company owned
95.7 percent of Cadipsa.
Nine Months Ended September 30, 1996, Compared to Nine Months Ended September
30, 1995
Net income was $26.8 million for the first nine months of 1996, up 253
percent from $7.6 million for the same period in 1995. Increases in the
Company's oil and gas production of 41 percent on an equivalent barrel basis,
an increase of 20 percent in natural gas prices, and an increase of nine
percent in oil prices are primarily responsible for the increase in net
income. The production increases primarily relate to the 1995 Acquisitions.
Oil and gas sales increased $73.0 million (65 percent), to $185.8 million
for the first nine months of 1996 from $112.8 million for the first nine
months of 1995. A 63 percent increase in oil production and a nine percent
increase in average oil prices combined to account for $62.7 million of the
increase. A nine percent increase in gas production and a 20 percent increase
in average gas prices contributed to an additional $10.3 million increase.
Oil and gas gathering net margins (revenue less expenses) increased $700,000
(39 percent), to $2.5 million for the first nine months of 1996 from $1.8
million for the first nine months of 1995, due
24
<PAGE>
primarily to improved profitability on a gathering system located in Texas,
additional net margins from a gathering system located in California acquired
from Texaco in May 1995 and increased gas prices.
Gas marketing net margins (revenue less expenses) increased $200,000 (14
percent), to $1.6 million for the first nine months of 1996 from $1.4 million
for the first nine months of 1995, due primarily to an increase in the reserve
for doubtful accounts associated with gas sales in the first nine months of
1995 with no similar increase in 1996.
Lease operating expenses, including production taxes, increased $20.1
million (42 percent), to $67.6 million for the first nine months of 1996 from
$47.5 million for the first nine months of 1995. The increase in lease
operating expenses is due primarily to the 1995 Acquisitions. Lease operating
expenses per equivalent barrel produced increased one percent to $5.31 in the
first nine months of 1996 from $5.25 for the same period in 1995.
General and administrative expenses increased $3.7 million (45 percent), to
$12.0 million for the first nine months of 1996 from $8.3 million for the
first nine months of 1995, due primarily to the acquisitions of Cadipsa and
Vintage Argentina in the last half of 1995.
Depreciation, depletion and amortization increased $14.4 million (39
percent), to $51.3 million for the first nine months of 1996 from $36.9
million for the first nine months of 1995, due primarily to the 41 percent
increase in production on an equivalent barrel basis. Amortization per
equivalent barrel of the Company's U.S. oil and gas properties declined to
$3.76 in the first nine months of 1996 from $3.87 in 1995. Amortization per
equivalent barrel of the Company's Argentina oil and gas properties for the
first nine months of 1996 was $4.18 as compared to $4.29 in the same period
for 1995.
Interest expense increased $9.1 million (68 percent), to $22.5 million for
the first nine months of 1996 from $13.4 million for the first nine months of
1995, due primarily to a 46 percent increase in the Company's total average
outstanding debt related primarily to the 1995 Acquisitions.
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Net income was $11.4 million for the year ended December 31, 1995, down 18
percent from $13.9 million in 1994. A decrease of 18 percent in natural gas
prices and a 68 percent increase in interest expense offset a 13 percent
increase in average oil prices and an 11 percent increase in production on an
equivalent barrel basis. In addition, certain oil and gas properties were
shut-in for a portion of the first six months of 1995 due to storm damage
caused by heavy rains in California and the resulting mudslides, reducing the
Company's overall production in the first half by approximately 70,000 Bbls of
oil and 350,000 Mcf of gas.
During the last half of 1995, the Company purchased a 71.6 percent
controlling interest in Cadipsa, a publicly-traded Argentine oil and gas
exploration and production company. The Company's consolidated revenues and
expenses for the year ended December 31, 1995, include the consolidation of
100 percent of Cadipsa for the last half of 1995 under the purchase method of
accounting. The minority interest in loss of subsidiary of $0.8 million
reflects the portion of Cadipsa's loss attributable to the minority ownership
during the last half of 1995.
Oil and gas sales increased $18.9 million (13 percent), to $160.3 million
for 1995 from $141.4 million for 1994, due primarily to a 13 percent increase
in average oil prices and an 11 percent increase in production on an
equivalent barrel basis, partially offset by an 18 percent decline in average
natural gas prices. The production increases primarily related to the Texaco
Properties purchased in May 1995, the acquisition of a controlling interest in
Cadipsa in July 1995, and the acquisition of Vintage Argentina in September
1995. However, these production increases were partially offset by lower
production from the Company's properties affected by the California storms. In
25
<PAGE>
addition, oil and gas sales for 1995 were reduced by $0.5 million reflecting
the total settlement of a class action lawsuit filed on June 8, 1990, on
behalf of certain royalty and mineral interest owners.
Oil and gas gathering net margins (revenues less expenses) increased
$600,000 (26 percent), to $2.9 million in 1995 from $2.3 million in 1994, due
primarily to net margins from a gathering system located in California
acquired from Texaco in May 1995 and additional third party volumes
transported on an existing system located in Texas.
Gas marketing net margins (revenues less expenses) decreased $200,000 (9
percent), to $2.1 million in 1995 from $2.3 million in 1994, due primarily to
an increase in the reserve for doubtful accounts associated with gas sales and
the decline in average natural gas prices.
Other income decreased $1.1 million (46 percent) to $1.3 million in 1995
from $2.4 million in 1994, due primarily to the recognition of a $0.9 million
loss from 1996 natural gas price hedges (swap agreements) which no longer
qualify as hedges.
Lease operating expenses, including production taxes, increased $7.5 million
(13 percent), to $66.8 million in 1995 from $59.3 million in 1994. The
increase in lease operating expenses is due primarily to the acquisitions of
Cadipsa and Vintage Argentina and the Texaco Properties. Lease operating
expenses per equivalent barrel produced increased 2 percent to $5.25 in 1995
from $5.17 in 1994, due to the impact of the California storms on production
and costs incurred.
General and administrative expenses increased $2.7 million (30 percent), to
$11.6 million in 1995 from $8.9 million in 1994, due primarily to the
acquisition of Cadipsa and the addition of new personnel throughout 1994 and
1995 as a result of 1994 acquisitions and an increase in the Company's
exploitation efforts.
Depreciation, depletion and amortization increased $6.5 million (14
percent), to $52.3 million in 1995 from $45.8 million in 1994, due primarily
to the 11 percent increase in production on an equivalent barrel basis.
Amortization per equivalent barrel increased 2 percent to $3.89 in 1995 from
$3.82 in 1994 on the Company's U.S. oil and gas properties. Amortization per
equivalent barrel of the Company's Argentina oil and gas properties for 1995
was $4.28. The Company had no Argentina operations prior to 1995.
Interest expense increased $8.2 million (68 percent), to $20.2 million in
1995 from $12.0 million in 1994, due primarily to a 28 percent increase in the
average interest rate on the Company's floating-rate debt with banks to 7.4
percent per annum in 1995 from 5.8 percent per annum in 1994, an increase in
average outstanding advances under the Company's bank revolving credit
facility and bank term loan, and interest expense on third-party debt of the
Company's foreign subsidiaries.
Year Ended December 31, 1994, Compared to Year Ended December 31, 1993
Income before the cumulative effect of the change in accounting for income
taxes was $13.9 million for the year ended December 31, 1994, down 17 percent
from $16.8 million in 1993. Significantly lower gas prices combined with lower
oil prices more than offset the impact on net income of a 34 percent increase
in oil and gas production on an equivalent barrel basis. The production
increases related primarily to production from certain oil and gas properties
acquired through various acquisitions in 1993 and 1994. Net income for the
year ended December 31, 1993, of $18.5 million included $1.7 million related
to the cumulative effect on prior years of adopting Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109").
Oil and gas sales increased $28.1 million (25 percent), to $141.4 million in
1994 from $113.3 million in 1993 due primarily to a 39 percent increase in oil
production and a 28 percent increase in
26
<PAGE>
gas production. The production increases related primarily to production from
certain oil and gas properties acquired from Conoco Inc. ("Conoco") in June
1993, Santa Fe Energy Resources, Inc. ("Santa Fe") in November 1993 and
various smaller acquisitions made throughout 1994. The production increases
were partially offset by a 4 percent decrease in the Company's average oil
price and a 12 percent decrease in the Company's average gas price for the
period.
Oil and gas gathering net margins (revenues less expenses) increased
$300,000 (15 percent) to $2.3 million in 1994 from $2.0 million in 1993 due
primarily to the acquisition of the remaining interests in certain gathering
systems located in Oklahoma and Kansas by acquiring the Vintage/P Acquisition
Limited Partnership in November 1993 and the acquisition and construction of
certain smaller gathering systems located in Texas in 1994.
Gas marketing net margins (revenues less expenses) increased $500,000 (28
percent) to $2.3 million in 1994 from $1.8 million in 1993 due primarily to a
3 percent increase in gas volumes marketed and a $300,000 nonrecurring charge
in 1993 with no similar charge in 1994.
Other income decreased $300,000 (11 percent) to $2.4 million in 1994 from
$2.7 million in 1993 due primarily to the receipt in 1993 of $865,000 related
to gas contract settlements with no similar settlements in 1994 partially
offset by an increase in rental income from Company owned equipment.
Lease operating expenses, including production taxes, increased $14.4
million (32 percent) to $59.3 million in 1994 from $44.9 million in 1993 due
primarily to the 34 percent increase in oil and gas production (on an
equivalent barrel basis) resulting from the acquisitions discussed above.
Lease operating expenses per equivalent barrel produced decreased 2 percent to
$5.17 in 1994 from $5.26 in 1993.
General and administrative expenses increased $2.8 million (46 percent) to
$8.9 million in 1994 from $6.1 million in 1993 due primarily to the addition
of personnel in 1994 associated with the Company's significant acquisitions in
late 1993.
Depreciation, depletion and amortization increased $12.5 million (38
percent) to $45.8 million in 1994 from $33.3 million in 1993 due primarily to
the 34 percent increase in oil and gas production on an equivalent barrel
basis. Amortization per equivalent barrel produced increased only 3 percent to
$3.82 in 1994 from $3.71 in 1993.
Interest expense increased $5.1 million (74 percent) to $12.0 million in
1994 from $6.9 million in 1993 due primarily to an increase in the average
outstanding advances under the Company's revolving credit facility and an
increase in the average annual interest rate paid under this facility to 5.8
percent in 1994 from 4.5 percent in 1993.
CAPITAL EXPENDITURES
During the first nine months of 1996, the Company's domestic capital
expenditures totaled $58.6 million of which $18.0 million were for
acquisitions of domestic producing oil and gas properties. The largest of
these acquisitions was approximately $13.9 million for certain oil and gas
properties from Conoco. Subsequent to September 30, 1996, the Company
purchased the Exxon Properties for approximately $28.2 million. Funds for
these acquisitions were provided by advances under the Bank Facility. See
"Recent Acquisitions."
During the nine months ended September 30, 1996, the Company's international
capital expenditures of $38.9 million included $35.1 million in Argentina. In
November 1996, the Company agreed to purchase all the outstanding stock of
Shamrock for approximately $29.0 million in cash. In addition, at closing on
January 7, 1997, the Company repaid all of Shamrock's existing bank debt
(approximately $9.2 million). Funds for the purchase of the stock and the
repayment of debt were
27
<PAGE>
provided by advances under the Company's Bank Facility. Shamrock's assets
include (a) oil and gas properties valued at $35.5 million (including the
effect of approximately $6.6 million of deferred income taxes recorded under
the purchase method of accounting), and (b) inventory, receivables, cash and
other assets net of liabilities (other than bank debt repaid at closing) of
approximately $9.3 million. See "Recent Acquisitions."
The timing of most of the Company's capital expenditures is discretionary
with no material long-term capital expenditure commitments. Consequently, the
Company has a significant degree of flexibility to adjust the level of such
expenditures as circumstances warrant. The Company primarily uses internally
generated cash flow to fund capital expenditures other than significant
acquisitions and anticipates that its cash flow, net of debt service
obligations, will be sufficient to fund its planned $117 million of non-
acquisition capital expenditures during 1997. Approximately $74 million of the
Company's planned 1997 non-acquisition capital expenditure budget is devoted
to reserve exploitation activities, including development and infill drilling,
and approximately $43 million is devoted to exploration activities. The
Company does not have a specific acquisition budget since the timing and size
of acquisitions are difficult to forecast. The Company is actively pursuing
additional acquisitions of oil and gas properties. In addition to internally
generated cash flow and advances under the Bank Facility, the Company may seek
additional sources of capital to fund any future significant acquisitions (see
"--Liquidity").
The Company's recent capital expenditure history is as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------
1996 1995 1994 1993
------------- -------- ------- --------
<S> <C> <C> <C> <C>
Acquisition of oil and gas reserves.... $21,712 $207,658 $36,544 $123,906
Workovers and recompletions............ 24,949 18,313 13,984 12,915
Drilling............................... 29,223 21,343 9,593 6,750
Acquisition and construction of gather-
ing systems........................... 107 234 632 3,319
Acquisition of undeveloped acreage and
seismic............................... 12,611 7,684 1,869 610
Other.................................. 8,876 5,367 3,146 3,071
------- -------- ------- --------
Total................................ $97,478 $260,599 $65,768 $150,571
======= ======== ======= ========
</TABLE>
LIQUIDITY
The $96.4 million of estimated net proceeds from the sale of the Notes under
the Note Offering will be used to repay a portion of existing indebtedness
outstanding under the Company's Bank Facility. In addition, the estimated
proceeds of $47.1 million from the Common Stock Offering will be used to repay
a portion of existing indebtedness outstanding under the Company's Bank
Facility. The Company may issue additional equity and debt securities in the
future in connection with any future major acquisitions and to maintain its
financial flexibility.
During 1990, early 1993 and late 1995, the Company completed public
offerings of Common Stock to finance certain acquisitions and provide
liquidity for its future activities. Simultaneous with the 1995 common stock
offering, the Company completed a public debt offering to provide liquidity
for its future activities.
In August 1990, the Company sold 3.4 million shares of its Common Stock for
net proceeds of approximately $32.8 million which were used to fund an
acquisition of oil and gas properties and reduce indebtedness under the
Company's revolving credit facility. In January 1993, the Company sold 3.9
million shares of its Common Stock for net proceeds of approximately $44.8
million which were used to reduce indebtedness under the Company's revolving
credit facility.
28
<PAGE>
On December 20, 1995, the Company completed a public offering of 2,793,700
shares of Common Stock of which 2,500,000 shares were sold by the Company and
293,700 shares were sold by a stockholder. Net proceeds to the Company, after
underwriting commission and other expenses, were approximately $49.5 million
and were used to fund a substantial portion of the purchase of the Astra/Shell
Properties.
Also on December 20, 1995, the Company issued $150 million of its 9% Senior
Subordinated Notes Due 2005 (the "9% Notes"). The net proceeds to the Company
from the sale of the 9% Notes of approximately $145.1 million were used
principally to reduce a portion of the outstanding balance under the Company's
revolving credit facility. The 9% Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after December 15, 2000. Upon
a change in control of the Company, holders of the 9% Notes may require the
Company to repurchase all or a portion of the 9% Notes at a purchase price
equal to 101 percent of the principal amount thereof, plus accrued and unpaid
interest. The 9% Notes will mature on December 15, 2005, with interest payable
semiannually on June 15 and December 15 of each year. See "Description of
Certain Indebtedness--9% Senior Subordinated Notes Due 2005."
Internally generated cash flow and the borrowing capacity under the Bank
Facility are the Company's major sources of liquidity. In addition, the
Company may use other sources of capital, including the issuance of additional
debt securities or equity securities, to fund any major acquisitions it might
secure in the future and to maintain its financial flexibility. The Company
funds its capital expenditures (excluding acquisitions) and debt service
requirements through internally generated cash flows from operations. Any
excess cash flow is used to reduce outstanding advances under the Bank
Facility and other indebtedness.
Under its Credit Agreement dated August 29, 1996, as amended, certain banks
have provided to the Company an unsecured Bank Facility. The Bank Facility
establishes a borrowing base (currently $305 million) determined by the banks'
evaluation of the Company's U.S. and certain Argentina oil and gas reserves.
Outstanding advances under the Bank Facility bear interest payable quarterly
at a floating rate based on Bank of Montreal's alternate base rate (as
defined) or, at the Company's option, at a fixed rate for up to six months
based on the eurodollar market rate ("LIBOR"). The Company's interest rate
increments above the alternate base rate and LIBOR vary based on the level of
outstanding senior debt and the portion of the borrowing base attributable to
U.S. reserves at the time. As of January 30, 1997, the Company had elected a
fixed rate based on LIBOR for a substantial portion of its outstanding
advances, which resulted in an average interest rate of approximately 6.6
percent. In addition, the Company must pay a commitment fee ranging from 0.25
to 0.375 percent per annum on the unused portion of the banks' commitment.
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's U.S. and certain Argentina oil
and gas reserves. If the sum of outstanding senior debt (excluding debt of the
Company's foreign subsidiaries) exceeds the borrowing base, as redetermined,
the Company must repay such excess. Any principal advances outstanding under
the Bank Facility at October 1, 1999, will be payable in 12 equal consecutive
quarterly installments commencing January 1, 2000, with maturity at October 1,
2002.
The unused portion of the Bank Facility was approximately $59.3 million at
January 30, 1997. The Company has entered into an amendment to its Bank
Facility in connection with the proposed Note Offering which provides that the
borrowing base will be reduced to approximately $270 million if such offering
is consummated. After giving effect to the application of the net proceeds
from the Note Offering and the Common Stock Offering as set forth in "Use of
Proceeds" and the related reduction in the borrowing base, the unused portion
of the Bank Facility would be approximately $167.8 million
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<PAGE>
($120.7 million if only the Note Offering is consummated or $106.4 million if
only the Common Stock Offering is consummated). The unused portion of the Bank
Facility and the Company's internally generated cash flow provide liquidity
which may be used to finance future capital expenditures, including
acquisitions. As additional U.S. and Argentina acquisitions are made and
properties are added to the borrowing base, the banks' determination of the
borrowing base and their commitments may be increased.
INFLATION
In recent years inflation has not had a significant impact on the Company's
operations or financial condition.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued SFAS 109.
The Company adopted SFAS 109 in 1993. An analysis of income taxes and a
discussion of the impact on the Company of adopting SFAS 109 is presented in
Notes 1 and 5 to the Company's December 31, 1995, consolidated financial
statements included elsewhere in this Prospectus.
The total provision for U.S. income taxes is based on the Federal corporate
statutory income tax rate plus an estimated average rate for state income
taxes. The Company incurred a current benefit for income taxes of
approximately $1.0 million during 1995, and a current provision for income
taxes of $1.6 million and $4.0 million for 1994 and 1993, respectively. During
the first nine months of 1996 and 1995, the Company incurred a current
provision for income taxes of approximately $2.1 million and $0.7 million,
respectively.
The Company has a $5.4 million U.S. Alternative Minimum Tax ("AMT") credit
carryforward which does not expire and is available to offset U.S. regular
income taxes in future years, but only to the extent that U.S. regular income
taxes exceed the U.S. AMT in such years.
Earnings of the Company's subsidiaries, Cadipsa and Vintage Argentina, are
subject to Argentina income taxes. Due to significant Argentina net operating
loss carryforwards for both companies, the Company does not expect to pay any
foreign income taxes related to these subsidiaries in 1996. Earnings of the
Company's subsidiary, Shamrock, are subject to Bolivia income taxes. No U.S.
deferred tax liability will be recognized related to the unremitted earnings
of these foreign subsidiaries as it is the Company's intention, generally, to
reinvest such earnings permanently.
FOREIGN OPERATIONS
A majority of the Company's foreign operations are located in Argentina. The
Company believes Argentina offers a politically stable environment and does
not anticipate any significant change in the near future. The current
democratic form of government has been in place since 1983 and, since 1989,
has pursued a steady process of privatization, deregulation and economic
stabilization and reforms involving the reduction of inflation and public
spending. Argentina's 12-month trailing inflation rate measured by the
Argentine Consumer Price Index declined from 200.7 percent as of June 1991 to
0.4 percent as of November 1996.
The Company believes that its Argentine operations present minimal currency
risk. All of the Company's Argentine revenues are U.S. dollar based, while a
large portion of its costs are Argentine peso-denominated. The Argentina
Central Bank is obligated by law to sell dollars at a rate of one Argentine
peso to one U.S. dollar and has sought to prevent appreciation of the peso by
buying dollars at rates of not less than 0.998 peso to one U.S. dollar. As a
result, the Company believes that should any devaluation of the Argentine peso
occur, its revenues would be unaffected and its operating costs would not be
significantly increased. At the present time, there are no foreign exchange
controls preventing or restricting the conversion of pesos into dollars.
30
<PAGE>
RECENT ACQUISITIONS
Since December 31, 1995, the Company has acquired, through several
transactions, oil and gas properties for an aggregate purchase price of
approximately $89.7 million. Most of these properties were acquired subsequent
to September 30, 1996. Based on estimates prepared by the Company, proved
reserves as of the dates of the various acquisitions aggregated 16.0 MMBbls of
oil and 74.0 Bcf of gas, or a total of 28.4 MMBOE. These reserves were
acquired at an average cost of $3.16 per BOE.
The two most significant acquisitions made subsequent to September 30, 1996,
are described below. If these properties had been acquired on January 1, 1996,
these properties would have increased the Company's revenues by approximately
$13.5 million, EBITDA by approximately $8.5 million and production by
approximately 302 MBbls of oil and 4.0 Bcf of gas for the nine months ended
September 30, 1996.
EXXON PROPERTIES (GULF COAST)
On November 20, 1996, the Company purchased certain producing oil and gas
properties and facilities from Exxon Company, U.S.A. located in south Alabama
for approximately $28.2 million in cash, subject to post-closing adjustments
(the "Exxon Properties"). Funds were provided by advances under the Company's
Bank Facility. The Exxon Properties include an interest in two fields totaling
approximately 5,000 net acres with a total of 17 gross (9.9 net) productive
wells with current net daily production of approximately 1,450 Bbls of oil and
liquids and 2,800 Mcf of gas. All of the wells are now operated by the
Company. The primary producing sands are the Smackover and Norphlet at depths
of approximately 15,000 feet. Future exploitation activities will include
operating cost reductions, treating plant efficiencies, workovers and infill
drilling.
SHAMROCK (BOLIVIA)
In November 1996, the Company agreed to purchase 100 percent of the
outstanding common stock of Shamrock Ventures Boliviana Ltd. ("Shamrock") from
affiliates of Ultramar Diamond Shamrock Corporation for approximately $29.0
million in cash. In addition, at closing on January 7, 1997, the Company
repaid all of Shamrock's existing bank debt (approximately $9.2 million).
Funds for the purchase of the stock and the repayment of debt were provided by
advances under the Company's Bank Facility. Shamrock's assets include (a) oil
and gas properties valued at $35.5 million (including the effect of
approximately $6.6 million of deferred income taxes recorded under the
purchase method of accounting), and (b) inventory, receivables, cash and other
assets net of liabilities (other than bank debt repaid at closing) of
approximately $9.3 million. This transaction is subject to government
approvals. The acquisition of Shamrock represents an extension of the
Company's South American operating area that was initially established through
a series of acquisitions in Argentina during 1995.
The oil and gas properties of Shamrock consist of three blocks, totaling
approximately 570,000 net acres, in the Chaco Plains area of southern Bolivia.
This region has experienced the greatest amount of exploration and currently
accounts for the majority of the country's production. The properties consist
of a 100 percent interest in the Chaco and Porvenir blocks, and a 50 percent
interest in the Nupuco block.
Proved reserves at the time of acquisition, as estimated by the Company,
were 53.2 Bcf of gas and 5.1 MMBbls of oil. Current net daily production is
approximately 14,500 Mcf of gas and 230 Bbls of condensate. Recent realized
prices on the properties were $1.23 per Mcf of gas and $21.00 per Bbl of
condensate. The purchase also included a 29 mile gas pipeline and an interest
in a gas processing plant with a capacity of 110 MMcf per day. Liquids are
transferred through the pipeline to the processing plant. The current market
for the gas is Argentina.
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The Company believes that the Shamrock properties contain substantial upside
potential which may be realized through exploitation and future exploration.
There can be no assurance, however, that such potential will be realized.
Bolivia occupies the strategic pivotal position in the area known as the
"Southern Cone" of South America. The Company expects that gas will be the key
energy source for the developing regional economies. The development of the
sizable gas reserves in southern Bolivia will play an important role as a
source of energy for the net importing countries of this region, the most
significant of which is Brazil. Third party plans call for construction of a
gas pipeline from Santa Cruz, Bolivia to Sao Paulo, Brazil which is
anticipated to be completed by 1999. The Company plans to begin work during
1997 to evaluate the exploration prospects on the Bolivian properties in order
to be ready to take advantage of the increased market for Bolivian gas that
should occur if the pipeline to Brazil is completed. There can be no
assurance, however, that this Brazilian market will be developed.
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<PAGE>
BUSINESS
GENERAL
The Company is an independent oil and gas company focused on the acquisition
of producing oil and gas properties which contain the potential for increased
value through exploitation and development. The Company, through its
experienced management and engineering staff, has been successful in realizing
such potential on prior acquisitions through workovers, recompletions,
secondary recovery operations, operating cost reductions, and the drilling of
development or infill wells. The Company believes that its primary strengths
are its ability to add reserves at attractive prices through property
acquisitions and subsequent exploitation, and its low cost operating
structure. These strengths have allowed the Company to substantially increase
reserves, production and cash flow during the last five years. As the Company
has grown its cash flow and added to its technical staff, exploration has
become a larger focus for its future growth. Planned exploration expenditures
for 1997 of approximately $43 million represent 37 percent of the Company's
capital budget, excluding acquisitions.
At September 30, 1996, the Company owned and operated producing properties
in 11 states, with its domestic proved reserves located primarily in four core
areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas of the
United States. During 1996, the Company expanded its Gulf Coast area through
the acquisitions of the Exxon Properties and the Conoco Properties. In
addition, the Company established a new core area in 1995 by acquiring 12 oil
concessions, 11 of which are producing and operated by the Company, in the
south flank of the San Jorge Basin in southern Argentina. The Company recently
expanded its South American operations into Bolivia through the acquisition of
Shamrock which owns and operates three blocks covering approximately 570,000
net acres in the Chaco Plains area of southern Bolivia. See "Recent
Acquisitions."
The Company owned interests in 3,053 gross (1,934 net) producing wells in
the United States as of September 30, 1996, of which approximately 81 percent
are operated by the Company. The Company owned interests in 610 gross (597
net) producing wells in Argentina as of September 30, 1996, of which
approximately 97 percent are operated by the Company. As of December 31, 1995,
the Company's properties had proved reserves of 199.7 MMBOE, comprised of
147.9 MMBbls of oil and 310.8 Bcf of gas, with a present value of estimated
future net revenues before income taxes (utilizing a 10 percent discount rate)
of $894 million and a standardized measure of discounted future net cash flows
of $737 million. Since that date, acquisitions have added 28.4 MMBOE of proved
reserves, as estimated by the Company as of the date of each acquisition.
The Company has consistently achieved growth in proved reserves, production
and revenues and has been profitable every full year since its founding in
1983. From the first quarter of 1993 through the third quarter of 1996, the
Company increased its average net daily production from 11,200 Bbls of oil to
32,900 Bbls of oil and from 60,000 Mcf of gas to 86,300 Mcf of gas. For the
year ended December 31, 1995, the Company generated revenues of $195 million
and EBITDA (as defined herein under "Selected Financial and Operating Data")
of $88 million. For the nine months ended September 30, 1996, the Company
generated revenues of $223 million and EBITDA of $111 million. (EBITDA is
included as a supplemental disclosure because it is commonly accepted as
providing useful information regarding a company's ability to service and
incur debt and certain covenants contained in the Indenture are based in part
on EBITDA. EBITDA, however, should not be considered in isolation or as a
substitute for net income, cash flow provided by operating activities or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity.)
BUSINESS STRATEGY
The Company's overall goal is to maximize its value through profitable
growth in its oil and gas reserves and production. The Company has been
successful at achieving this goal through its ongoing
33
<PAGE>
strategy of (a) acquiring producing oil and gas properties, at favorable
prices, with significant exploitation potential, (b) focusing on low risk
exploitation and development activities to maximize production and ultimate
reserve recovery, (c) exploring non-producing properties, (d) maintaining a
low cost operating structure, and (e) maintaining financial flexibility. Key
elements of the Company's strategy include:
. Acquisitions of Producing Properties. The Company has an experienced
management and engineering team which focuses on acquisitions of
operated producing properties that meet its selection criteria which
include (a) significant potential for increasing reserves and production
through low risk exploitation and development, (b) attractive purchase
price, and (c) opportunities for improved operating efficiency. The
Company's emphasis on property acquisitions reflects its belief that
continuing consolidation and restructuring activities on the part of
major integrated and large independent oil companies has afforded in
recent years, and should afford in the future, attractive opportunities
to purchase domestic and international producing properties. This
acquisition strategy has allowed the Company to rapidly grow its
reserves at favorable acquisition prices. From January 1, 1993, through
September 30, 1996, the Company acquired 140.1 MMBOE of proved oil and
gas reserves at an average acquisition cost of $2.78 per BOE, which is
significantly below the industry average. The Company replaced through
acquisitions approximately 3.1 times its production of 45.5 MMBOE during
the same period.
. Exploitation and Development. The Company pursues workovers,
recompletions, secondary recovery operations and other production
optimization techniques on its properties, as well as development and
infill drilling, to offset normal production declines and replace the
Company's annual production. From January 1, 1993, through December 31,
1995, the Company spent approximately $83.9 million on exploitation and
development activities. During this period, the Company's recompletion
and workover activities resulted in improved production or operating
efficiencies in approximately 75 percent of these operations, and the
result of all of its exploitation activities, including development and
infill drilling, succeeded in replacing more than 78 percent of
production during this period. The Company has an extensive inventory of
exploitation and development opportunities including identified projects
which represent approximately a ten year inventory at current activity
levels. The Company anticipates spending approximately $33 million in
the United States and approximately $40 million in Argentina during 1997
on exploitation and development projects.
. Exploration. The Company's overall exploration strategy balances high
potential international prospects with lower risk drilling in known
formations in the United States and Argentina. This prospect mix and the
Company's practice of risk-sharing with industry partners is intended to
lower the incidence and costs of dry holes. The Company makes extensive
use of geophysical studies, including 3-D seismic, which further reduce
the cost and increase the success of its exploration program. From
January 1, 1993, through September 30, 1996, the Company spent
approximately $39.8 million on exploration activities including the
drilling of 75 gross (32.65 net) exploration wells, of which
approximately 69 percent gross (58 percent net) were productive. The
Company has increased its 1997 exploration budget by 79 percent over
1996 to approximately $43 million with spending planned in its core
areas in the United States and Argentina as well as in Block 19 of
Ecuador and the Chaco Block in Bolivia.
. Low Cost Structure. The Company is an efficient operator and capitalizes
on its low cost structure in evaluating acquisition opportunities. The
Company generally achieves substantial reductions in labor and other
field level costs from those experienced by the previous operators. In
addition, the Company targets acquisition candidates which are located
in its core areas and provide opportunities for cost efficiencies
through consolidation with other Company operations. The lower cost
structure has generally allowed the Company to substantially improve the
cash flow of newly acquired properties.
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<PAGE>
. Financial Flexibility. The Company is committed to maintaining
substantial financial flexibility, which management believes is
important for the successful execution of its acquisition, exploitation
and exploration strategy. In conjunction with the purchase of
substantial oil and gas assets in 1990, 1992 and 1995, the Company
completed three public equity offerings, as well as a public debt
offering in 1995, which provided the Company with aggregate net proceeds
of approximately $272 million. Upon consummation of the Note Offering
and the Common Stock Offering and the application of the net proceeds
therefrom, and after giving effect to the related borrowing base
reduction, the unused portion of the Bank Facility as of January 30,
1997, would have been approximately $167.8 million ($120.7 million if
only the Note Offering is consummated).
ACQUISITION ACTIVITIES
Historically, the Company has allocated a substantial portion of its capital
expenditures to the acquisition of producing oil and gas properties. The
Company's emphasis on property acquisitions reflects its belief that
continuing consolidation and restructuring activities on the part of major
integrated and large independent oil companies has in recent years and should
in the future afford attractive opportunities to purchase domestic and
international producing properties. The Company's ability to quickly evaluate
and complete acquisitions as well as its financial flexibility allow it to
take advantage of these opportunities as they materialize.
Since the Company's incorporation in May 1983, it has been actively engaged
in the acquisition of producing oil and gas properties primarily in the Gulf
Coast, East Texas and Mid-Continent areas of the United States, and in
California since April 1992. In 1995, a series of acquisitions made by the
Company established a new core area in the San Jorge Basin in southern
Argentina.
From January 1, 1993, through September 30, 1996, the Company made oil and
gas property acquisitions involving total costs of approximately $390 million.
As a result of these acquisitions, the Company acquired approximately 140.1
MMBOE of proved oil and gas reserves. The following table summarizes the
Company's acquisition experience during the periods indicated:
<TABLE>
<CAPTION>
PROVED RESERVES WHEN ACQUIRED ACQUISITION
----------------------------- COST PER
ACQUISITION OIL GAS BOE WHEN
COSTS (MBBLS) (MMCF) MBOE ACQUIRED
-------------- ----------------------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Acquisitions
1993.................... $123,906 27,898 68,000 39,231 $3.16
1994.................... 36,544 5,645 29,655 10,588 3.45
1995.................... 38,896 8,840 39,486 15,421 2.52
1996 (through September
30, 1996).............. 17,958 4,650 10,112 6,335 2.83
-------- --------- --------- ---------
Total U.S. Acquisi-
tions................ 217,304 47,033 147,253 71,575 3.04
-------- --------- --------- ---------
Argentina Acquisitions
1995.................... 168,762 65,653 -- 65,653 2.57
1996 (through September
30, 1996).............. 3,754 2,849 -- 2,849 1.32
-------- --------- --------- ---------
Total Argentina Acqui-
sitions.............. 172,516 68,502 -- 68,502 2.52
-------- --------- --------- ---------
Total U.S. and Argen-
tina Acquisitions.... $389,820 115,535 147,253 140,077 $2.78
======== ========= ========= =========
</TABLE>
The following is a brief discussion of significant acquisitions in recent
years:
1993 Acquisitions. In June 1993, the Company acquired the interest of Conoco
in certain oil and gas properties for approximately $38.1 million. The
properties, now operated by the Company, are located in the San Miguelito,
Rincon and Ventura fields in Ventura County, California. Proved reserves
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totaled approximately 11.7 MMBbls of oil and 5.8 Bcf of gas at the time of
acquisition. Exploitation potential identified at the time of acquisition
included the adding of additional productive intervals in existing producing
wells, recompletion of inactive wells and expansion of an existing waterflood
operation to include an additional zone.
In November 1993, the Company acquired certain oil and gas properties from
Santa Fe and its affiliates for approximately $43.4 million. The properties
are located primarily in the Ventura Basin of California and the Gulf Coast
areas of Texas, Louisiana and Mississippi. Substantially all of the properties
acquired are now operated by the Company and are adjacent or in close
proximity to Company-operated fields or increased the Company's ownership in
its existing fields. Proved reserves totaled approximately 11.6 MMBbls of oil
and 22.4 Bcf of gas at the time of acquisition. The major fields acquired
included the Sespe, Rincon, Santa Fe Springs, San Miguelito and Ojai-
Silverthread fields in California and the Gwinville field in Mississippi.
Included in this acquisition was an additional interest in the properties
acquired from Conoco in June 1993. In addition to cost efficiencies resulting
from consolidation with other Company operations, exploitation potential
identified in the properties at the time of acquisition included adding
productive intervals and stimulations of existing producing wells,
recompletions of inactive wells and development drilling.
The Company spent a total of approximately $27.7 million in several other
transactions throughout 1993 to increase its ownership in Company-owned
properties located primarily in the Mid-Continent and California areas.
Purchases of additional interests in currently owned properties enable the
Company to increase reserves, production and cash flow with little or no
incremental administrative costs.
1994 Acquisitions. The Company acquired approximately 5.6 MMBbls of oil and
29.7 Bcf of gas through a series of small transactions in 1994 for a total of
approximately $36.5 million. The oil reserves are located primarily in the
Colgrade field in Louisiana and the Rincon field in Southern California. The
gas reserves are located primarily in California's Sacramento Basin,
Louisiana's Gulf Coast area and the Mid-Continent area in Oklahoma. The
Company has identified numerous exploitation opportunities in these
properties, including infill development drilling, adding productive intervals
in existing producing wells and recompleting inactive wells.
1995 Acquisitions. In May 1995, the Company purchased all of Texaco
Exploration and Production, Inc.'s interests in nine oil fields and seven gas
fields in California located primarily in Kern, Ventura, Los Angeles, Orange
and Santa Barbara Counties and the Sacramento Basin area for $26.7 million in
cash. Netherland, Sewell & Associates, Inc. ("Netherland, Sewell") estimated
that proved reserves attributable to these properties at the date of
acquisition were approximately 7.5 MMBbls of oil and 16.4 Bcf of gas. The
Company has identified numerous exploitation opportunities in these properties
including development drilling, recompletions, steam flood expansions as well
as lease operating expense efficiencies.
In the third quarter of 1995, the Company closed two acquisitions of related
properties located in the south flank of the San Jorge Basin in southern
Argentina, establishing a new core area for the Company. On July 5, 1995, the
Company purchased approximately 51.8 percent of the outstanding common stock
of Cadipsa for 302,808 shares of the Company's Common Stock (then valued at
$5.7 million) and $7.4 million in cash. Cadipsa's major assets include a 100
percent working interest in two concessions and a 50 percent working interest
in three additional concessions, all five of which are mature, producing and
operated by Cadipsa, covering approximately 322,000 gross acres. Cadipsa's net
daily production at the date of acquisition was approximately 3,700 Bbls of
mid-gravity oil from multiple zones at depths between 2,500 feet and 5,500
feet. The Company has subsequently purchased an additional 45.0 percent of
Cadipsa which increases its total ownership to approximately 96.8 percent.
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<PAGE>
On September 29, 1995, the Company purchased 100 percent of the outstanding
common stock of Vintage Argentina from British Gas plc, for $37 million in
cash. Vintage Argentina's major assets consist of a 50 percent working
interest in three of the producing concessions operated by Cadipsa.
In November 1995, the Company entered into separate agreements with Astra
Compania Argentina de Petroleo S.A. ("Astra") and Shell Compania Argentina de
Petroleo S.A. ("Shell") to acquire certain producing oil and gas properties in
Argentina (the "Astra/Shell Properties"). On November 30, 1995, the Company
completed the purchase of the Astra portion of the Astra/Shell Properties by
paying $17.9 million in cash for Astra's 35 percent working interest in the
Astra/Shell Properties. On December 27, 1995, the Company completed the
purchase of the remaining 65 percent working interest from Shell for $32.8
million cash and deferred payments valued at $5.1 million.
The acquisition of the Astra/Shell Properties resulted in the Company
acquiring 100 percent working interests in seven concessions, six of which are
currently producing and all of which are located on the south flank of the San
Jorge Basin in southern Argentina. The concessions cover approximately 450,000
acres and are located in close proximity to the Company's other Argentina
properties.
1996 Acquisitions. On January 31, 1996, the Company purchased interests in
two fields located in south-central Louisiana from Conoco Inc. for $13.9
million (the "Conoco Properties"). Funds were provided by advances under the
Bank Facility. The Conoco Properties included 26 gross (21 net) productive
wells with net daily production of approximately 1,000 Bbls of oil and 550 Mcf
of gas. All of the wells are now operated by the Company. The primary
producing sands include the Ortego A, Haas, Tate, Wilcox 1 through 6 and the
Middle and Basal Cockfield at depths ranging from 7,500 feet to 12,000 feet.
Planned exploitation activities include workovers, recompletions and
developmental drilling.
For additional 1996 acquisitions, see "Recent Acquisitions."
The Company intends to continue its growth strategy emphasizing reserve
additions through its acquisition efforts. The Company may utilize any one or
a combination of its line of credit with banks, institutional financing,
issuance of debt securities or additional equity securities and internally
generated cash flow to finance its acquisition efforts. No assurance can be
given that sufficient external funds will be available to fund the Company's
desired acquisitions.
The Company does not have a specific acquisition budget since the timing and
size of acquisitions are difficult to forecast. The Company is constantly
reviewing acquisition possibilities. The Company may expand into new domestic
core areas. The Company is also evaluating additional acquisition
opportunities in other countries which the Company believes are politically
stable. At the present time the Company has no binding agreements with respect
to any significant acquisitions.
EXPLOITATION AND DEVELOPMENT ACTIVITIES
The Company concentrates its acquisition efforts on proved producing
properties which demonstrate a potential for significant additional
development through workovers, behind-pipe recompletions, secondary recovery
operations, the drilling of development or infill wells, and other
exploitation techniques. The Company has pursued an active workover and
recompletion program on the properties it has acquired and intends to continue
its workover and recompletion program in the future.
The Company's exploitation staff focuses on maximizing the value of the
properties within its reserve base. The Company's exploitation engineers, who
strive to offset normal production declines and replace the Company's annual
production, have replaced more than 78 percent of its production during the
last three years. The results of their efforts are reflected in revisions to
reserves. Net
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revisions to reserves for 1995 totaled 13.2 MMBOE, or 104 percent of the
Company's production of 12.7 MMBOE.
From January 1, 1993, through September 30, 1996, the Company spent
approximately $70.2 million on recompletion and workover operations. A measure
of the overall success of the Company's recompletion and workover operations
during this period (excluding minor equipment repair and replacement) has been
that improved production or operating efficiencies have been achieved from
approximately 77 percent of such operations. However, there can be no
assurance that such results will continue. The Company anticipates spending in
excess of $29 million on workover and recompletion operations during 1997. The
expenditures required for this program have historically been, and are
expected to continue to be, financed by internally generated funds.
Development drilling activity is generated both through the Company's
exploration efforts and as a result of the Company's obtaining undeveloped
acreage in connection with producing property acquisitions. In addition, there
are many opportunities for infill drilling on Company leases currently
producing oil and gas. The Company intends to continue to pursue development
drilling opportunities which offer potentially significant returns to the
Company.
From January 1, 1993, through September 30, 1996, the Company participated
in the drilling of 122 gross (69.36 net) development wells, of which
approximately 90 percent gross (89 percent net) were productive. However,
there can be no assurance that this past rate of drilling success will
continue in the future. The Company is pursuing development drilling in the
West Coast, Gulf Coast, Mid-Continent and East Texas areas as well as its
Argentina concessions and anticipates continued growth in its drilling
activities. Additionally, the Company has numerous infill drilling locations
in several East Texas area fields, specifically South Gilmer (Cotton Valley
formation), Southern Pine (Travis Peak formation), Bethany Longstreet (Hosston
formation) and Rosewood (Cotton Valley formation) fields.
During 1995, the Company participated in the drilling of 41 gross (22.75
net) development wells. At December 31, 1995, the Company's proved reserves
included approximately 135 development or infill drilling locations on its
U.S. acreage and 181 locations on its Argentine acreage. In addition, the
Company has an extensive inventory of development and infill drilling
locations on its existing properties which are not included in proved
reserves. During the nine-month period ended September 30, 1996, the Company
participated in the drilling of 31 gross (24.26 net) development wells. The
Company spent approximately $22.2 million on development/infill drilling
during the first nine months of 1996. The Company expects to spend
approximately $45 million on development/infill drilling activities during
1997.
In connection with its exploitation focus, the Company actively pursues
operating cost reductions on the properties it acquires. The Company believes
that its cost structure and operating practices generally result in improved
operating economics. Although each situation is unique, the Company generally
has achieved reductions in labor and other field level costs from those
experienced by the previous operators, particularly in its acquisitions from
major oil companies.
The following is a brief discussion of significant developments in the
Company's recent exploitation and development activities:
West Coast Area. The San Miguelito/Rincon field area, acquired from Conoco,
Santa Fe Energy and Mobil, continues to be the primary focus of the Company's
West Coast exploitation efforts. Consolidation of the three acquisition areas
into a single operating unit has significantly reduced operating costs. At the
time of the initial acquisition in July 1993, the Company identified 18
exploitation projects; however, since that time, the Company has completed 90
projects. Exploitation efforts including artificial lift enhancements,
waterflood optimization, recompletions and sidetracking junked producers have
resulted in sustaining the average field production at levels comparable to
that of three
38
<PAGE>
years prior. As a result, the Company has been able to increase proved
reserves each year since the properties were acquired. Also during 1996, the
Company initiated pilot waterflooding operations on the Fourth Grubb producing
interval. Based on this successful pilot injection test, full scale
waterflooding operations will be initiated during 1997. Ongoing reservoir
studies continue to identify significant upside to the Company's existing
inventory of exploitation projects.
Gulf Coast Area. In the Galveston Bay area of Texas, the Company performed
during 1996 12 workovers in the Red Fish Reef, Trinity Bay and Fishers Reef
fields which are 100 percent owned by the Company and which historically have
had good exploitation potential. This work consisted of recompletions and
repair jobs in the multi-pay Frio zones productive in the area which resulted
in a total gross production increase of 250 Bbls of oil per day and 4,200 Mcf
of gas per day. During 1996, the Company also performed recompletions and
workovers on seven wells in the Tepetate field, a 100 percent owned field
acquired from Conoco in January 1996, which resulted in gross production
increases of 850 Bbls of oil per day and 400 Mcf of gas per day. The Company
also experienced a successful 1996 exploitation program in the South Pass 24
field where three recompletions and one development well resulted in increased
gross daily production from the field of 140 Bbls of oil and 4,370 Mcf of gas.
Mid-Continent Area. Water injection began in October 1993 in the Shawnee
Townsite Unit waterflood project and oil response began in November 1994.
Gross unit production has increased from a low of 250 barrels of oil per day
to a current rate of approximately 2,300 Bbls of oil per day. Oil rates are
forecasted to peak at approximately 3,500 Bbls of oil per day in 1997. An
engineering and geological study performed in 1996 has refined the reservoir
characterization and established the viability of drilling several infill
development wells within the unit boundary to recover oil that would otherwise
be undrained. In addition to the Shawnee waterflood, the Company is actively
pursuing four other secondary recovery projects located in the Texas
Panhandle. Each of these waterflood projects is targeting the Upper Morrow
sand at depths of approximately 8,000 feet. Three of these units have been
approved and water injection has been initiated. Installation of the final
unit, pending Texas Railroad Commission approval, is expected to commence in
the first quarter of 1997. Two analogous Upper Morrow fields producing in the
immediate area have already responded favorably to waterflood operations. The
Company owns working interests ranging from 82 percent to 100 percent in each
of the four projects. The Company anticipates additional proved reserves will
be added based on the level of success of these secondary recovery projects.
East Texas Area. Gas development projects remain the focus of the Company's
exploitation efforts in East Texas. In the South Gilmer field, Upshur County,
Texas, a Company engineering study performed in 1993 established the potential
viability of 10 infill drilling locations along with workover opportunities in
eight existing wells. This exploitation work was initiated in 1994 and
successful workovers were conducted on five wells. Seven of the infill
locations have now been drilled and completed. As a result of this work, gross
field production has increased to over 9,000 Mcf per day. The Company's
working interests in these wells range from 73 percent to 99 percent.
Argentina Concessions. Development and extensional drilling along with
development of secondary recovery projects have been the focus of the
Company's exploitation efforts in its Argentina properties. During 1996, the
Company continued the expansion of the Canadon Minerales Block 123A waterflood
by adding additional sands to the flood and completing additional patterns.
Water injection began in February 1992 and first oil response was seen
approximately 12 months later. Since the initiation of this project, gross
production has increased from 150 Bbls of oil per day to 1,300 Bbls of oil per
day. During 1996, the Company installed two new waterflood projects in areas
immediately adjacent to the Block 123A waterflood. There are two additional
areas in Canadon Minerales for which new waterflood projects are planned for
1997. Numerous other areas within the other concessions are being evaluated as
future waterflood candidates. Drilling activity commenced during February 1996
and reached its peak with three rigs running during the fourth quarter of
1996. Forty-one wells were
39
<PAGE>
drilled in 1996 and an additional 10 were in process at year end 1996. The two
main areas where this activity was concentrated were Canadon Minerales with 25
wells drilled and Canadon Seco with 12 wells drilled. Largely due to the
results of this drilling activity, gross production during 1996 increased from
3,500 Bbls of oil per day to 6,900 Bbls of oil per day in Canadon Minerales
and from 1,300 Bbls of oil per day to 3,200 Bbls of oil per day in Canadon
Seco. During 1996, the Company acquired 124 square kilometers (48 square
miles) of 3-D seismic to aid in the optimum placement of future drilling
locations. This data was acquired in an attempt to aid in the evaluation of
the extremely complex stratigraphy that has historically caused problems in
geologic interpretation in this basin. The first three wells that were drilled
from the evaluation of the 3-D seismic data have proven successful. If future
wells verify these initial results, the Company believes that substantial
upside potential that has historically been overlooked can be economically
exploited.
EXPLORATION
The Company's exploration program is designed to contribute significantly to
its growth. Management divides the strategic objectives of its exploration
program into two parts. First, in the U.S. and in Argentina, the Company's
exploration focus is in its core areas where its geological and engineering
expertise and experience are greatest. State-of-the-art technology, including
3-D seismic, is employed to identify prospects. Exploration in the U.S. and
Argentina is designed to generate reserve growth in the Company's core areas
in combination with its exploitation activities. The Company's longer-term
plans are to increase the magnitude of this program with a goal of achieving
production replacement through core area exploration. Such exploration is
characterized by numerous individual projects with medium to low risk.
Secondly, international exploration targets significant long-term reserve
growth and value creation. International exploration projects in Ecuador and
Bolivia are characterized by higher potential and higher risk. From January 1,
1993, through September 30, 1996, the Company spent $39.8 million on
exploration activities. The Company plans to spend approximately $43 million
on exploration activities during 1997, approximately $31 million in the U.S.
and Argentina and approximately $12 million in other international areas.
The following is a brief discussion of the primary areas of exploration
activity for the Company:
United States.
Gulf Coast Area. In the Galveston Bay area of Texas, the Company has
---------------
acquired over 180 square miles of new 3-D seismic data and controls over
30,000 net acres in shallow state waters. The Company uses 3-D seismic data to
identify new exploration and extentional opportunities in new reservoirs as
well as in existing fields. The Company has identified several new prospects
in Galveston Bay. The Texas State Tract-75, an exploratory well which utilized
3-D seismic data, was drilled in the Umbrella Point area and was successfully
completed as a producer. One or more offset wells are planned to be drilled at
Umbrella Point in 1997. The Texas State Tract No. 2-3A well in the area of
Fishers Reef West is scheduled to spud during the second quarter of 1997. A
third exploratory prospect, White Heron, is also scheduled to spud during
second quarter of 1997. The Galveston Bay prospects, if successful, may
require multiple development wells to drain target reservoirs. Working
interests net to the Company range between 33 percent and 100 percent in
Galveston Bay. At the Company's Deweyville prospect, a new 10 square mile 3-D
seismic survey is being used to aid in the identification of an expanded Yegua
Trend on the Texas and Louisiana border. The Company has a 90 percent working
interest in this prospect and is in the process of acquiring additional
acreage.
Mid-Continent Area. The focus of the Company's Mid-Continent drilling
------------------
program continues to be the Anadarko and Ardmore Basins. In the Fort-X
prospect, four exploratory wells were drilled in 1996 utilizing 3-D seismic.
All four wells found sands targeted to be developed. Two were completed
40
<PAGE>
as producers and are producing at 1,250 to 2,500 Mcf of gas per day. A fifth
well is currently drilling. With the information obtained from these four
wells, the Company has entered into two large 3-D seismic joint ventures in
the Anadarko Basin aimed at increasing its inventory of exploratory prospects,
drilling activity and reserves in selected multi-pay areas over the next
several years. The Wheeler project, in which the Company has a 25 percent
working interest, is a 150 square mile 3-D seismic survey in the Texas
Panhandle targeting the productive Granite Wash, Morrow, Hunton and Arbuckle
formations which are known to exist regionally. An exploratory well is planned
for the first half of 1997. The second project is a 500 square mile 3-D
seismic joint venture in which the Company has a 31.25 percent working
interest. Eight areas of interest have been selected for geologic imaging,
targeting the Granite Wash, Red Fork, Morrow, Springer, Hunton and Arbuckle
formations. In the Stagecoach evaluation area of southern Oklahoma, the
Company has initiated an extentional drilling program utilizing a new frac
technology aimed at developing a large 6,000 net acre lease block. Drilling of
the first well has begun with evaluation expected in early 1997. If
successful, the play could open up additional extentional projects in this gas
rich sub-basin. The Company's working interests in these prospects range
between 70 percent and 100 percent.
West Coast Area. Based on a discovery made by the Company in 1995, 3-D
---------------
seismic data is being used to generate additional prospects in the Buttes
Slough area of Northern California. Three to five wells are planned in the
Grimes area during 1997. In the Zaca field located in Santa Barbara County, an
exploratory horizontal well is targeted to be drilled in 1997 to access
potential reserves in new fault blocks. The Company owns a 100 percent working
interest in this field and has eight additional exploratory prospects.
International.
South America. The Company is currently pursuing several international
-------------
exploratory projects which, if successful, have the potential to increase the
growth of the Company. The Company believes that its existing projects in
Ecuador and Bolivia have the potential to significantly increase reserves. The
exploration play with the largest potential for reserve additions, as
estimated by the Company, is Block 19 in the Oriente Basin in Ecuador. The
Company has a 30 percent working interest in a project to explore Block 19.
Numerous commercially productive fields have been discovered in this basin.
Primary targets are the Hollin, Napo "U" and "T" sands which are productive in
other significant fields in this basin. Two wells are planned for 1997. In
Bolivia, geological studies are underway to confirm a prospect which has been
identified on the Company's recently acquired acreage. Pending the results of
these studies, the Company plans to drill a well during 1997 that would test
independent oil and gas concepts in this area. Additionally, the Company has
identified several exploratory leads on the 570,000 acres it controls which,
if successfully developed into prospects, could require several years to test.
The Company's working interest in the area is 100 percent. In Argentina, in
the Cerro Wenceslao concession in the western portion of the San Jorge Basin,
an exploratory project is currently underway to test an area structurally high
on an anticline feature to a prior well with oil shows. A similar structural
feature located in the northeast portion of the same concession produces from
numerous sands in the Bajo Barreal formation. This field is currently
producing at a rate of 1,520 Bbls of oil per day with a cumulative recovery to
date of 17 MMBbls of oil. The Company has a 100 percent working interest in
the Cerro Wenceslao concession.
OIL AND GAS PROPERTIES
At September 30, 1996, the Company owned and operated producing properties
in 11 states, with its U.S. proved reserves located primarily in four core
areas: the West Coast, Gulf Coast, East Texas and Mid-Continent areas. In
addition, during 1995 the Company established a new core area in the San Jorge
Basin of Argentina. As of September 30, 1996, the Company operated
approximately 3,076 productive wells and also owned non-operating interests in
587 productive wells. The Company continuously evaluates the profitability of
its oil, gas and related activities and has a policy of divesting itself of
unprofitable leases or areas of operations that are not consistent with its
operating philosophy.
41
<PAGE>
The following table summarizes the Company's proved reserves in its 30
largest fields in the U.S. and its five largest concessions in Argentina at
December 31, 1995, as estimated by Netherland, Sewell. These fields and
concessions represent approximately 80 percent of the Company's proved
reserves on such date.
<TABLE>
<CAPTION>
LOCATION (COUNTY NET NET
OR PARISH, STATE OIL GAS
AREA FIELD/CONCESSION NAME OR PROVINCE) (MBBLS) (MMCF) MBOE
---- ----------------------------- ------------------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
West Coast.............. San Miguelito Ventura, CA 15,432 3,491 16,013
South Mountain Ventura, CA 5,498 6,975 6,660
Rincon Ventura, CA 4,371 4,094 5,053
Ojai-Silverthread Ventura, CA 2,961 12,230 5,000
North Tejon Kern, CA 1,746 9,540 3,336
Santa Maria Valley/Cat Canyon Santa Barbara, CA 3,294 0 3,294
Pleito Ranch Kern, CA 2,905 692 3,021
Canfield Ranch Kern, CA 2,700 508 2,784
Sespe Ventura, CA 2,311 1,915 2,630
Buena Vista Hills Kern, CA 2,065 3,348 2,623
Lathrop San Joaquin, CA 0 12,135 2,022
Antelope Hills Kern, CA 1,797 0 1,797
Zaca Santa Barbara, CA 1,693 0 1,693
Wheeler Ridge Kern, CA 1,235 2,497 1,651
Tejon Kern, CA 1,618 181 1,649
Landslide Kern, CA 1,251 182 1,282
Timber Canyon Ventura, CA 769 2,410 1,171
Gulf Coast.............. Waveland Hancock, MS 323 14,930 2,811
South Pass 24 Plaquemines, LA 1,200 3,142 1,724
Little Lake/Temple Jefferson, LA 1,190 2,740 1,647
Panther Reef Calhoun, TX 298 6,122 1,319
Trinity Bay Chambers, TX 1,114 804 1,248
Vacherie St. James, LA 39 7,016 1,209
East Texas.............. South Gilmer Upshur, TX 523 31,088 5,704
Southern Pine Cherokee, TX 0 25,128 4,188
Fruitvale Van Zandt, TX 0 23,384 3,897
Colgrade Winn, LA 3,393 0 3,393
Mid-Continent........... Shawnee Pottawatomie, OK 2,820 230 2,858
Booker Ochiltree, TX 1,848 171 1,877
Strong City Roger Mills, OK 59 9,867 1,703
San Jorge Basin,
Argentina.............. Canadon Minerales Santa Cruz Province 18,768 0 18,768
Las Heras/Piedra Clavada Santa Cruz Province 14,958 0 14,958
Canadon Seco Santa Cruz Province 11,103 0 11,103
Cerro Wenceslao Santa Cruz Province 9,477 0 9,477
Meseta Espinosa Santa Cruz Province 7,749 0 7,749
</TABLE>
West Coast Area. The Company expanded its operations to the West Coast in
1992 through two separate acquisitions of properties located in Kern, Ventura,
and Santa Barbara Counties in California. Since 1992, the Company has
continued to expand its operations in the West Coast area through additional
property acquisitions. As of December 31, 1995, the area comprised 35 percent
of the Company's total proved reserves and 54 percent of the Company's U.S.
proved reserves. The Company currently operates 1,158 productive wells with
daily gross production of approximately 11,700 Bbls of mid-gravity oil, 2,600
Bbls of heavy oil and 30,300 Mcf of gas. In addition, the Company owns an
interest in 72 productive wells operated by others.
San Miguelito. The San Miguelito field is located in the west central
-------------
portion of the greater Ventura Avenue field just north of the City of Ventura,
California. Production is from multiple pay intervals in Pliocene-age sands
which span 7,000 vertical feet. Well depths generally range from 7,000 feet to
just over 16,000 feet in the deepest wells. Currently, active waterflood
operations are underway in three of the producing zones. With the field still
producing in excess of 3,400 gross Bbls of oil per day, the Company believes
additional waterflood potential exists in lower sands currently producing on
42
<PAGE>
primary depletion. The Company operates this single lease property with a 100
percent working and 87.5 percent net revenue interest. For additional
information regarding this field, see "--Exploitation and Development
Activities--West Coast Area."
South Mountain. The South Mountain field, located just south of Santa
--------------
Paula, California, has become one of the Company's major producing areas. As a
result of the acquisition of the Texaco Properties, which included certain
properties in this field, the Company now operates 226 active wells in the
South Mountain field. Gross daily production of 1,150 Bbls of oil and 2,000
Mcf of gas comes from Eocene and Pliocene sand intervals at depths of 3,000
feet to 10,000 feet. The solution gas and gravity drainage producing
mechanisms are responsible for low decline rates which result in long-life
reserves. In addition to the producing wells, the Company also operates the
South Mountain Gas Gathering System which transports approximately 3,500 Mcf
per day of Company and third party gas. The Company's working interests in the
South Mountain field range from 50 percent to 100 percent with net revenue
interests from 42 percent to 100 percent; however, the properties are
predominantly owned 100 percent.
Rincon. The Rincon field is located on the western updip end of the greater
------
Ventura Avenue field just north of the City of Ventura, California, and
adjacent to the Company's San Miguelito field properties. Like the San
Miguelito field, production is from multiple pay intervals of Pliocene-age
sands. These intervals span several thousand feet with three waterfloods
currently in operation. Producing intervals range in depth from approximately
3,500 feet to 14,000 feet. The Company operates this field with a 100 percent
working and 80 percent net revenue interest. Current daily gross production
from this field is approximately 1,030 Bbls of oil and 1,100 Mcf of gas.
During 1996, the Company was able to increase total field production through
development of uphole producing intervals and re-vitalization of existing
waterfloods. The Company believes that significant upside reserve potential
remains in the development of these shallow producing horizons as well as
workover and stimulation activity in the presently producing intervals. For
additional information regarding this field, see "--Exploitation and
Development Activities--West Coast Area."
Ojai-Silverthread and Timber Canyon. The Ojai field, which extends to the
-----------------------------------
Silverthread and Timber Canyon areas, is located in the western central
portion of Ventura County, California. All production in this area is from the
fractured Monterey Shale formation which is encountered at depths ranging from
2,000 feet to 6,000 feet. The Company operates 118 productive wells in this
field with a 100 percent working interest and net revenue interests ranging
from 83 percent to 100 percent. The properties are mature, characterized by
pressure depletion and gravity drainage, with highly predictable production
decline rates. Combined daily gross production exceeds 800 Bbls of oil and
3,500 Mcf of gas.
North Tejon. The North Tejon field is located near the southern end of the
-----------
San Joaquin Basin. This field is divided into a series of fault blocks with
productive reservoirs in the lower Miocene, Oligocene, Zemorrian and Eocene
sands. These producing zones range in depth from 5,400 feet to 11,300 feet.
All productive wells are operated by the Company with a 100 percent working
and net revenue interest. Gross production rates average in excess of 200 Bbls
of oil per day and 2,200 Mcf of gas per day. The Company believes that future
projects in this field may increase production and reserves.
Santa Maria Valley/Cat Canyon. The Company operates these two heavy (low
-----------------------------
gravity) oil fields near Santa Maria, California. At the end of 1992, the
Company built and commenced operation of two non-conventional fuel facilities.
Those facilities are located in the Santa Maria Valley and Cat Canyon fields
and now produce oil from tar sands. Since December 1992, the Company has
produced over 800 MBbls of tar sand oil through these facilities. In addition,
the Company operates one waterflood. Total produced volume from the fields is
in excess of 1,400 gross Bbls of oil per day. The Company's working interests
in the fields are 100 percent with net revenue interests ranging from 74.5
percent to 100 percent.
43
<PAGE>
Pleito Ranch. The Pleito Ranch field is located on the southern end of the
------------
San Joaquin Basin. Production is from Miocene-age Chanac and Santa Margarita
sands below the Wheeler Ridge thrust fault. Well depths range from 11,000 feet
to 14,000 feet. All productive wells are operated by the Company with a 100
percent working and net revenue interest. The recovery mechanism is
predominantly gravity drainage and is characterized by low decline, long-life
reserves with gross production of approximately 600 Bbls of oil per day.
Gulf Coast Area. The Gulf Coast Area comprised approximately 12 percent of
the Company's December 31, 1995, total proved reserves. Production in this
area is predominantly from structural accumulations in reservoirs of Miocene
Age. The depths of the producing reservoirs in this area range from 1,200 feet
to 14,500 feet. The Company currently operates 232 productive wells and owns
interests in an additional 166 productive wells in this area. Daily gross
production from the operated wells averages 7,600 Bbls of oil and 52,400 Mcf
of gas. Additional development potential exists in this area from
recompletions in existing wellbores particularly in the South Pass 24 (70
percent working interest), Red Fish Reef (100 percent working interest), and
Panther Reef (96 percent average working interest) fields.
Waveland. The Company's largest field in the Gulf Coast Area is the
--------
Waveland field. The Waveland field is located in Hancock County, Mississippi,
and produces from the Washita-Fredricksburg, Paluxy and Mooringsport
formations at depths ranging from 11,800 feet to 13,340 feet. The Company
currently operates gross daily production of 3,250 Mcf of gas. This field
contains a significant amount of reserves that are behind-pipe in existing
well bores. The Company intends to further develop this field through a series
of workovers and recompletions with two to four such projects scheduled for
1997.
South Pass 24. The South Pass 24 field is located in state waters of
-------------
Plaquemines Parish, Louisiana, at shallow water depths averaging 10 to 20
feet. The 33 productive oil wells and seven productive gas wells in this field
are operated by the Company and one other operator. The South Pass 24 field
produces hydrocarbons from various members of the Miocene sand series at an
average depth of approximately 7,000 feet. Future value enhancements in this
field are expected to come from exploitation opportunities.
East Texas Area. The East Texas Area comprised approximately 11 percent of
the Company's December 31, 1995, total proved reserves. The Cotton Valley,
Smackover and Travis Peak formations are the dominant producing reservoirs on
the Company's acreage in this area. The Company currently operates daily gross
production of 1,150 Bbls of oil and 30,500 Mcf of gas from 594 operated
productive wells in this area. The Company owns an interest in an additional
71 productive wells in this area. Significant infill drilling potential exists
on the Company's acreage in the South Gilmer, Colgrade, Southern Pine,
Rosewood, Bethany Longstreet and Bear Grass fields. The Company plans to
continue infill drilling programs in Southern Pine, Colgrade and South Gilmer
fields. During 1996, these infill drilling programs have resulted in the
addition of five wells, all of which were successful. For additional
information regarding these producing operations, see "--Exploitation and
Development Activities--East Texas Area."
South Gilmer. The South Gilmer field, the Company's largest field in the
------------
East Texas area, is located in Upshur County and produces from the Cotton
Valley Lime formation at average depths of 11,300 feet to 11,800 feet. The
Company currently operates 18 productive wells and owns interests in three
additional productive wells in this field. A workover program implemented in
1994 increased production substantially in five wells. The Company began the
drilling of an infill well in December 1994, with two additional wells drilled
in 1995 and four wells in 1996. All seven wells resulted in successful
completions. Significant behind-pipe reserves are booked for the Company's
6,727 gross acres in the Cotton Valley sand formation.
44
<PAGE>
Southern Pine. The Southern Pine field is located in Cherokee County,
-------------
Texas, and produces from the Travis Peak formation with gross daily production
of 7,900 Mcf of gas. The Company currently operates 26 productive wells in
this field. The Company completed the drilling of eight development wells in
1995. These wells, combined with the ten wells acquired from Herd Producing
Company in March 1995, increased gross daily production from 1,200 Mcf of gas
to a peak rate of 10,000 Mcf of gas. The installations of plunger lift and
central compression during 1996 have helped maintain the current gross daily
production of 7,900 Mcf of gas.
Mid-Continent Area. The Mid-Continent Area extends from the Arkoma Basin of
Eastern Oklahoma to the Texas Panhandle and north to include Kansas. This area
comprises seven percent of the Company's total proved reserves as of December
31, 1995. The Company currently operates daily gross production of 3,500 Bbls
of oil and 29,500 Mcf of gas from 373 operated productive wells in this area.
The Company owns an interest in an additional 249 productive wells in this
area.
The Company's largest field in the Mid-Continent Area is the Shawnee
Townsite field, which the Company operates. On March 1, 1993, a unit was
formed for secondary recovery operations with water injection initiated in
October 1993. For additional information regarding this field, see "--
Exploitation and Development Activities--Mid-Continent Area."
Argentina Concessions. The Argentina properties consist primarily of 12
mature producing concessions located on the south flank of the San Jorge
Basin. These concessions comprised approximately 34 percent of the Company's
December 31, 1995, total proved reserves. The Company currently operates 600
productive wells (100 percent working interest) with daily gross production of
16,200 Bbls of oil. In addition, the Company owns an interest in 17 productive
wells operated by others. At December 31, 1995, the Company's proved reserves
included approximately 181 development or infill drilling locations and 253
workovers on its Argentina acreage. In addition, the Company has an extensive
inventory of workovers and development or infill drilling locations on its
Argentina properties which are not included in proved reserves.
Canadon Minerales. The primary oil producing reservoirs of the Canadon
-----------------
Minerales oil concession are the Mina del Carmen and Canadon Seco formations
which are both fluvial channel sand bodies at depths ranging from 3,000 feet
to 4,000 feet. This concession currently has 169 producing wells and 31 water
injection wells with daily gross production of approximately 6,850 Bbls of
oil. Approximately 20 percent of the concession's daily production is produced
from the Block 123A waterflood, which contains 22 producing wells and 17 water
injection wells. The Block 123A waterflood was expanded during 1996 to include
additional sands. Also during 1996, two additional waterflood projects were
initiated in areas adjacent to Block 123A. At this time there are two
additional waterflood projects scheduled for development.
Future development plans at Canadon Minerales include numerous workovers and
development drilling locations. Many of the workovers are expected to return
idle wells back to production by perforating zones not produced by the former
owner. Log cross sections reveal many zones which do not appear to have been
previously tested.
The proved undeveloped locations are generally infill development locations
in areas offsetting existing production. Well depths vary from 3,000 to 6,000
feet. The first well was drilled in the first quarter of 1996 and 25 wells
were drilled on this concession during 1996. See "--Exploitation and
Development Activities--Argentina Concessions."
Las Heras/Piedra Clavada. The primary oil producing reservoirs of the Las
------------------------
Heras/Piedra Clavada oil concession are the Castillo and Bajo Barreal
formations which are both fluvial channel sand bodies with good to moderate
sand quality at depths ranging from 3,500 feet to 7,000 feet. Currently, there
are 82 producing wells and three water injection wells with daily gross
production of
45
<PAGE>
approximately 1,160 Bbls of oil. There is one active waterflood in Block 24,
which contains 13 producing wells and five water injection wells. In addition
to the activities in Block 24, there are three other waterflood projects
scheduled for development at Las Heras/Piedra Clavada.
Future development plans at Las Heras/Piedra Clavada include numerous
workovers and development drilling locations. Many of these workovers are
expected to return idle wells back to production by perforating additional
zones. Cross sections reveal many zones which do not appear to have been
tested. The proved undeveloped locations are generally infill development
locations in areas offsetting existing production.
Canadon Seco. The primary oil producing reservoirs of the Canadon Seco oil
------------
concession are the Canadon Seco and Mina del Carmen which are fluvial channel
sand bodies at depths ranging from 4,000 feet to 7,000 feet. This field
currently has 74 producing wells and eight water injection wells with a daily
gross production of approximately 3,200 Bbls of oil.
There are three active waterfloods at Canadon Seco which contain a total of
10 producing wells and eight water injection wells. The Block VIIIAo
waterflood has additional drilling and water injection conversions scheduled
for additional development of the concession.
Additional development plans at Canadon Seco include numerous workovers and
development drilling locations. Many of the workovers are expected to return
idle wells back to production by perforating additional zones. See "--
Exploitation and Development Activities--Argentina Concessions."
Cerro Wenceslao. The primary oil producing reservoir of the Cerro Wenceslao
---------------
oil concession is the Bajo Barreal which contains sands at depths ranging from
1,000 feet to 3,000 feet. Currently, there are 122 producing oil wells and 10
water injection wells with daily gross production of approximately 1,520 Bbls
of oil.
Future development plans at Cerro Wenceslao include workovers, fracture
stimulations, and development drilling on several drilling locations. In
addition, the Company plans to further develop the significant waterflood
potential in Block 2, Block 5 and the East Flank Block.
Meseta Espinosa. The primary oil producing reservoirs of the Meseta
---------------
Espinosa oil concession are the Canadon Seco and Mina del Carmen which are
fluvial channel sand bodies with good to moderate sand quality at depths
ranging from 4,000 feet to 7,000 feet. This concession currently has 101
producing wells and 10 water injection wells with a daily gross production of
approximately 2,250 Bbls of oil.
There are seven active waterfloods at Meseta Espinosa which contain a total
of 17 producing wells and 10 water injection wells. One new proven waterflood
project was installed during 1996. It will be followed by the implementation
of a second new proven waterflood project. Additional development plans at
Meseta Espinosa include several workovers and the drilling of development
wells.
MARKETING
The Company's gas production and gathered gas are sold primarily on the spot
market or under market-sensitive, long-term agreements with a variety of
purchasers, including intrastate and interstate pipelines, their marketing
affiliates, independent marketing companies and other purchasers who have the
ability to move the gas under firm transportation agreements. Because an
insignificant amount of the Company's gas is committed to long-term fixed-
price contracts, the Company is positioned to take advantage of rising prices
for gas but it is also subject to gas price declines.
46
<PAGE>
In order to more efficiently handle spot market transactions, the Company's
gas marketing activities are handled by Vintage Gas, Inc., its wholly owned
gas marketing affiliate, which commenced operation on May 1, 1991. This
marketing affiliate purchases gas on the spot market from the Company and
third parties. Generally, the marketing affiliate purchases this gas on a
month-to-month basis at a percentage of resale prices.
Generally, the Company's domestic oil production is sold under short-term
contracts at posted prices plus a premium in some cases. The Company's
Argentina oil production is currently sold at port to ESSO SAPA and Petrobras
at West Texas Intermediate spot prices less a specified differential.
The most significant purchaser of the Company's oil during 1995 was Texaco
Trading and Transportation, Inc. Such oil purchases amounted to approximately
17 percent of the Company's total revenues for 1995. No other purchaser of the
Company's oil or gas during 1995 exceeded 10 percent of the Company's total
revenues.
The Company has previously engaged in oil and gas hedging activities and
intends to continue to consider various hedging arrangements to realize
commodity prices which it considers favorable. Three hedges (swap agreements)
are currently in place for a total of 7,500 Bbls of oil per day at a weighted
average price of $19.26 per Bbl (NYMEX reference price) for the period January
1997 through December 1997.
GATHERING SYSTEMS
The Company owns 100 percent interests in two oil and gas gathering systems
located in Pottawatomie County, Oklahoma and Harris and Chambers Counties,
Texas. In addition, the Company owns 100 percent interests in 22 gas gathering
systems located in active producing areas of California, Kansas, Texas and
Oklahoma. All of these gathering systems are operated by the Company.
Together, these systems comprise approximately 300 miles of varying diameter
pipe with a combined capacity in excess of 175 MMcf of gas per day. At
September 30, 1996, there were 432 wells (most of which are operated by the
Company) connected to these systems. Generally, the gathering systems buy gas
at the wellhead on the basis of a percentage of the resale price under
contracts containing terms of one to 10 years.
RESERVES
At December 31, 1995, the Company had proved reserves, as estimated by
Netherland, Sewell, of 199.7 MMBOE, comprised of 147.9 MMBbls of oil and 310.8
Bcf of gas. The following table sets forth, at December 31, 1995, the present
value of future net revenues (revenues less production and development costs)
before income taxes attributable to the Company's proved reserves at such date
(in thousands):
<TABLE>
<S> <C>
Proved Reserves:
Future net revenues............................................ $1,470,350
Present value of future net revenues before income taxes, dis-
counted at 10 percent......................................... 894,249
Standardized measure of discounted future net cash flows....... 736,546
Proved Developed Reserves:
Future net revenues............................................ 1,032,798
Present value of future net revenues before income taxes, dis-
counted at 10 percent......................................... 675,318
</TABLE>
47
<PAGE>
In computing this data, assumptions and estimates have been utilized, and
the Company cautions against viewing this information as a forecast of future
economic conditions. The historical future net revenues are determined by
using estimated quantities of proved reserves and the periods in which they
are expected to be developed and produced based on December 31, 1995, economic
conditions. The estimated future production is priced at prices prevailing at
December 31, 1995, except where fixed and determinable price escalations are
provided by contract. The resulting estimated future gross revenues are
reduced by estimated future costs to develop and produce the proved reserves,
based on December 31, 1995, cost levels, but such costs do not include debt
service, general and administrative expenses and income taxes. For additional
information concerning the historical discounted future net revenues to be
derived from these reserves and the disclosure of the Standardized Measure
information in accordance with the provisions of Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities," see Note 9 "Supplementary Financial Information for Oil and Gas
Producing Activities" to the Company's consolidated financial statements
included elsewhere in this Prospectus.
The following table sets forth estimates of the proved oil and gas reserves
of the Company at December 31, 1995, as evaluated by Netherland, Sewell:
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF) MBOE
----------------------------- ----------------------------- -------
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL TOTAL
--------- ----------- ------- --------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
West Coast(a)........... 45,947 10,204 56,151 79,514 7,388 86,902 70,635
Gulf Coast.............. 9,159 1,936 11,095 73,772 7,777 81,549 24,687
East Texas.............. 3,723 1,167 4,890 75,934 23,483 99,417 21,459
Mid-Continent........... 4,619 2,854 7,473 41,180 1,687 42,867 14,618
Other U.S............... 343 275 618 27 -- 27 622
------- ------ ------- ------- ------ ------- -------
Total U.S............. 63,791 16,436 80,227 270,427 40,335 310,762 132,021
Argentina............... 36,928 30,716 67,644 -- -- -- 67,644
------- ------ ------- ------- ------ ------- -------
Total Company(b)...... 100,719 47,152 147,871 270,427 40,335 310,762 199,665
======= ====== ======= ======= ====== ======= =======
</TABLE>
- --------
(a) Total proved oil reserves include 5.1 MMBbls of heavy oil located in the
Company's Santa Maria Valley/Cat Canyon and Antelope Hills fields in
California.
(b) Does not include acquisitions since December 31, 1995. See "Recent
Acquisitions."
Estimates of the Company's 1995 proved reserves set forth above have not
been filed with, or included in reports to, any Federal authority or agency,
other than the Securities and Exchange Commission.
The Company's non-producing proved reserves are largely behind-pipe in
fields which it operates. Undeveloped proved reserves are predominantly infill
drilling locations and secondary recovery projects. Approximately 67 percent
of the U.S. proved reserves associated with infill drilling locations are
located in the Company's 30 largest U.S. fields.
The reserve data set forth in this Prospectus or incorporated by reference
herein represent only estimates. Reserve engineering is a subjective process
of estimating underground accumulations of oil and gas that cannot be measured
in an exact manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation and
judgment. As a result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent to the date
of an estimate may justify revision of such estimate. Accordingly, reserve
estimates often differ from the quantities of oil and gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based.
48
<PAGE>
For further information on reserves, costs relating to oil and gas
activities and results of operations from producing activities, see Note 9
"Supplementary Financial Information for Oil and Gas Producing Activities" to
the Company's consolidated financial statements included elsewhere in this
Prospectus.
PRODUCTIVE WELLS; DEVELOPED ACREAGE
The following table sets forth the Company's domestic and Argentina
productive wells and developed acreage assignable to such wells at September
30, 1996:
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
---------------------------------
DEVELOPED ACREAGE OIL GAS TOTAL
------------------- ----------- --------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
--------- --------- ----- ----- ----- --- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S....................... 585,106 309,322 2,108 1,583 945 358 3,053 1,941
Argentina................. 1,008,339 844,372 610 597 -- -- 610 597
--------- --------- ----- ----- --- --- ----- -----
Total................... 1,593,445 1,153,694 2,718 2,180 945 358 3,663 2,538
========= ========= ===== ===== === === ===== =====
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including gas wells awaiting pipeline connections to commence deliveries and
oil wells awaiting connection to production facilities. Wells which are
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, two had multiple completions.
PRODUCTION; UNIT PRICES; COSTS
The following table sets forth information with respect to production and
average unit prices and costs for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ==========================
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Production:
Oil (MBbls)--
U.S......................... 5,683 4,933 6,647 6,657 4,785
Argentina................... 2,966 377 961 -- --
Total....................... 8,649 5,310 7,608 6,657 4,785
Gas, all U.S. (MMcf).......... 24,535 22,489 30,610 28,884 22,504
Average sales prices:
Oil (per Bbl)--
U.S. ....................... $ 17.08(a) $ 15.42 $ 15.44 $ 13.53 $ 14.14
Argentina................... 15.87(a) 14.20 13.98 -- --
Total....................... 16.66(a) 15.33 15.26 13.53 14.14
Gas, all U.S. (per Mcf)....... 1.70 1.42 1.46 1.78 2.03
Production costs (per BOE):
U.S........................... 5.38 5.27 5.24 5.17 5.26
Argentina..................... 5.07 4.62 5.42 -- --
Total......................... 5.31 5.25 5.25 5.17 5.26
</TABLE>
- --------
(a) The impact of oil hedges reduced the Company's 1996 U.S., Argentina and
total average oil prices per Bbl by $0.79, $1.89 and $1.17, respectively.
The components of production costs may vary substantially among wells
depending on the methods of recovery employed and other factors, but generally
include production taxes, maintenance and repairs, labor and utilities.
49
<PAGE>
UNDEVELOPED ACREAGE
At September 30, 1996, the Company held the following undeveloped acres
located in the United States and Ecuador. With respect to such United States
acreage held under leases, 101,132 gross (38,363 net) acres are held under
leases with primary terms that expire at varying dates through December 31,
2000, unless commercial production is commenced. The following table sets
forth the location of the Company's undeveloped acreage and the number of
gross and net acres in each. Although substantial undeveloped acreage exists
in the Company's concessions in Argentina, the concessions in their entirety
are held by production.
<TABLE>
<CAPTION>
STATE/COUNTRY GROSS ACRES NET ACRES
------------- ----------- ---------
<S> <C> <C>
California............................................. 6,698 5,910
Colorado............................................... 2,720 972
Kansas................................................. 1,420 1,420
Louisiana.............................................. 1,182 430
Mississippi............................................ 204 65
Montana................................................ 12,382 6,250
New Mexico............................................. 11,469 1,656
Oklahoma............................................... 13,978 8,510
Texas.................................................. 52,826 14,097
------- -------
Total U.S............................................ 102,879 39,310
Ecuador................................................ 494,226 148,268
------- -------
Total Company........................................ 597,105 187,578
======= =======
</TABLE>
DRILLING ACTIVITY
During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------
1996 1995 1994 1993
------------------ ----------- ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
------------------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development:
United States--
Productive........... 11 5.69 36 19.26 31 18.75 16 2.12
Non-Productive....... 3 1.57 5 3.49 2 1.04 1 0.44
Argentina--
Productive........... 16 16.00 -- -- -- -- -- --
Non-Productive....... 1 1.00 -- -- -- -- -- --
------- --------- --- ----- --- ----- --- -----
Total.............. 31 24.26 41 22.75 33 19.79 17 2.56
======= ========= === ===== === ===== === =====
Exploratory:
United States--
Productive........... 4 2.25 13 9.84 12 2.82 21 2.01
Non-Productive....... 3 1.50 5 2.69 5 4.04 10 5.70
Argentina--
Productive........... 2 2.00 -- -- -- -- -- --
Non-Productive....... -- -- -- -- -- -- -- --
------- --------- --- ----- --- ----- --- -----
Total.............. 9 5.75 18 12.33 17 6.86 31 7.71
======= ========= === ===== === ===== === =====
Total:
Productive........... 33 25.94 49 29.10 43 21.58 37 4.13
Non-Productive....... 7 4.07 10 6.18 7 5.07 11 6.14
------- --------- --- ----- --- ----- --- -----
Total.............. 40 30.01 59 35.28 50 26.65 48 10.27
======= ========= === ===== === ===== === =====
</TABLE>
The above well information excludes wells in which the Company has only a
royalty interest.
50
<PAGE>
At September 30, 1996, the Company was a participant in the drilling or
completion of 18 gross (13.59 net) wells. All of the Company's drilling
activities are conducted with independent contractors. The Company owns no
drilling equipment.
LEGAL PROCEEDINGS
On November 5, 1996, the Province of Santa Cruz, Argentina brought suit
against Cadipsa in the Corte Suprema de Justicia de la Nacion (the Supreme
Court of Justice of the Argentine Republic, Buenos Aires, Argentina), Dossier
No. s-1451, seeking to recover approximately $10.6 million (which sum includes
interest) allegedly due as additional royalties on four concessions granted in
1990 in which the Company currently owns a 100 percent working interest. The
Company and its predecessors in title have been paying royalties at an eight
percent rate; the Province of Santa Cruz claims the rate should be 12 percent.
The amount of such claim will increase at the differential of these royalty
rates until this claim is resolved. With respect to the 50 percent interest in
the two concessions that the Company acquired from British Gas, plc, the
Company believes that it is entitled to indemnification by British Gas, plc
for any loss sustained by the Company as a result of this claim. Such
indemnification equals approximately $4.0 million of the $10.6 million claim.
The Company has no indemnification from its predecessors in title with respect
to the payment of royalties on the other two concessions. Although the Company
cannot predict the outcome of this litigation, based upon the advice of
counsel, the Company does not expect this claim to have a material adverse
impact on the Company's financial position or results of operations.
The Company is also a named defendant in other lawsuits and is a party in
governmental proceedings from time to time arising in the ordinary course of
business. While the outcome of such other lawsuits or proceedings against the
Company cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the Company's financial position
or results of operations.
51
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of the Company. Officers are elected annually by the
Board of Directors and serve at its discretion.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles C. Stephenson,
Jr. ................... 60 Director and Chairman of the Board of Directors
Jo Bob Hille............ 55 Director, Vice Chairman of the Board of Directors
and Chief Executive Officer
S. Craig George......... 44 Director, President and Chief Operating Officer
William C. Barnes....... 42 Director, Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
William L. Abernathy.... 45 Senior Vice President--Acquisitions
Robert W. Cox........... 51 Vice President--General Counsel
William E. Dozier....... 44 Vice President--Operations
Michael F. Meimerstorf.. 40 Vice President and Controller
Robert E. Phaneuf....... 50 Vice President--Corporate Development
Barry D. Quackenbush.... 54 Vice President--Production
Larry W. Sheppard....... 42 Vice President--International
Bryan H. Lawrence....... 54 Director
John T. McNabb, II...... 52 Director
</TABLE>
Mr. Stephenson, a co-founder of the Company, has been a Director since June
1983 and Chairman of the Board of Directors of the Company since April 1987.
He was also Chief Executive Officer of the Company from April 1987 to March
1994 and President of the Company from June 1983 to May 1990. From October
1974 to March 1983, he was President of Santa Fe-Andover Oil Company (formerly
Andover Oil Company), an independent oil and gas company ("Andover"), and from
January 1973 to October 1974, he was Vice President of Andover. Mr. Stephenson
has a B.S. Degree in Petroleum Engineering from the University of Oklahoma,
and has approximately 37 years of oil and gas experience.
Mr. Hille, the other co-founder of the Company, has been a Director of the
Company since June 1983, Chief Executive Officer of the Company since March
1994 and Vice Chairman of the Company since September 1995. He was also
President of the Company from May 1990 to September 1995, Chief Operating
Officer of the Company from April 1987 to March 1994, Executive Vice President
of the Company from June 1983 to May 1990 and Treasurer and Secretary of the
Company from June 1983 to April 1987. From August 1972 to March 1983, Mr.
Hille was employed by Andover where he served at various times primarily as
Executive Vice President and Vice President--Operations. Mr. Hille has a B.S.
Degree in Petroleum Engineering from the University of Tulsa, and has
approximately 31 years of oil and gas experience.
Mr. George has been a Director since October 1991, President of the Company
since September 1995 and Chief Operating Officer of the Company since March
1994. He was also an Executive Vice President of the Company from March 1994
to September 1995 and a Senior Vice President of the Company from October 1991
to March 1994. From April 1991 to October 1991, Mr. George was Vice President
of Operations and International with Santa Fe Minerals, Inc., an independent
oil and gas company ("Santa Fe Minerals"). From May 1981 to March 1991, he
served in various other management and executive capacities with Santa Fe
Minerals and its subsidiary, Andover. From December 1974 to April 1981, Mr.
George held various management and engineering positions with Amoco Production
Company. He has a B.S. Degree in Mechanical Engineering from the University of
Missouri-Rolla.
52
<PAGE>
Mr. Barnes, a certified public accountant, has been a Director, Treasurer
and Secretary of the Company since April 1987, an Executive Vice President of
the Company since March 1994 and Chief Financial Officer of the Company since
May 1990. He was also a Senior Vice President of the Company from May 1990 to
March 1994 and Vice President--Finance of the Company from January 1984 to May
1990. From November 1982 to December 1983, Mr. Barnes was an audit manager for
Arthur Andersen & Co., an independent public accounting firm, where he dealt
primarily with clients in the oil and gas industry. He was Assistant
Controller--Finance of Andover from December 1980 to November 1982. From June
1976 to December 1980, he was an auditor with Arthur Andersen & Co., where he
dealt primarily with clients in the oil and gas industry. Mr. Barnes has a
B.S. Degree in Business Administration from Oklahoma State University.
Mr. Abernathy has been Senior Vice President--Acquisitions of the Company
since March 1994. He was Vice President--Acquisitions of the Company from May
1990 to March 1994 and Manager--Acquisitions of the Company from June 1987 to
May 1990. From June 1976 to June 1987, Mr. Abernathy was employed by Exxon
Company USA, where he served at various times as Senior Staff Engineer, Senior
Supervising Engineer and in other engineering capacities, with assignments in
drilling, production and reservoir engineering in the Gulf Coast and offshore.
He has B.S. and M.S. Degrees in Mechanical Engineering from Auburn University.
Mr. Cox has been Vice President--General Counsel of the Company since March
1988. From August 1982 to March 1988, he was employed by Santa Fe Minerals and
its subsidiary, Andover, where he served at various times as Vice President--
Law and Regional Attorney. From April 1982 to August 1982, he was employed as
Corporate Attorney by Andover. Prior to that time, Mr. Cox was employed by
Amerada Hess Corporation, a major oil company, served as General Counsel and
Secretary of Kissinger Petroleum Corporation, an independent oil and gas
company, and served on the legal staff of Champlin Petroleum Company, an
independent oil and gas company. He has a B.S. Degree in Business
Administration with a major in Petroleum Marketing from the University of
Tulsa, and a Juris Doctor from the University of Michigan Law School.
Mr. Dozier has been Vice President--Operations of the Company since May
1992. From June 1983 to April 1992, he was employed by Santa Fe Minerals where
he held various engineering and management positions serving most recently as
Manager of Operations Engineering. From January 1975 to May 1983, he was
employed by Amoco Production Company serving in various positions where he
worked all phases of production, reservoir evaluations, drilling and
completions in the Mid-Continent and Gulf Coast areas. He has a B.S. Degree in
Petroleum Engineering from the University of Texas.
Mr. Meimerstorf, a certified public accountant, has been Controller of the
Company since January 1988 and a Vice President of the Company since May 1990.
He was Accounting Manager of the Company from February 1984 to January 1988.
From April 1981 to February 1984, he was the Financial Reporting Supervisor
for Andover. From June 1979 to April 1981, he was an auditor with Arthur
Andersen & Co. He has a B.S. Degree in Accounting from Arkansas Tech
University and an M.B.A. Degree from the University of Arkansas.
Mr. Phaneuf joined the Company as Vice President--Corporate Development in
October 1995. From June 1995 to October 1995, he was employed in the Corporate
Finance Group of Arthur Andersen LLP, specializing in energy industry
corporate finance activities. From April 1993 to August 1994, he was Senior
Vice President and head of the Energy Research Group at Kemper Securities, an
investment banking firm. From 1988 until April 1993, he was employed by
Rauscher, Pierce Refsnes, Inc., an investment banking firm, as a Senior Vice
President, serving as an energy analyst involved in equity research. From 1978
to 1988, Mr. Phaneuf was Vice President of Kidder, Peabody, & Co., an
investment banking firm, serving as an energy analyst in the Research
Department. From
53
<PAGE>
1976 to 1978, he was employed by Schneider, Bernet, and Hickman, serving as an
energy analyst in the Research Department. From 1972 to 1976, he held the
position of Investment Advisor for First International Investment Management,
a subsidiary of NationsBank. He holds a B.A. Degree in Psychology and an
M.B.A. Degree from the University of Texas.
Mr. Quackenbush has been Vice President--Production of the Company since May
1990. He was Manager--Production of the Company from November 1989 to May
1990. From May 1970 to July 1989, Mr. Quackenbush was employed by Tenneco Oil
Co., an oil and gas company, where he served as Acquisition Manager and in
various engineering positions. He has a B.S. Degree in Petroleum Engineering
from the Colorado School of Mines.
Mr. Sheppard has been Vice President--International of the Company since
November 1994. From June 1984 to August 1994, he was employed by Santa Fe
Minerals serving as Manager--Acquisitions & Special Projects, Manager--
International Operations, and in various other management and supervisory
capacities. From August 1977 to June 1984, he was employed by Amoco Production
Company serving in various engineering and supervisory capacities. He has a
B.S. Degree in Petroleum Engineering from Texas Tech University.
Mr. Lawrence has been a Director of the Company since January 1987. He has
been employed by Dillon, Read & Co. Inc., an investment banking firm ("Dillon
Read"), since January 1966 and is currently a Managing Director. Mr. Lawrence
also serves as a Director of D & K Wholesale Drug, Inc., Hallador Petroleum
Company, TransMontaigne Oil Company and Willbros Group, Inc. (each a United
States public company), Benson Petroleum Ltd. and Cavell Energy Corp. (each a
Canadian public company) and certain non-public companies in which affiliates
of Dillon Read hold equity interests including Meenan Oil Co., Inc., Fintube
Limited Partnership, Interenergy Corporation, PetroSantander Inc., Strega
Energy, Inc. and Savoy Energy, L.P. Mr. Lawrence is a graduate of Hamilton
College and also has an M.B.A. from Columbia University.
Mr. McNabb has been a Director of the Company since October 1990. He has
been Chief Executive Officer of Growth Capital Partners, Inc., an investment
and advisory firm in Houston, Texas serving privately held and public middle
market companies based in the Southwest, since March 1992. From June 1990 to
January 1992, he was a Managing Director of Bankers Trust Company, managing
commercial banking, investment banking and financial advisory activities in
the Southwest for Bankers Trust Company, and head of BT Southwest, Inc., an
affiliate of Bankers Trust New York Corporation. From September 1984 to June
1990, Mr. McNabb was employed by investment affiliates of The Prudential
Insurance Company of America where he provided a wide range of investment
banking services and corporate finance expertise to corporate clients. Mr.
McNabb also serves as a Director of Hugoton Energy Corporation and several
non-public companies. He holds undergraduate and graduate (M.B.A.) degrees
from Duke University.
54
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK FACILITY
Under the Company's Credit Agreement dated August 29, 1996, as amended,
certain banks have provided to the Company an unsecured revolving credit
facility (the "Bank Facility"). The Bank Facility establishes a borrowing base
(currently $305 million) determined by the banks' evaluation of the Company's
U.S. and certain Argentina oil and gas reserves.
Outstanding advances under the Bank Facility bear interest payable quarterly
at a floating rate based on Bank of Montreal's alternate base rate (as
defined) or, at the Company's option, at a fixed rate for up to six months
based on LIBOR. The Company's interest rate increments above the alternate
base rate and LIBOR vary based on the level of outstanding senior debt and the
portion of the borrowing base attributable to U.S. reserves at the time. As of
January 30, 1997, the Company had elected a fixed rate based on LIBOR for a
substantial portion of its outstanding advances, which resulted in an average
interest rate of approximately 6.6 percent. In addition, the Company must pay
a commitment fee ranging from 0.25 to 0.375 percent per annum on the unused
portion of the banks' commitment.
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's U.S. and certain Argentina oil
and gas reserves. If the sum of outstanding senior debt exceeds the borrowing
base, as redetermined, the Company must repay such excess. Any principal
advances outstanding under the Bank Facility at October 1, 1999, will be
payable in 12 equal consecutive quarterly installments commencing January 1,
2000, with maturity at October 1, 2002.
The unused portion of the Bank Facility was approximately $59.3 million at
January 30, 1997. The Company has entered into an amendment to its Bank
Facility in connection with this Offering which provides that the borrowing
base will be reduced to approximately $270 million if this Offering is
consummated. After giving effect to the application of the net proceeds from
this Offering and the Common Stock Offering as set forth in "Use of Proceeds"
and the related reduction in the borrowing base, the unused portion of the
Bank Facility would be approximately $167.8 million ($120.7 million if only
the Note Offering is consummated).
The Bank Facility includes customary covenants, including, among other
things: (a) maintenance of consolidated tangible net worth; (b) limitations on
indebtedness; (c) limitations on creation of liens; (d) limitations on
guarantees, loans or advances; (e) limitations on certain consolidations,
mergers and transfers of assets; (f) limitations on investments; (g)
limitations on transactions with affiliates; and (h) payment restrictions
affecting restricted subsidiaries of the Company.
The Bank Facility includes customary events of default, including among
other things, and subject to applicable grace periods, if any: (a) failure of
the Company to make any payment of principal of or interest on any loan under
the Bank Facility when due and payable; (b) breaches of any representations or
warranties in any material respect when made; (c) a breach of certain
agreements and covenants, including all negative covenants in the Bank
Facility; (d) a default in payment under any other indebtedness for borrowed
money or contingent liability of the Company or any of its subsidiaries or any
other default if the effect of such is to permit acceleration of such
indebtedness; (e) any judgment or order for the payment of money in excess of
$10 million is rendered against the Company or any of its subsidiaries; (f)
certain acts of bankruptcy, insolvency or dissolution; and (g) any change in
control.
55
<PAGE>
9% SENIOR SUBORDINATED NOTES DUE 2005
In December 1995, the Company publicly offered and sold $150,000,000
aggregate principal amount at maturity of 9% Senior Subordinated Notes Due
2005 (the "9% Notes") pursuant to an Indenture between the Company and The
Chase Manhattan Bank (formerly Chemical Bank) (the "Existing Indenture").
Interest on the 9% Notes is payable on June 15 and December 15 of each year,
and such payments commenced on June 15, 1996. The 9% Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after
December 15, 2000, at the redemption prices set forth in the Existing
Indenture plus accrued and unpaid interest, if any, to the date of redemption.
The 9% Notes are not subject to any mandatory sinking fund.
Upon the occurrence of a Change of Control (as defined in the Existing
Indenture), the Company will be required to make an offer to repurchase the 9%
Notes at 101 percent of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase.
The 9% Notes are unsecured senior subordinated obligations of the Company.
The 9% Notes rank subordinate in right of payment to all existing and future
senior indebtedness, pari passu with any existing and future senior
subordinated indebtedness (including the Notes) and senior to any future
junior subordinated indebtedness of the Company. The 9% Notes are structurally
subordinated to the indebtedness and other liabilities of the Company's
subsidiaries.
The Existing Indenture for the 9% Notes contains limitations on, among other
things, (a) the ability of the Company to incur additional indebtedness, (b)
the payment of dividends and other distributions with respect to the capital
stock of the Company and the purchase, redemption or retirement of capital
stock of the Company, (c) the making of certain investments, (d) the
incurrence of certain liens, (e) asset sales, (f) the issuance and sale of
capital stock of restricted subsidiaries, (g) transactions with affiliates,
(h) payment restrictions affecting restricted subsidiaries, and (i) certain
consolidations, mergers and transfers of assets.
Events of default under the Existing Indenture are: (a) failure to pay any
interest on the 9% Notes when due, continued for 30 days; (b) failure to pay
principal of (or premium, if any, on) the 9% Notes when due; (c) failure to
perform any other covenant of the Company in the Existing Indenture, continued
for 60 days after written notice as provided in the Existing Indenture; (d) a
default under any indebtedness for borrowed money by the Company or any
restricted subsidiary which results in acceleration of the maturity of such
indebtedness, or failure to pay any such indebtedness at maturity, in an
amount greater than $10 million ($40 million in the case of indebtedness of a
foreign subsidiary the recourse for which is limited to solely foreign
subsidiaries) if such indebtedness is not discharged or such acceleration is
not rescinded or annulled within 10 days after written notice as provided in
the Existing Indenture; (e) one or more final judgments or orders by a court
of competent jurisdiction are entered against the Company or any restricted
subsidiary in an uninsured or unindemnified aggregate amount in excess of $10
million and such judgments or orders are not discharged, waived, stayed,
satisfied or bonded for a period of 60 consecutive days; and (f) certain
events of bankruptcy, insolvency or reorganization.
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DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture dated as of February 5, 1997
(the "Indenture"), between the Company and The Chase Manhattan Bank, as
Trustee (the "Trustee"). A copy of the form of Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part and
will be made available to prospective purchasers of the Notes upon request.
The Indenture is subject to and is governed by the Trust Indenture Act of
1939, as amended (the "1939 Act"). The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject, and
are qualified in their entirety by reference, to the 1939 Act and to all the
provisions of the Notes and the Indenture, including the definitions therein
of certain terms. Wherever particular Sections or defined terms of the
Indenture are referred to herein, such Sections or defined terms are
incorporated by reference herein. For purposes of this Section, references to
the "Company" shall mean Vintage Petroleum, Inc. excluding its subsidiaries.
Certain terms used in this Section are defined under "--Certain Definitions."
GENERAL
The Notes will mature on February 1, 2009, and will be limited to an
aggregate principal amount of $100,000,000. The Notes will bear interest at
the rate set forth on the cover page of this Prospectus from February 5, 1997
(the "Issue Date"), or from the most recent interest payment date to which
interest has been paid, payable semiannually on February 1 and August 1 of
each year, beginning on August 1, 1997, to the person in whose name the Note
(or any predecessor Note) is registered at the close of business on the
preceding January 15 or July 15, as the case may be. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on, the Notes will be payable,
and the Notes will be exchangeable and 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 of the Trustee) or such other
office or agency permitted under the Indenture; provided, however, that
payment of interest may be made at the option of the Company by check mailed
to the person entitled thereto as shown on the Security Register. The Notes
will be issued only in fully registered form without coupons, in denominations
of $1,000 and any integral multiple thereof. No service charge will be made
for any registration of transfer, exchange or redemption of Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
SUBORDINATION
The Notes will be unsecured senior subordinated obligations of the Company.
The payment of the principal of, premium, if any, and interest on, the Notes
will be subordinated in right of payment, as set forth in the Indenture, to
the payment when due in cash of all Senior Indebtedness (as defined) of the
Company. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust will not be subordinate to any Senior
Indebtedness or subject to the restrictions described herein. The Notes will
rank subordinate in right of payment to all existing and future Senior
Indebtedness, pari passu with the 9% Notes and all other existing and any
future senior subordinated indebtedness and senior to any future junior
subordinated indebtedness of the Company. As adjusted for the purchase of the
Exxon Properties, the acquisition of Shamrock and the consummation of the Note
Offering and the Common Stock Offering and the application of the estimated
net proceeds therefrom, at September 30, 1996, the Company's outstanding
Senior Indebtedness would have been $108 million ($155 million if the Common
Stock Offering is not consummated). The Company also has outstanding the 9%
Notes ($150 million) which will rank pari passu with the Notes. The Notes will
be structurally subordinated to indebtedness and other liabilities of the
Company's subsidiaries. The total liabilities of the Company's subsidiaries
included $73.3 million of liabilities at September 30, 1996. The Company and
its subsidiaries have other liabilities, including contingent liabilities,
which may be
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significant. Although the Indenture contains limitations on the amount of
additional Indebtedness which the Company and its 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 will be structurally subordinated). See "--Certain
Covenants--Limitation on Indebtedness."
The Company may not pay principal of, premium, if any, or interest on, the
Notes or make any deposit pursuant to the provisions described under "--
Defeasance and Covenant Defeasance" and may not repurchase, redeem or
otherwise retire any Notes (collectively, "pay the Notes") if (a) any
principal, premium or interest in respect of any Senior Indebtedness is not
paid within any applicable grace period (including at maturity) or (b) any
other default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms unless, in either
case, the default has been cured or waived and any such acceleration has been
rescinded or such Senior Indebtedness has been paid in full; provided,
however, that the Company may pay the Notes without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment from
the Representative of each issue of Designated Senior Indebtedness. During the
continuance of any default (other than a default described in clause (a) or
(b) of the preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration), the Company may not pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Company and the
Trustee of written notice of such default from the Representative of the
holders of any Designated Senior Indebtedness specifying an election to effect
a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days
thereafter (unless earlier terminated (i) by written notice to the Trustee and
the Company from the Representative which gave such Payment Blockage Notice,
(ii) because such default is no longer continuing, or (iii) because such
Designated Senior Indebtedness has been repaid in full). Notwithstanding the
provisions described in the immediately preceding sentence, unless the holders
of such Designated Senior Indebtedness or the Representative of such holders
have accelerated the maturity of such Designated Senior Indebtedness and not
rescinded such acceleration, the Company may (unless otherwise prohibited as
described in the first sentence of this paragraph) resume payments on the
Notes after the end of such Payment Blockage Period. Not more than one Payment
Blockage Notice may be given in any consecutive 360-day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation, dissolution or winding up of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness
will be entitled to receive payment in full in cash before the holders of the
Notes are entitled to receive any payment of principal of, or premium, if any,
or interest on, the Notes. In addition, until the Senior Indebtedness is paid
in full in cash, any distribution to which holders of Notes would be entitled
but for the subordination provisions of the Indenture will be made to holders
of the Senior Indebtedness, except that holders of Notes may receive and
retain shares of stock and any debt securities that are subordinated to Senior
Indebtedness to at least the same extent as the Notes.
By reason of such subordination provisions contained in the Indenture, in
the event of bankruptcy, insolvency or winding up, creditors of the Company
who are holders of Senior Indebtedness may recover more, ratably, than the
holders of the Notes, and creditors of the Company who are not holders of
Senior Indebtedness or the Notes may recover less, ratably, than holders of
Senior Indebtedness and may recover more, ratably, than the holders of the
Notes.
Claims of creditors of the Company's subsidiaries, including trade
creditors, and holders of Preferred Stock of the Company's subsidiaries (if
any), will generally have a priority as to the assets of such subsidiaries
over the claims of the Company and the holders of the Company's Indebtedness,
including the Notes. Under the Indenture, and subject to certain limitations,
Indebtedness may be incurred by subsidiaries of the Company.
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OPTIONAL REDEMPTION
The Notes are not redeemable prior to February 1, 2002. At any time on or
after February 1, 2002, the Notes are redeemable at the option of the Company,
in whole or in part, on not less than 30 nor more than 60 days' prior notice,
in amounts of $1,000 or an integral multiple thereof at the following
redemption prices (expressed as percentages of principal amount), plus accrued
and unpaid interest, if any, to the date of redemption (subject to the right
of holders of record on the relevant record date to receive interest due on
the relevant interest payment date), if redeemed during the 12-month period
commencing February 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002........................................................ 104.313%
2003........................................................ 103.234%
2004........................................................ 102.156%
2005........................................................ 101.078%
</TABLE>
and thereafter, beginning February 1, 2006, at 100 percent of the principal
amount of the Notes.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase such holder's Notes in whole or
in part in integral multiples of $1,000 pursuant to the offer described below
(the "Change of Control Offer") at a purchase price equal to 101 percent of
the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the repurchase date (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company shall mail a
notice to each holder stating, among other things: (1) that a Change of
Control has occurred and a Change of Control Offer is being made pursuant to
the covenant entitled "Mandatory Repurchase Upon a Change of Control" and that
all Notes (or portions thereof) timely tendered will be accepted for payment;
(2) the purchase price and the repurchase date, which shall be, subject to any
contrary requirements of applicable law, no earlier than 30 days nor later
than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"); (3) that any Note (or portion thereof) accepted for payment
(and duly paid on the Change of Control Payment Date) pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of Control
Payment Date; (4) that any Notes (or portions thereof) not tendered will
continue to accrue interest; (5) a description of the transaction or
transactions constituting the Change of Control; and (6) the procedures that
holders of Notes must follow in order to tender their Notes (or portions
thereof) for payment and the procedures that holders of Notes must follow in
order to withdraw an election to tender Notes (or portions thereof) for
payment.
The Company will comply, to the extent applicable, with the requirements of
Rules 13e-4 and 14e-1 under the Exchange Act, and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of Notes in connection with a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions relating to the Change of Control
Offer, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations described
above by virtue thereof.
Except as described above with respect to a Change of Control, the Indenture
does not contain any other provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring.
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There can be no assurance that the Company will be able to fund any such
repurchase of the Notes and all other existing and future Pari Passu
Indebtedness. The Company's existing credit agreement contains and any future
credit agreements or other agreements relating to indebtedness of the Company
may contain prohibitions or restrictions on the Company's ability to effect a
Change of Control Payment. In the event a Change of Control occurs at a time
when such prohibitions or restrictions are in effect, the Company could seek
the consent of its lenders to the repurchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will be
effectively prohibited from repurchasing Notes. In such case, the Company's
failure to repurchase tendered Notes would constitute an Event of Default
under the Indenture.
A "Change of Control" shall be deemed to occur if (i) any "person" or
"group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange
Act or any successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities within
the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than any one or
more of the Permitted Holders, becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act) of 50 percent or more of the
total voting power of all classes of the Voting Stock of the Company and/or
warrants or options to acquire such Voting Stock, calculated on a fully
diluted basis, (ii) the sale, lease, conveyance or transfer of all or
substantially all of the assets of the Company (other than to any Wholly Owned
Subsidiary) shall have occurred, (iii) the stockholders of the Company shall
have approved any plan of liquidation or dissolution of the Company, (iv) the
Company consolidates with or merges into another Person or any Person
consolidates with or merges into the Company in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is
reclassified into or exchanged for cash, securities or other property, other
than any such transaction where (a) the outstanding Voting Stock of the
Company is reclassified into or exchanged for Voting Stock of the surviving
corporation that is Capital Stock and (b) the holders of the Voting Stock of
the Company immediately prior to such transaction own, directly or indirectly,
not less than a majority of the Voting Stock of the surviving corporation
immediately after such transaction in substantially the same proportion as
before the transaction, or (v) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Company's
Board of Directors (together with any new directors whose election or
appointment by such board or whose nomination for election by the stockholders
of the Company was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Company's Board of Directors
then in office.
The definition of Change of Control includes a phrase relating to the sale,
lease, conveyance or transfer of "all or substantially all" of the Company's
assets. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
conveyance or transfer of less than all of the assets of the Company to
another person may be uncertain.
"Permitted Holders" means Charles C. Stephenson, Jr., Jo Bob Hille, S. Craig
George, William C. Barnes and their Permitted Designees.
"Permitted Designee" means (i) a spouse or a child of a Permitted Holder,
(ii) trusts for the benefit of a Permitted Holder or a spouse or child of a
Permitted Holder, (iii) in the event of the death or incompetence of a
Permitted Holder, his estate, heirs, executor, administrator, committee or
other personal representative, or (iv) any Person so long as a Permitted
Holder owns at least 51 percent of the voting power of all classes of the
Voting Stock of such Person.
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BOOK-ENTRY SYSTEM
The Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
The Depository Trust Company ("DTC") or its nominee will initially be the sole
registered holder of the Notes for all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts
of the Notes represented by such Global Security purchased by such persons in
this Offering. Such accounts shall be designated by the Underwriters with
respect to Notes placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on Notes represented by any such Global
Security will be made to DTC or its nominee, as the case may be, as the sole
registered owner and the sole holder of the Notes represented thereby for all
purposes under the Indenture. None of the Company, the Trustee, any agent of
the Company, or the Underwriters will have any responsibility or liability for
any aspect of DTC's records relating to or payments made on account of
beneficial ownership interests in a Global Security representing any Notes or
for maintaining, supervising, or reviewing any of DTC's records relating to
such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately
credit, on its book-entry registration and transfer system, the accounts of
participants with payments in amounts proportionate to their respective
beneficial interests in the principal or face amount of such Global Security
as shown on the records of DTC. Payments by participants to owners of
beneficial interests in a Global Security held through such participants will
be governed by standing instructions and customary practices as is now the
case with securities held for customer accounts registered in "street name"
and will be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC. A Global Security is
exchangeable for certificated Notes only if (i) DTC notifies the Company that
it is unwilling or unable to continue as a Depositary for such Global Security
or if at any time DTC ceases to be a clearing agency registered under the
Exchange Act, (ii) the Company executes and delivers to the Trustee a notice
that such Global Security shall be so transferable, registrable, and
exchangeable, and such transfers shall be registrable, or (iii) there shall
have occurred and be continuing an Event of Default or an event which, with
the giving of notice or lapse of time or both, would constitute an Event of
Default with respect to the Notes represented by such Global Security. Any
Global Security that is exchangeable for certificated Notes pursuant to the
preceding sentence will be transferred to, and registered and exchanged for,
certificated Notes in authorized denominations and registered in such names as
the Depositary holding such Global Security may direct. Subject to the
foregoing, a Global Security is not exchangeable, except for a Global Security
of like denomination to be registered in the name of the Depositary or its
nominee. In the event that a Global Security becomes exchangeable for
certificated Notes, (i) certificated Notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples thereof, (ii)
payment of principal, any repurchase price, and interest on the certificated
Notes will be payable, and
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the transfer of the certificated Notes will be registerable, at the office or
agency of the Company maintained for such purposes, and (iii) no service
charge will be made for any registration of transfer or exchange of the
certificated Notes, although the Company may require payment of a sum
sufficient to cover any tax or governmental charge imposed in connection
therewith.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Notes
represented by such Global Security for the purposes of receiving payment on
the Notes, receiving notices, and for all other purposes under the Indenture
and the Notes. Beneficial interests in Notes will be evidenced only by, and
transfers thereof will be effected only through, records maintained by the
Depositary and its participants. Cede & Co. has been appointed as the nominee
of DTC. Except as provided above, owners of beneficial interests in a Global
Security will not be entitled to and will not be considered the holders
thereof for any purposes under the Indenture. Accordingly, each person owning
a beneficial interest in a Global Security must rely on the procedures of the
Depositary, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any
rights of a holder under the Indenture. The Company understands that under
existing industry practices, in the event that the Company requests any action
of holders or that an owner of a beneficial interest in a Global Security
desires to give or take any action which a holder is entitled to give or take
under the Indenture, the Depositary would authorize the participants holding
the relevant beneficial interest to give or take such action and such
participants would authorize beneficial owners owning through such
participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations, and certain other organizations some of whom (and/or
their representatives) own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
CERTAIN COVENANTS
Limitation on Indebtedness. The Indenture provides that the Company will
not, and it will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur any Indebtedness unless, after giving pro forma effect to
the application of the proceeds thereof, no Default or Event of Default would
occur as a consequence of such Incurrence or be continuing following such
Incurrence and either (a) after giving pro forma effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds thereof, the
Consolidated Interest Coverage Ratio exceeds 2.5 to 1.0 or (b) such
Indebtedness is Permitted Indebtedness.
Permitted Indebtedness means any and all of the following: (a) Indebtedness
evidenced by the Notes; (b) Indebtedness under Bank Credit Facilities,
provided that the aggregate principal amount of all such Indebtedness under
Bank Credit Facilities, together with all Indebtedness Incurred pursuant to
clause (l) of this paragraph in respect of Indebtedness previously Incurred
pursuant to this clause (b), at any one time outstanding does not exceed the
greater of (i) $265 million and (ii) an amount equal to the sum of (A) $100
million and (B) 15 percent of Adjusted Consolidated Net Tangible Assets
determined as of the date of the Incurrence of such Indebtedness; provided,
however, that the
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maximum amount available to be outstanding under Bank Credit Facilities shall
be permanently reduced by the amount of Net Available Cash from Assets Sales
used to permanently repay Indebtedness under Bank Credit Facilities, and not
subsequently reinvested in Additional Assets or used to permanently reduce
other Indebtedness to the extent permitted pursuant to the "Limitation on
Asset Sales" covenant; (c) Indebtedness to the Company or any of its Wholly
Owned Subsidiaries by any of its Restricted Subsidiaries or Indebtedness of
the Company to any of its Wholly Owned Subsidiaries (but only so long as such
Indebtedness is held by the Company or a Wholly Owned Subsidiary); (d)
Indebtedness in connection with one or more standby letters of credit,
Guarantees, performance bonds or other reimbursement obligations issued in the
ordinary course of business and not in connection with the borrowing of money
or the obtaining of advances or credit (other than advances or credit on open
account, includable in current liabilities, for goods and services in the
ordinary course of business and on terms and conditions which are customary in
the Oil and Gas Business and other than the extension of credit represented by
such letter of credit, Guarantee or performance bond itself); (e) Indebtedness
of any Person which shall merge or consolidate with or into the Company in
accordance with the covenant described under "--Merger, Consolidation and Sale
of Assets," which was outstanding prior to such merger or consolidation; (f)
Indebtedness under Interest Rate Protection Agreements entered into for the
purpose of limiting interest rate risks, provided that the obligations under
such agreements are related to payment obligations on Indebtedness otherwise
permitted by the terms of the "Limitation on Indebtedness" covenant; (g)
Indebtedness under Exchange Rate Contracts, provided that such Exchange Rate
Contracts were entered into for the purpose of limiting exchange rate risks in
connection with transactions entered into in the ordinary course of business;
(h) Indebtedness under Oil and Gas Purchase and Sale Contracts, provided that
such contracts were entered into in the ordinary course of business for the
purpose of limiting risks that arise in the ordinary course of business of the
Company and its Subsidiaries; (i) in-kind obligations relating to net oil or
gas balancing positions arising in the ordinary course of business that are
customary in the Oil and Gas Business; (j) Indebtedness outstanding on the
Issue Date not otherwise permitted in clauses (a) through (i) above; (k)
Indebtedness not otherwise permitted to be Incurred pursuant to this
paragraph, provided that the aggregate principal amount of all Indebtedness
Incurred pursuant to this clause (k), together with all Indebtedness Incurred
pursuant to clause (l) of this paragraph in respect of Indebtedness previously
Incurred pursuant to this clause (k), at any one time outstanding does not
exceed $25 million; (l) Indebtedness Incurred in exchange for, or the proceeds
of which are used to refinance, (i) Indebtedness referred to in clauses (a)
through (k) of this paragraph (including Indebtedness previously Incurred
pursuant to this clause (l)) and (ii) Indebtedness Incurred pursuant to clause
(a) of the first paragraph of the "Limitation on Indebtedness" covenant;
provided, however, that (i) such Indebtedness is in an aggregate principal
amount not in excess of the sum of (A) the aggregate principal amount then
outstanding of the Indebtedness being exchanged or refinanced and (B) an
amount necessary to pay any fees and expenses, including premiums, related to
such exchange or refinancing, (ii) such Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being exchanged or
refinanced, (iii) such Indebtedness has an Average Life to Stated Maturity at
the time such Indebtedness is Incurred that is equal to or greater than the
Average Life to Stated Maturity of the Indebtedness being exchanged or
refinanced, and (iv) such Indebtedness is subordinated in right of payment to
Senior Indebtedness or the Notes to at least the same extent, if any, as the
Indebtedness being exchanged or refinanced; (m) Indebtedness consisting of
obligations in respect of purchase price adjustments, indemnities or
Guarantees of the same or similar matters in connection with the acquisition
or disposition of assets; and (n) accounts payable or other obligations of the
Company or any Restricted Subsidiary to trade creditors created or assumed by
the Company or such Restricted Subsidiary in the ordinary course of business
in connection with the obtaining of goods or services.
Limitation on Liens. The Indenture provides that the Company will not,
directly or indirectly, Incur any Lien on or with respect to any Property of
the Company, whether owned on the Issue Date or acquired after the Issue Date,
or any interest therein or any income or profits therefrom, unless the
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Notes are secured equally and ratably with (or prior to) any and all other
obligations secured by such Lien, except that the Company may without
restriction Incur Liens securing Senior Indebtedness and the following (each a
"Permitted Lien"): (a) Liens existing as of the Issue Date; (b) any Lien
existing on any Property of a Person at the time such Person is merged or
consolidated with or into the Company (and not Incurred in anticipation of
such transaction), provided that such Liens are not extended to other Property
of the Company; (c) any Lien existing on any Property at the time of the
acquisition thereof (and not Incurred in anticipation of such transaction),
provided that such Liens are not extended to other Property of the Company;
(d) Liens securing the Notes and other obligations arising under the
Indenture; (e) Liens to secure any permitted extension, renewal, refinancing,
refunding or exchange (or successive extensions, renewals, refinancings,
refundings or exchanges), in whole or in part, of or for any Indebtedness
secured by Liens referred to in clauses (a) through (d) of this paragraph;
provided, however, that (i) such new Lien shall be limited to all or part of
the same Property that secured the original Lien, plus improvements on such
Property and (ii) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness secured by Liens
described under clauses (a) through (d) of this paragraph at the time the
original Lien became a Lien permitted in accordance with the Indenture and (B)
an amount necessary to pay any fees and expenses, including premiums, related
to such refinancing, refunding, extension, renewal or replacement; (f) any
Lien incidental to the normal conduct of the business of the Company, the
ownership of its property or the conduct in the ordinary course of its
business (including, without limitation, (i) easements, rights of way and
similar encumbrances, (ii) rights of lessees under leases, (iii) rights of
collecting banks having rights of setoff, revocation, refund or chargeback
with respect to money or instruments of the Company or on deposit with or in
the possession of such banks, (iv) Liens imposed by law, including without
limitation Liens under workers' compensation or similar legislation and
mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors'
Liens, (v) Oil and Gas Liens, and (vi) Liens Incurred to secure performance of
obligations with respect to statutory or regulatory requirements, performance
or return-of-money bonds, surety bonds or other obligations of a like nature
and Incurred in a manner consistent with industry practice) in each case which
are not Incurred in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the deferred purchase price of Property
and which do not in the aggregate impair in any material respect the use of
Property in the operation of the business of the Company and its Restricted
Subsidiaries taken as a whole; (g) Liens for taxes not yet due or which are
being contested in good faith by appropriate proceedings, so long as reserves
have been established to the extent required by U.S. GAAP as in effect at such
time; (h) Liens incurred to secure appeal bonds and judgment and attachment
Liens, in each case in connection with litigation or legal proceedings that
are being contested in good faith by appropriate proceedings so long as
reserves have been established to the extent required by U.S. GAAP as in
effect at such time and so long as such Liens do not encumber assets by an
amount in excess of $20 million; (i) Liens securing Hedging Agreements so long
as such Hedging Agreements are permitted under the "Limitation on
Indebtedness" covenant; (j) Liens in connection with Sale and Leaseback
Transactions permitted pursuant to the "Limitation Indebtedness" covenant; (k)
Liens resulting from a pledge of Capital Stock of a Person that is not a
Restricted Subsidiary to secure obligations of such Person and any
refinancings thereof; and (l) Liens resulting from the deposit of funds or
evidences of Indebtedness in trust for the purpose of decreasing Indebtedness
of the Company or any of its Subsidiaries so long as such deposit of funds is
permitted under the "Limitation on Restricted Payments" covenant.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, make any Restricted Payment if, at the time of and after giving
effect to the proposed Restricted Payment (a) any Default or Event of Default
would have occurred and be continuing, (b) the Company could not Incur at
least $1.00 of additional Indebtedness pursuant to clause (a) of the first
paragraph of the "Limitation on Indebtedness" covenant, or (c) the aggregate
amount expended or declared for all Restricted
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Payments from December 20, 1995 (the date of issue of the 9% Notes), would
exceed the sum of (i) $25 million, (ii) 100 percent of the aggregate net cash
proceeds or the Fair Market Value of Property other than cash received by the
Company on or subsequent to December 20, 1995, from capital contributions to
the Company (other than from a Subsidiary of the Company) and from the
issuance or sale (other than to a Subsidiary of the Company) of Capital Stock
of the Company, including Capital Stock of the Company issued upon conversion
of convertible debt or convertible Redeemable Stock and upon the exercise of
options, warrants or rights to purchase Capital Stock of the Company, (iii) 50
percent of the aggregate Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, less 100 percent of such deficit)
subsequent to September 30, 1995, and ending on the last day of the fiscal
quarter ending on or immediately preceding the date of such Restricted
Payment, and (iv) an amount equal to the net reduction in Investments made by
the Company and its Restricted Subsidiaries subsequent to December 20, 1995,
in any Person resulting from (A) payments of interest on debt, dividends,
repayment of loans or advances, or other transfers or distributions of
Property (but only to the extent the Company excludes such transfers or
distributions from the calculation of Consolidated Net Income for purposes of
clause (iii) above), in each case to the Company or any Restricted Subsidiary
from any Person, or (B) the redesignation of any Unrestricted Subsidiary as a
Restricted Subsidiary, not to exceed, in the case of (A) or (B), the amount of
such Investments previously made in such Person or such Unrestricted
Subsidiary, as the case may be, which were treated as Restricted Payments.
Any payments made pursuant to clauses (a) through (i) of the definition of
Permitted Investments shall be excluded for purposes of any calculation of the
aggregate amount of Restricted Payments. Any payments made pursuant to clause
(j) of the definition of Permitted Investments shall be included for purposes
of any calculation of the aggregate amount of Restricted Payments.
The foregoing limitations do not prevent the Company or any Restricted
Subsidiary from (a) paying a dividend on its Capital Stock within 60 days
after declaration thereof if, on the declaration date, such dividend could
have been paid in compliance with the Indenture, or (b) making Permitted
Investments so long as no Default or Event of Default shall have occurred and
be continuing.
Permitted Investments is defined to mean any and all of the following: (a)
Permitted Short-Term Investments; (b) Investments in property, plant and
equipment used in the ordinary course of business and Permitted Business
Investments; (c) Investments by the Company or any Restricted Subsidiary in a
Restricted Subsidiary and Investments by a Restricted Subsidiary in the
Company; (d) Investments in any other Person, including the acquisition from
third parties of Capital Stock of a Restricted Subsidiary or any other Person,
as a result of which such other Person becomes a Restricted Subsidiary in
compliance with the "Restricted and Unrestricted Subsidiaries" covenant or is
merged into or consolidated with or transfers or conveys all or substantially
all of its assets to the Company or a Restricted Subsidiary; (e) negotiable
instruments held for collection; lease, utility and other similar deposits; or
stock, obligations or securities received in settlement of debts owing to the
Company or any of its Restricted Subsidiaries as a result of foreclosure,
perfection or enforcement of any Lien or Indebtedness, in each of the
foregoing cases in the ordinary course of business of the Company or such
Restricted Subsidiary; (f) Investments in Persons in the Oil and Gas Business
(other than Restricted Subsidiaries) intended to promote the Company's
strategic business objectives in an amount not to exceed $20 million at any
one time outstanding; (g) loans made (i) to officers, directors and employees
of the Company or any Subsidiary approved by the Board of Directors (or by a
duly authorized officer), the proceeds of which are used solely to exercise
stock options received pursuant to an employee stock option plan or other
incentive plan, in a principal amount not to exceed the exercise price of such
stock options and (ii) to refinance loans, together with accrued interest
thereon, made pursuant to this clause (g); (h) advances and loans to officers,
directors and employees of the Company or any Subsidiary in the ordinary
course of business, provided such loans and advances do not exceed $3.0
million at any one time outstanding; (i) Investments in the form of securities
received from Asset Sales, provided that such Asset Sales are made in
compliance with the "Limitation on
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Asset Sales" covenant; and (j) Investments pursuant to any agreement or
obligation of the Company or any of its Restricted Subsidiaries as in effect
on the Issue Date (other than Investments described in clauses (a) through (i)
above).
Limitation on Issuance and Sale of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Company will not (a) permit any
Restricted Subsidiary to issue any Capital Stock other than to the Company or
one of its Wholly Owned Subsidiaries or (b) permit any Person other than the
Company or a Restricted Subsidiary to own any Capital Stock of any other
Restricted Subsidiary (other than directors' qualifying shares), except, in
each case, for (i) a sale of the Capital Stock of a Restricted Subsidiary
owned by the Company or its Restricted Subsidiaries effected in accordance
with the "Limitation on Asset Sales" covenant, (ii) the issuance of Capital
Stock by a Restricted Subsidiary to a Person other than the Company or a
Restricted Subsidiary and (iii) the Capital Stock of a Restricted Subsidiary
owned by a Person at the time such Restricted Subsidiary became a Restricted
Subsidiary or acquired by such Person in connection with the formation of the
Restricted Subsidiary, or transfers thereof; provided, that any sale or
issuance of Capital Stock of a Restricted Subsidiary shall be deemed to be an
Asset Sale to the extent the percentage of the total outstanding Voting Stock
of such Restricted Subsidiary owned directly and indirectly by the Company is
reduced as a result of such sale or issuance; provided, further, that if a
Person whose Capital Stock was issued or sold in a transaction described in
this paragraph is, as a result of such transaction, no longer a Restricted
Subsidiary, then the Fair Market Value of Capital Stock of such Person
retained by the Company and the other Restricted Subsidiaries shall be treated
as an Investment for purposes of the "Limitation on Restricted Payments"
covenant.
Limitation on Asset Sales. The Indenture provides that the Company will not,
and will not permit any Restricted Subsidiary to, consummate 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 shares and assets subject to such Asset Sale and (ii)
all of the consideration paid to the Company or such Restricted Subsidiary in
connection with such Asset Sale is in the form of cash, cash equivalents,
Liquid Securities, or the assumption by the purchaser of liabilities of the
Company (other than liabilities of the Company that are by their terms
subordinated to the Notes) or any Restricted Subsidiary as a result of which
the Company and its remaining Restricted Subsidiaries are no longer liable;
provided, however, that (x) the Fair Market Value of Exchanged Properties
shall be treated as cash for purposes of this clause (ii) and (y) the Company
and its Restricted Subsidiaries shall be permitted to receive property and
securities other than cash, cash equivalents, Exchanged Properties or Liquid
Securities, so long as the aggregate Fair Market Value of all such property
and securities received in Asset Sales held by the Company or any Restricted
Subsidiary at any one time shall not exceed 10 percent of Adjusted
Consolidated Net Tangible Assets.
The Net Available Cash from Asset Sales may be applied by the Company or a
Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary
elects (or is required by the terms of any Senior Indebtedness), (A) to
prepay, repay or purchase Senior Indebtedness or Indebtedness of a Restricted
Subsidiary (in each case excluding Indebtedness owed to the Company or an
Affiliate of the Company); (B) to reinvest in Additional Assets (including by
means of an Investment in Additional Assets by a Restricted Subsidiary with
Net Available Cash received by the Company or another Restricted Subsidiary);
or (C) if there are no 9% Notes outstanding, to purchase Notes (excluding
Notes owned by the Company or an Affiliate of the Company).
Any Net Available Cash from an Asset Sale not applied in accordance with the
preceding paragraph within 365 days from the date of such Asset Sale shall
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10 million, the Company will be required to comply with the
applicable provisions of the indenture relating to the 9% Notes, to make a
prepayment offer to purchase on a pro rata basis, from all holders of the 9%
Notes, an aggregate principal amount
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of 9% Notes equal to the Excess Proceeds, at a price in cash not in excess of
100 percent of the outstanding principal amount thereof plus accrued interest,
if any. To the extent that any portion of the amount of such Excess Proceeds
remains after compliance with the preceding sentence such amount shall
constitute "Remaining Excess Proceeds" held for the benefit of the holders of
the Notes and any then outstanding Pari Passu Indebtedness (other than the 9%
Notes) and the amount of Excess Proceeds will be reset to zero. When the
aggregate amount of Remaining Excess Proceeds exceeds $10 million, the Company
will be required to make an offer to purchase (a "Prepayment Offer") on a pro
rata basis, from all holders of the Notes and any then outstanding Pari Passu
Indebtedness (other than the 9% Notes), an aggregate principal amount of Notes
and any then outstanding Pari Passu Indebtedness (other than the 9% Notes)
equal to the Remaining Excess Proceeds, at a price in cash at least equal to
100 percent of the outstanding principal amount thereof plus accrued interest,
if any, to the Purchase Date (as defined herein). To the extent that any
portion of the amount of Remaining Excess Proceeds remains after compliance
with the preceding sentence and provided that all holders of Notes have been
given the opportunity to tender their Notes for purchase as described in the
following paragraph in accordance with the Indenture, the Company or such
Restricted Subsidiary may use such remaining amount for general corporate
purposes and the amount of Remaining Excess Proceeds will be reset to zero.
Within five Business Days after the later of (i) 365 days from the date of
an Asset Sale and (ii) the completion of any offer for the 9% Notes required
by the indenture relating to the 9% Notes, the Company shall, if it is
obligated to make an offer to purchase the Notes pursuant to the preceding
paragraph, send a written Prepayment Offer notice, by first-class mail, to the
holders of the Notes (the "Prepayment Offer Notice"), accompanied by such
information regarding the Company and its Subsidiaries as the Company in good
faith believes will enable such holders of the Notes to make an informed
decision with respect to the Prepayment Offer. The Prepayment Offer Notice
will state, among other things, (a) that the Company is offering to purchase
Notes pursuant to the provisions of the Indenture described herein under "--
Limitation on Asset Sales," (b) that any Note (or any portion thereof)
accepted for payment (and duly paid on the Purchase Date) pursuant to the
Prepayment Offer shall cease to accrue interest after the Purchase Date, (c)
the purchase price and purchase date, which shall be, subject to any contrary
requirements of applicable law, no less than 30 days nor more than 60 days
after the date the Prepayment Offer Notice is mailed (the "Purchase Date"),
(d) the aggregate principal amount of Notes to be purchased, and (e) a
description of the procedure which holders of Notes must follow in order to
tender their Notes and the procedures that holders of Notes must follow in
order to withdraw an election to tender their Notes for payment.
The Company will comply, to the extent applicable, with the requirements of
Rules 13e-4 and 14e-1 under the Exchange Act and any other securities laws or
regulations thereunder to the extent such laws and regulations are applicable
in connection with the purchase of Notes as described above. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions relating to the Prepayment Offer, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations described above by virtue thereof.
Incurrence of Layered Indebtedness. The Indenture provides that the Company
will not Incur any Indebtedness which is subordinate or junior in right of
payment to any Senior Indebtedness unless such Indebtedness constitutes
Indebtedness which is junior to, or pari passu with, the Notes in right of
payment.
Transactions with Affiliates. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, conduct any business or enter into any transaction or series of
transactions (including, but not limited to, the sale, transfer, disposition,
purchase, exchange or lease of Property, the making of any Investment, the
giving of any Guarantee or the rendering of any service) with or for the
benefit of any Affiliate of the Company, unless (a) such
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transaction or series of transactions is in the best interest of the Company
or such Restricted Subsidiary, (b) such transaction or series of transactions
is on terms no less favorable to the Company or such Restricted Subsidiary
than those that could be obtained in a comparable arm's-length transaction
with a Person that is not an Affiliate of the Company or such Restricted
Subsidiary, and (c) with respect to a transaction or series of transactions
involving aggregate payments by or to the Company or such Restricted
Subsidiary having a Fair Market Value equal to or in excess of (i) $5.0
million but less than $20.0 million, the Board of Directors of the Company
(including a majority of the disinterested members of the Board of Directors
of the Company) approves such transaction or series of transactions and, in
its good faith judgment, believes that such transaction or series of
transactions complies with clauses (a) and (b) of this paragraph as evidenced
by a certified resolution delivered to the Trustee or (ii) $20.0 million, (A)
the Company receives from an independent, nationally recognized investment
banking firm or appraisal firm, in either case specializing or having a
specialty in the type and subject matter of the transaction (or series of
transactions) at issue, a written opinion that such transaction (or series of
transactions) is fair, from a financial point of view, to the Company or such
Restricted Subsidiary and (B) the Board of Directors of the Company (including
a majority of the disinterested members of the Board of Directors of the
Company) approves such transaction or series of transactions and, in its good
faith judgment, believes that such transaction or series of transactions
complies with clauses (a) and (b) of this paragraph, as evidenced by a
certified resolution delivered to the Trustee.
The limitations of the preceding paragraph do not apply to (a) the payment
of reasonable and customary regular fees to directors of the Company or any of
its Restricted Subsidiaries who are not employees of the Company or any of its
Restricted Subsidiaries, (b) indemnities of officers and directors of the
Company or any Subsidiary consistent with such Person's bylaws and applicable
statutory provisions, (c) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary, (d) loans made (i) to officers and directors of the Company or any
Subsidiary approved by the Board of Directors (or by a duly authorized
officer), the proceeds of which are used solely to exercise stock options
received pursuant to an employee stock option plan or other incentive plan, in
a principal amount not to exceed the exercise price of such stock options, or
(ii) to refinance loans, together with accrued interest thereon, made pursuant
to this clause (d), (e) advances and loans to officers and directors of the
Company or any Subsidiary in the ordinary course of business, provided such
loans and advances do not exceed $3.0 million at any one time outstanding, or
(f) transactions with Restricted Subsidiaries.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
assume or otherwise cause or suffer to exist or become effective, or enter
into any agreement with any Person that would cause to become effective, any
consensual encumbrance or restriction on the legal right of any Restricted
Subsidiary (other than a Foreign Subsidiary) to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock or Redeemable Stock held by the Company or a Restricted Subsidiary, (b)
pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary, (c) make any loans or advances to the Company or any
other Restricted Subsidiary, or (d) transfer any of its property or assets to
the Company or any other Restricted Subsidiary. Such limitation will not apply
(1) with respect to clauses (c) and (d) only, to encumbrances and restrictions
(i) in existence under or by reason of any agreements in effect on the Issue
Date, (ii) required by Bank Credit Facilities that are not more restrictive
than those in effect under the Bank Credit Facility on the Issue Date, (iii)
existing at such Restricted Subsidiary at the time it became a Restricted
Subsidiary if (A) such encumbrance or restriction was not created in
anticipation of such acquisition and (B) immediately following such
acquisition, on a pro forma basis, the Company could incur at least $1.00 of
additional Indebtedness pursuant to clause (a) of the first paragraph of the
"Limitation on Indebtedness" covenant, or (iv) which
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result from the renewal, refinancing, extension or amendment of an agreement
referred to in the immediately preceding clauses (i), (ii) and (iii),
provided, such replacement or encumbrance or restriction is no more
restrictive to the Company or Restricted Subsidiary and is not materially less
favorable to the holders of Notes than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced, and (2) with respect to clause (d) only, to (i) any restriction on
the sale, transfer or other disposition of assets or Property securing
Indebtedness as a result of a Lien permitted under the "Limitation on Liens"
covenant, (ii) any encumbrance or restriction in connection with an
acquisition of Property, so long as such encumbrance or restriction relates
solely to the Property so acquired and was not created in connection with or
in anticipation of such acquisition, (iii) customary provisions restricting
subletting or assignment of leases and customary provisions in other
agreements that restrict assignment of such agreements or rights thereunder,
(iv) any encumbrance or restriction due to applicable law, (v) customary
restrictions contained in asset sale agreements limiting the transfer of such
assets pending the closing of such sale and (vi) restrictions contained in
purchase money obligations for Property acquired in the ordinary course of
business with respect to transfers of such Property.
Restricted and Unrestricted Subsidiaries. Unless defined or designated as an
Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company
or any of its Restricted Subsidiaries shall be classified as a Restricted
Subsidiary subject to the provisions of the next paragraph. The Company may
designate a Subsidiary (including a newly formed or newly acquired Subsidiary)
of the Company or any of its Restricted Subsidiaries as an Unrestricted
Subsidiary if (i) such Subsidiary does not own any Capital Stock, Redeemable
Stock or Indebtedness of, or own or hold any Lien on any property of, the
Company or any other Restricted Subsidiary, (ii) such Subsidiary does not have
any Indebtedness or other obligations which, if in Default, would result (with
the passage of time or notice or otherwise) in a default on any Indebtedness
of the Company or any Restricted Subsidiary, and (iii)(A) such designation is
effective immediately upon such Subsidiary becoming a Subsidiary of the
Company or of a Restricted Subsidiary, (B) the Subsidiary to be so designated
has total assets of $1,000 or less, or (C) if such Subsidiary has assets
greater than $1,000, then such redesignation as an Unrestricted Subsidiary is
deemed to constitute a Restricted Payment in an amount equal to the Fair
Market Value of the Company's direct and indirect ownership interest in such
Subsidiary, and such Restricted Payment would be permitted to be made at the
time of such designation under the "Limitation on Restricted Payments"
covenant. Except as provided in clauses (iii)(B) and (C) of this paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The
designation of an Unrestricted Subsidiary or removal of such designation shall
be made by the Board of Directors of the Company or a committee thereof
pursuant to a certified resolution delivered to the Trustee and shall be
effective as of the date specified in the applicable certified resolution,
which shall not be prior to the date such certified resolution is delivered to
the Trustee.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, take any action or enter into any transaction or series of transactions
that would result in a Person becoming a Restricted Subsidiary (whether
through an acquisition or otherwise) unless, after giving effect to such
action, transaction or series of transactions, on a pro forma basis, (i) the
Company could Incur at least $1.00 of additional Indebtedness pursuant to
clause (a) of the first paragraph of the "Limitation on Indebtedness" covenant
and (ii) no Default or Event of Default would occur or be continuing.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture provides that the Company will not merge or consolidate with
or into any other entity (other than a merger of a Restricted Subsidiary into
the Company) or sell, transfer, assign, lease, convey or otherwise dispose of
all or substantially all of its Property or assets in any one transaction or
series of transactions unless: (a) the entity formed by or surviving any such
consolidation or merger
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(if the Company is not the surviving entity) or the Person to which such sale,
assignment, transfer, lease or conveyance is made (the "Surviving Entity")
shall be a corporation organized and existing under the laws of the United
States of America or a State thereof or the District of Columbia and such
corporation expressly assumes, by supplemental indenture satisfactory to the
Trustee, executed and delivered to the Trustee by such corporation, the due
and punctual payment of the principal of, premium, if any, and interest on all
the Notes, according to their tenor, and the due and punctual performance and
observance of all of the covenants and conditions of the Indenture to be
performed by the Company; (b) in the case of a sale, transfer, assignment,
lease, conveyance or other disposition of all or substantially all of the
Company's Property or assets, such Property or assets shall have been
transferred as an entirety or virtually as an entirety to one Person; (c)
immediately before and after giving effect to such transaction or series of
transactions, no Default or Event of Default shall have occurred and be
continuing; (d) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness Incurred or anticipated to be Incurred in connection with such
transaction or series of transactions), the Company or the Surviving Entity,
as the case may be, would be able to Incur at least $1.00 of additional
Indebtedness under clause (a) of the first paragraph of the "Limitation on
Indebtedness" covenant; and (e) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness Incurred or anticipated to be Incurred in
connection with such transaction or series of transactions), the Company or
the Surviving Entity shall have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to the
transaction or series of transactions.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Additional Assets" means (i) any property (other than cash, cash
equivalents or securities) used in any business in which the Company or any
Restricted Subsidiary is engaged as of the date of the Indenture or any
business ancillary thereto, (ii) Investments in any other Person engaged in
the Oil and Gas Business or any business ancillary thereto (including the
acquisition from third parties of Capital Stock of such Person) as a result of
which such other Person becomes a Restricted Subsidiary in compliance with the
"Restricted and Unrestricted Subsidiaries" covenant, (iii) the acquisition
from third parties of Capital Stock of a Restricted Subsidiary, (iv) the costs
of acquiring, exploiting, developing and exploring in respect of oil and gas
properties, or (v) Permitted Business Investments.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (a) the sum of (i) discounted future net
revenues from proved oil and gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with Commission guidelines before any
state, federal or foreign income taxes, as estimated by a nationally
recognized firm of independent petroleum engineers in a reserve report
prepared as of the end of the Company's most recently completed fiscal year
for which financial statements are available, as increased by, as of the date
of determination, the estimated discounted future net revenues from (A)
estimated proved oil and gas reserves acquired since the date of such year-end
reserve report, and (B) estimated oil and gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since the date of such
year-end reserve report due to exploration, development or exploitation
activities, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (C) estimated proved oil and gas reserves produced or disposed
of since the date of such year-end reserve report and (D) estimated oil and
gas reserves attributable to downward revisions of estimates of proved oil and
gas reserves since the date of such year-end reserve report
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due to changes in geological conditions or other factors which would, in
accordance with standard industry practice, cause such revisions, in each case
calculated in accordance with Commission guidelines (utilizing the prices
utilized in such year-end reserve report); provided that, in the case of each
of the determinations made pursuant to clauses (A) through (D), such increases
and decreases shall be as estimated by the Company's petroleum engineers,
unless there is a Material Change as a result of such acquisitions,
dispositions or revisions, in which event the discounted future net revenues
utilized for purposes of this clause (a)(i) shall be confirmed in writing by a
nationally recognized firm of independent petroleum engineers, (ii) the
capitalized costs that are attributable to oil and gas properties of the
Company and its Restricted Subsidiaries to which no proved oil and gas
reserves are attributable, based on the Company's books and records as of a
date no earlier than the date of the Company's latest annual or quarterly
financial statements, (iii) the Net Working Capital on a date no earlier than
the date of the Company's latest annual or quarterly financial statements and
(iv) the greater of (A) the net book value on a date no earlier than the date
of the Company's latest annual or quarterly financial statements or (B) the
appraised value, as estimated by independent appraisers, of other tangible
assets (including, without duplication, Investments in unconsolidated
Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of
the date no earlier than the date of the Company's latest audited financial
statements, minus (b) the sum of (i) minority interests, (ii) any gas
balancing liabilities of the Company and its Restricted Subsidiaries reflected
in the Company's latest audited financial statements, (iii) to the extent
included in (a)(i) above, the discounted future net revenues, calculated in
accordance with Commission guidelines (utilizing the prices utilized in the
Company's year-end reserve report), attributable to reserves which are
required to be delivered to third parties to fully satisfy the obligations of
the Company and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect thereto and (iv)
the discounted future net revenues, calculated in accordance with Commission
guidelines, attributable to reserves subject to Dollar-Denominated Production
Payments which, based on the estimates of production and price assumptions
included in determining the discounted future net revenues specified in (a)(i)
above, would be necessary to fully satisfy the payment obligations of the
Company and its Restricted Subsidiaries with respect to Dollar-Denominated
Production Payments on the schedules specified with respect thereto. If the
Company changes its method of accounting from the full cost method to the
successful efforts method or a similar method of accounting, "Adjusted
Consolidated Net Tangible Assets" will continue to be calculated as if the
Company were still using the full cost method of accounting.
"Affiliate" of any specified Person means any other Person (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person or (ii)
which beneficially owns or holds directly or indirectly 10 percent or more of
any class of the Voting Stock of such specified Person or of any Subsidiary of
such specified Person. For the purposes of this definition, "control," when
used with respect to any specified Person, means the power to direct the
management and policies of such Person directly or indirectly, whether through
the ownership of Voting Stock, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger) by such Person or any of its
Restricted Subsidiaries in any single transaction or series of transactions of
(a) shares of Capital Stock or other ownership interests of another Person
(including Capital Stock of Unrestricted Subsidiaries) or (b) any other
Property of such Person or any of its Restricted Subsidiaries; provided,
however, that the term "Asset Sale" shall not include: (i) the sale or
transfer of Permitted Short-Term Investments, inventory, accounts receivable
or other Property in the ordinary course of business; (ii) the liquidation of
Property received in settlement of debts owing to the Company or any
Restricted Subsidiary as a result of foreclosure, perfection or enforcement of
any Lien or debt, which debts were owing to the Company or any Restricted
Subsidiary in the ordinary course
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of business of the Company or such Restricted Subsidiary; (iii) when used with
respect to the Company, any asset disposition permitted pursuant to the
covenant described under "--Merger, Consolidation and Sale of Assets" which
constitutes a disposition of all or substantially all of the Company's assets;
(iv) the sale or transfer of any Property by the Company or a Restricted
Subsidiary to the Company or a Restricted Subsidiary; or (v) the sale or
transfer of any asset with a Fair Market Value of less than $1 million.
"Bank Credit Facilities" means, with respect to any Person, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders (including, without limitation, the credit facility pursuant to the
Credit Agreement, dated August 29, 1996, as amended, among the Company and
certain banks) providing for revolving credit loans, term loans, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or trade letters of credit. Notwithstanding the foregoing, for
purposes of determining whether Indebtedness under Bank Credit Facilities
constitutes Permitted Indebtedness and only for such purposes, Indebtedness
Incurred in reliance on clause (a) of the first paragraph of the "Limitation
on Indebtedness" covenant shall not be deemed to constitute Indebtedness
Incurred in reliance on the exception provided by clause (b) or clause (l) of
the definition of Permitted Indebtedness. Notwithstanding any of the
foregoing, Bank Credit Facilities shall not include (i) the Refinancing
Agreement (Contrato de Refinanciacion) dated May 19, 1995, between Cadipsa
S.A. and Banco Medefin S.A., Banco Mercantil Argentino S.A. and ABN AmroBank,
or (ii) the Amended and Restated Investment Agreement dated April 28, 1994, as
amended, between the International Finance Corporation and Cadipsa S.A.
Notwithstanding anything to the contrary in the Indenture, the principal
amount outstanding on the Issue Date under Bank Credit Facilities, together
with accrued and unpaid interest thereon (if any) on the Issue Date, shall be
Senior Indebtedness for purposes of the Indenture.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other arrangement conveying the
right to use) real or personal property of such Person which is required to be
classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with U.S. GAAP. For purposes of
the "Limitation on Liens" covenant, a Capital Lease Obligation shall be deemed
to be secured by a Lien on the property being leased.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however
designated) in such Person and any rights (other than debt securities
convertible into an equity interest), warrants or options to subscribe for or
to acquire an equity interest in such Person; provided, however, that "Capital
Stock" shall not include Redeemable Stock.
"Consolidated Interest Coverage Ratio" means, as of the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount
of EBITDA of the Company and its consolidated Restricted Subsidiaries for the
four full fiscal quarters immediately prior to the Transaction Date for which
financial statements are available to (ii) the aggregate Consolidated Interest
Expense of the Company and its Restricted Subsidiaries that is anticipated to
accrue during a period consisting of the fiscal quarter in which the
Transaction Date occurs and the three fiscal quarters immediately subsequent
thereto (based upon the pro forma amount and maturity of, and interest
payments in respect of, Indebtedness of the Company and its Restricted
Subsidiaries expected by the Company to be outstanding on the Transaction
Date), assuming for the purposes of this measurement the continuation of
market interest rates prevailing on the Transaction Date and base interest
rates in respect of floating interest rate obligations equal to the base
interest rates on such obligations in effect as of the Transaction Date;
provided, that if the Company or any of its Restricted Subsidiaries is a party
to any Interest Rate Protection Agreement which would have the effect of
changing the interest rate on any Indebtedness of the Company or any
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of its Restricted Subsidiaries for such four quarter period (or a portion
thereof), the resulting rate shall be used for such four quarter period or
portion thereof; provided further that any Consolidated Interest Expense with
respect to Indebtedness Incurred or retired by the Company or any of its
Restricted Subsidiaries during the fiscal quarter in which the Transaction
Date occurs shall be calculated as if such Indebtedness was so Incurred or
retired on the first day of the fiscal quarter in which the Transaction Date
occurs. In addition, if since the beginning of the four full fiscal quarter
period preceding the Transaction Date, (x) the Company or any of its
Restricted Subsidiaries shall have engaged in any Asset Sale, EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive), or
increased by an amount equal to the EBITDA (if negative), directly
attributable to the assets which are the subject of such Asset Sale for such
period calculated on a pro forma basis as if such Asset Sale and any related
retirement of Indebtedness had occurred on the first day of such period or (y)
the Company or any of its Restricted Subsidiaries shall have acquired any
material assets, EBITDA shall be calculated on a pro forma basis as if such
asset acquisitions had occurred on the first day of such four fiscal quarter
period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, (i) the sum of (a) the aggregate amount of cash
and noncash interest expense (including capitalized interest) of such Person
and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with U.S. GAAP in respect of Indebtedness
(including, without limitation, (A) any amortization of debt discount, (B) net
costs associated with Interest Rate Protection Agreements (including any
amortization of discounts), (C) the interest portion of any deferred payment
obligation, (D) all accrued interest, and (E) all commissions, discounts,
commitment fees, origination fees and other fees and charges owed with respect
to Bank Credit Facilities and other Indebtedness) paid, accrued or scheduled
to be paid or accrued during such period; (b) Redeemable Stock dividends of
such Person (and of its Restricted Subsidiaries if paid to a Person other than
such Person or its Wholly Owned Subsidiaries) declared and payable other than
in kind; (c) the portion of any rental obligation of such Person or its
Restricted Subsidiaries in respect of any Capital Lease Obligation allocable
to interest expense in accordance with U.S. GAAP; (d) the portion of any
rental obligation of such Person or its Restricted Subsidiaries in respect of
any Sale and Leaseback Transaction that is Indebtedness allocable to interest
expense (determined as if such obligation were treated as a Capital Lease
Obligation); and (e) to the extent any Indebtedness of any other Person (other
than Restricted Subsidiaries) is Guaranteed by such Person or any of its
Restricted Subsidiaries, the aggregate amount of interest paid, accrued or
scheduled to be paid or accrued by such other Person during such period
attributable to any such Indebtedness; less (ii) to the extent included in (i)
above, amortization or write-off of deferred financing costs of such Person
and its Restricted Subsidiaries during such period; in the case of both (i)
and (ii) above, after elimination of intercompany accounts among such Person
and its Restricted Subsidiaries and as determined in accordance with U.S.
GAAP.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss, as the case may be) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with U.S. GAAP; provided that there shall be excluded therefrom, without
duplication, (i) items classified as extraordinary (other than the tax benefit
of the utilization of net operating loss carry-forwards and alternative
minimum tax credits); (ii) any gain or loss, net of taxes, on the sale or
other disposition of assets (including the Capital Stock of any other Person)
in excess of $5.0 million, from any sale or disposition, or series of related
sales or dispositions (but in no event shall this clause (ii) apply to the
sale of oil and gas inventories in the ordinary course of business); (iii) the
net income of any Subsidiary of such specified Person to the extent the
transfer to that Person of that income is restricted by contract or otherwise,
except for any cash dividends or cash distributions actually paid by such
Subsidiary to such Person during such period; (iv) the net income (or loss) of
any other Person in which such specified Person or any of its Restricted
Subsidiaries has an interest (which interest does not cause the net income of
such other Person to be consolidated with the net income of such specified
Person in accordance with U.S. GAAP or is an
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interest in a consolidated Unrestricted Subsidiary), except to the extent of
the amount of cash dividends or other cash distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period;
(v) the net income of any Person acquired by such specified Person or any of
its Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of such acquisition; (vi) any gain or loss, net of
taxes, realized on the termination of any employee pension benefit plan; (vii)
any adjustments of a deferred tax liability or asset pursuant to Statement of
Financial Accounting Standards No. 109 which result from changes in enacted
tax laws or rates; and (viii) the cumulative effect of a change in accounting
principles.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person and its Restricted Subsidiaries, as determined on a consolidated
basis in accordance with U.S. GAAP, less (to the extent included in
stockholders' equity) amounts attributable to Redeemable Stock of such Person
or its Restricted Subsidiaries.
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means any Senior Indebtedness which has, at
the time of determination, an aggregate principal amount outstanding of at
least $10 million (including the amount of all undrawn commitments and matured
and contingent reimbursement obligations pursuant to letters of credit
thereunder) that is specifically designated in the instrument evidencing such
Senior Indebtedness and is designated in a notice delivered by the Company to
the holders or a Representative of the holders of such Senior Indebtedness and
the Trustee as "Designated Senior Indebtedness" of the Company.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with U.S. GAAP, together
with all undertakings and obligations in connection therewith.
"EBITDA" means with respect to any Person for any period, the Consolidated
Net Income of such Person and its consolidated Restricted Subsidiaries for
such period, plus (a) the sum of, to the extent reflected in the consolidated
income statement of such Person and its Restricted Subsidiaries for such
period from which Consolidated Net Income is determined and deducted in the
determination of such Consolidated Net Income, without duplication, (i) income
tax expense (but excluding income tax expense relating to sales or other
disposition of assets (including the Capital Stock of any other Person) the
gains and losses from which are included in the determination of such
Consolidated Net Income), (ii) Consolidated Interest Expense, (iii)
depreciation and depletion expense, (iv) amortization expense, (v) exploration
expense, and (vi) any other noncash charges including, without limitation,
unrealized foreign exchange losses (but excluding losses on sales or other
dispositions of assets which are included in the determination of such
Consolidated Net Income); less (b) the sum of, to the extent reflected in the
consolidated income statement of such Person and its Restricted Subsidiaries
for such period from which Consolidated Net Income is determined and added in
the determination of such Consolidated Net Income, without duplication (i)
income tax recovery (but excluding income tax recovery relating to sales or
other dispositions of assets (including the Capital Stock of any other Person)
the gains and losses from which are included in the determination of such
Consolidated Net Income) and (ii) unrealized foreign exchange gains.
"Event of Default" has the meaning set forth under the caption "--Events of
Default and Notice."
"Exchanged Properties" means oil and gas properties received by the Company
or a Restricted Subsidiary in trade or as a portion of the total consideration
for other such properties.
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar
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agreements, exchange rate insurance and other agreements or arrangements, or
any combination thereof, designed to provide protection against fluctuations
in currency exchange rates.
"Fair Market Value" means, with respect to any assets to be transferred
pursuant to any Asset Sale or Sale and Leaseback Transaction or any non-cash
consideration or property transferred or received by any Person, the fair
market value of such consideration or property as determined in good faith by
(i) any officer of the Company if such fair market value is less than $10
million and (ii) the Board of Directors of the Company as evidenced by a
certified resolution delivered to the Trustee if such fair market value is
equal to or in excess of $10 million; provided that if such resolution
indicates that such fair market value is equal to or in excess of $20 million
and such transaction involves any Affiliate of the Company (other than a
Restricted Subsidiary), such resolution shall be accompanied by the written
opinion of an independent, nationally recognized investment banking firm or
appraisal firm, in either case specializing or having a specialty in the type
and subject matter of the transaction (or series of transactions) at issue, to
the effect that such consideration or property is fair, from a financial point
of view, to such Person.
"Foreign Subsidiary" means a Restricted Subsidiary that is incorporated in a
jurisdiction other than the United States or a State thereof or the District
of Columbia and engages in the Oil and Gas Business exclusively outside the
United States of America.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person (the "primary obligor") in any manner,
whether directly or indirectly, and including, without limitation, any Lien on
the assets of such Person securing obligations of the primary obligor and any
obligation of such Person (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to
advance or supply funds for the purchase or payment of) any security for the
payment of such Indebtedness, (ii) to purchase Property, securities or
services for the purpose of assuring the holder of such Indebtedness of the
payment of such Indebtedness, or (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness (and
"Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing); provided, however, that a Guarantee by any Person shall not
include (i) endorsements by such Person for collection or deposit, in either
case, in the ordinary course of business or (ii) a contractual commitment by
one Person to invest in another Person for so long as such Investment is
reasonably expected to constitute a Permitted Investment under clause (b) of
the definition of Permitted Investments.
"Hedging Agreements" means Interest Rate Protection Agreements, Exchange
Rate Contracts and Oil and Gas Purchase and Sale Contracts.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to U.S. GAAP or
otherwise, of any such Indebtedness or obligation on the balance sheet of such
Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have
meanings correlative to the foregoing); provided, however, that a change in
U.S. GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Indebtedness, becoming Indebtedness
shall not be deemed an Incurrence of such Indebtedness. For purposes of this
definition, Indebtedness of the Company or a Restricted Subsidiary held by a
Wholly Owned Subsidiary shall be deemed to be Incurred by the Company or such
Restricted Subsidiary in the event such Wholly Owned Subsidiary ceases to be a
Wholly Owned Subsidiary or in the event such Indebtedness is transferred to a
Person other than the Company or a Wholly Owned Subsidiary.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for borrowed
money, (ii) any obligation of such Person evidenced by bonds,
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debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations Incurred in connection with the acquisition
of Property, assets or businesses, (iii) any reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any obligation of such
Person issued or assumed as the deferred purchase price of Property or
services, (v) any Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Redeemable Stock of such Person at the
time of determination, (vii) any payment obligation of such Person under
Hedging Agreements at the time of determination, (viii) any obligation to pay
rent or other payment amounts of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a party, and (ix) any obligation
of the type referred to in clauses (i) through (viii) of this paragraph of
another Person and all dividends of another Person the payment of which, in
either case, such Person has Guaranteed or is responsible or liable, directly
or indirectly, as obligor, Guarantor or otherwise; provided that Indebtedness
shall not include Production Payments and Reserve Sales. For purposes of this
definition, the maximum fixed repurchase price of any Redeemable Stock that
does not have a fixed repurchase price shall be calculated in accordance with
the terms of such Redeemable Stock as if such Redeemable Stock were
repurchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture; provided, however, that if such
Redeemable Stock is not then permitted to be repurchased, the repurchase price
shall be the book value of such Redeemable Stock. The amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability at such
date in respect of any contingent obligations described above.
"Interest Rate Protection Agreement" means, with respect to any Person, any
interest rate swap agreement, forward rate agreement, interest rate cap or
collar agreement or other financial agreement or arrangement designed to
protect such Person or its Restricted Subsidiaries against fluctuations in
interest rates, as in effect from time to time.
"Investment" means, with respect to any Person (i) any amount paid by such
Person, directly or indirectly (such amount to be the fair market value of
such Capital Stock, securities or Property at the time of transfer), to any
other Person for Capital Stock or other Property of, or as a capital
contribution to, any other Person or (ii) any direct or indirect loan or
advance to any other Person (other than accounts receivable of such Person
arising in the ordinary course of business); provided, however, that
Investments shall not include extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices and any increase in
the equity ownership in any Person resulting from retained earnings of such
Person.
"Issue Date" means the date upon which the Notes first were issued and
authenticated under the Indenture.
"Lien" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest,
lien (statutory or other), charge, easement, encumbrance, preference, priority
or other security or similar agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such Property (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing). For purposes
of the "Limitation on Liens" covenant, a Capital Lease Obligation shall be
deemed to be secured by a Lien on the property being leased.
"Liquid Securities" means securities (i) of an issuer that is not an
Affiliate of the Company, (ii) that are publicly traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market and (iii)
as to which the Company is not subject to any restrictions on sale or transfer
(including any volume restrictions under Rule 144 under the Securities Act or
any other restrictions imposed by the Securities Act) or as to which a
registration statement under the Securities Act covering the resale thereof is
in effect for as long as the securities are held; provided, that securities
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meeting the requirements of clauses (i), (ii) and (iii) above shall be treated
as Liquid Securities from the date of receipt thereof until and only until the
earlier of (x) the date on which such securities are sold or exchanged for
cash or cash equivalents and (y) 180 days following the date of receipt of
such securities. In the event such securities are not sold or exchanged for
cash or cash equivalents within 180 days of receipt thereof, for purposes of
determining whether the transaction pursuant to which the Company or a
Restricted Subsidiary received the securities was in compliance with the
"Limitation on Asset Sales" covenant, such securities shall be deemed not to
have been Liquid Securities at any time.
"Material Change" means an increase or decrease (except to the extent
resulting from changes in prices) of more than 30 percent during a fiscal
quarter in the estimated discounted future net revenues 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 with respect to which the Company's estimate of the
discounted future net revenues from proved oil and gas reserves has been
confirmed by independent petroleum engineers and (ii) any dispositions of
Properties during such quarter that were disposed of in compliance with the
"Limitation on Asset Sales" covenant.
"Net Available Cash" from an Asset Sale means cash proceeds received
(including any cash proceeds received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, and excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to such properties or assets) therefrom, in each case net of (i) all
legal, title and recording expenses, commissions and other fees and expenses
incurred, and all Federal, state, foreign and local taxes required to be paid
or accrued as a liability under U.S. GAAP as a consequence of such Asset Sale,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Sale, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Sale or by applicable law, be repaid out of the proceeds from
such Asset Sale, (iii) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Sale, and (iv) the deduction of appropriate amounts to be
provided by the seller as a reserve, in accordance with U.S. GAAP, against any
liabilities associated with the assets disposed of in such Asset Sale and
retained by the Company or any Restricted Subsidiary after such Asset Sale;
provided, however, that in the event that any consideration for an Asset Sale
(which would otherwise constitute Net Available Cash) is required to be held
in escrow pending determination of whether a purchase price adjustment will be
made, such consideration (or any portion thereof) shall become Net Available
Cash only at such time as it is released to such Person or its Restricted
Subsidiaries from escrow; and provided, further, however, that any non-cash
consideration received in connection with an Asset Sale which is subsequently
converted to cash shall be deemed to be Net Available Cash at such time and
shall thereafter be applied in accordance with the "Limitation on Asset Sales"
covenant.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, less (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with U.S. GAAP.
"Oil and Gas Business" means the business of exploiting, exploring for,
developing, acquiring, producing, processing, gathering, marketing, storing
and transporting hydrocarbons and other related energy businesses.
"Oil and Gas Liens" means (i) Liens on any specific property or any interest
therein, construction thereon or improvement thereto to secure all or any part
of the costs incurred for surveying,
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exploration, drilling, extraction, development, operation, production,
construction, alteration, repair or improvement of, in, under or on such
property and the plugging and abandonment of wells located thereon (it being
understood that, in the case of oil and gas producing properties, or any
interest therein, costs incurred for "development" shall include costs
incurred for all facilities relating to such properties or to projects,
ventures or other arrangements of which such properties form a part or which
relate to such properties or interests); (ii) Liens on an oil and/or gas
producing property to secure obligations Incurred or guarantees of obligations
Incurred in connection with or necessarily incidental to commitments for the
purchase or sale of, or the transportation or distribution of, the products
derived from such property; (iii) Liens arising under partnership agreements,
oil and gas leases, overriding royalty agreements, net profits agreements,
production payment agreements, royalty trust agreements, master limited
partnership agreements, farm-out agreements, division orders, contracts for
the sale, purchase, exchange, transportation, gathering or processing of oil,
gas or other hydrocarbons, unitizations and pooling designations,
declarations, orders and agreements, development agreements, operating
agreements, production sales contracts, area of mutual interest agreements,
gas balancing or deferred production agreements, injection, repressuring and
recycling agreements, salt water or other disposal agreements, seismic or
geophysical permits or agreements, and other agreements which are customary in
the Oil and Gas Business, provided in all instances that such Liens are
limited to the assets that are the subject of the relevant agreement; (iv)
Liens arising in connection with Production Payments and Reserve Sales; and
(v) Liens on pipelines or pipeline facilities that arise by operation of law.
"Oil and Gas Purchase and Sale Contract" means, with respect to any Person,
any oil and gas agreements, and other agreements or arrangements, or any
combination thereof, designed to provide protection against oil and gas price
fluctuations.
"Pari Passu Indebtedness" means any Indebtedness of the Company (including,
without limitation, the 9% Notes) that is pari passu in right of payment to
the Notes.
"Permitted Business Investments" means Investments and expenditures made in
the ordinary course of, and of a nature that is or shall have become customary
in, the Oil and Gas Business as means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting oil
and gas through agreements, transactions, interests or arrangements which
permit one to share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives customarily achieved
through the conduct of Oil and Gas Business jointly with third parties,
including, without limitation, (i) ownership interests in oil and gas
properties or gathering, transportation, processing, storage or related
systems and (ii) Investments and expenditures in the form of or pursuant to
operating agreements, processing agreements, farm-in agreements, farm-out
agreements, development agreements, area of mutual interest agreements,
unitization agreements, pooling arrangements, joint bidding agreements,
service contracts, joint venture agreements, partnership agreements (whether
general or limited), subscription agreements, stock purchase agreements and
other similar agreements with third parties (including Unrestricted
Subsidiaries).
"Permitted Short-Term Investments" means (a) Investments in U.S. Government
Obligations maturing within one year of the date of acquisition thereof, (b)
Investments in demand accounts, time deposit accounts, certificates of
deposit, bankers acceptances and money market deposits maturing within one
year of the date of acquisition thereof issued by a bank or trust company
which is organized under the laws of the United States of America or any State
thereof that is a member of the Federal Reserve System having capital, surplus
and undivided profits aggregating in excess of $500 million and whose long-
term indebtedness is rated "A" (or higher) according to Moody's Investors
Service Inc., (c) Investments in demand accounts, time deposit accounts,
certificates of deposit, bankers acceptances and money market deposits
maturing within one year of the date of acquisition thereof issued by a
Canadian bank to which the Bank Act (Canada) applies having capital, surplus
and undivided profits aggregating in excess of U.S. $500 million, (d)
Investments in deposits available for
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withdrawal on demand with any commercial bank which is organized under the
laws of any country in which the Company or any Restricted Subsidiary
maintains an office or is engaged in the Oil and Gas Business, provided that
(i) all such deposits have been made in such accounts in the ordinary course
of business and (ii) such deposits do not at any one time exceed $20 million
in the aggregate, (e) repurchase and reverse repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clause (a) entered into with a bank meeting the qualifications
described in either clause (b) or (c), (f) Investments in commercial paper,
maturing not more than one year after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any State thereof
with a rating at the time as of which any Investment therein is made of "P-1"
(or higher) according to Moody's Investors Service Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group, and (g) Investments in any money
market mutual fund having assets in excess of $250 million substantially all
of which consist of other obligations of the types described in clauses (a),
(b), (e) and (f) hereof.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends and/or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person; provided, however, that
"Preferred Stock" shall not include Redeemable Stock.
"Production Payments and Reserve Sales" means the grant or transfer to any
Person of a royalty, overriding royalty, net profits interest, production
payment (whether volumetric or dollar denominated), master limited partnership
interest or other interest in oil and gas properties, reserves or the right to
receive all or a portion of the production or the proceeds from the sale of
production attributable to such properties where the holder of such interest
has recourse solely to such production or proceeds of production, subject to
the obligation of the grantor or transferor to operate and maintain, or cause
the subject interests to be operated and maintained, in a reasonably prudent
manner or other customary standard or subject to the obligation of the grantor
or transferor to indemnify for environmental matters.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including, without limitation, Capital Stock in any other Person
(but excluding Capital Stock or other securities issued by such first
mentioned Person).
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or otherwise (including on the
happening of an event), is or could become required to be redeemed for cash or
other Property or is or could become redeemable for cash or other Property at
the option of the holder thereof, in whole or in part, on or prior to the
first anniversary of the Stated Maturity of the Notes; or is or could become
exchangeable at the option of the holder thereof for Indebtedness at any time
in whole or in part, on or prior to the first anniversary of the Stated
Maturity of the Notes; provided, however, that Redeemable Stock shall not
include any security by virtue of the fact that it may be exchanged or
converted at the option of the holder for Capital Stock of the Company having
no preference as to dividends or liquidation over any other Capital Stock of
the Company.
"Representative" means the trustee, agent or representative expressly
authorized to act in such capacity, if any, for an issue of Senior
Indebtedness.
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"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock or Redeemable Stock of the Company or to the
Company's stockholders (other than dividends, distributions or payments made
solely in Capital Stock of the Company), or declared and paid to any Person
other than the Company or any of its Restricted Subsidiaries on the Capital
Stock or Redeemable Stock of any Restricted Subsidiary, (ii) a payment made by
the Company or any of its Restricted Subsidiaries (other than to the Company
or any Restricted Subsidiary) to purchase, redeem, acquire or retire any
Capital Stock or Redeemable Stock of the Company or of a Restricted
Subsidiary, (iii) a payment made by the Company or any of its Restricted
Subsidiaries to redeem, repurchase, defease or otherwise acquire or retire for
value (including pursuant to mandatory repurchase covenants), prior to any
scheduled maturity, scheduled sinking fund or scheduled mandatory redemption,
Indebtedness of the Company which is subordinate (whether pursuant to its
terms or by operation of law) in right of payment to the Notes, (iv) an
Investment by the Company or a Restricted Subsidiary in any Person other than
the Company or a Restricted Subsidiary or (v) the sale or issuance of Capital
Stock of a Restricted Subsidiary to a Person other than the Company or another
Restricted Subsidiary if the result thereof is that such Restricted Subsidiary
shall cease to be a Restricted Subsidiary, in which event the amount of such
"Restricted Payment" shall be the Fair Market Value of the remaining interest
in such former Restricted Subsidiary held by the Company and its other
Restricted Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated an Unrestricted Subsidiary in the manner provided in the
covenant described under "--Certain Covenants--Restricted and Unrestricted
Subsidiaries."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement (excluding, however, any such arrangement
between such Person and a Wholly Owned Subsidiary of such Person or between
one or more Wholly Owned Subsidiaries of such Person) pursuant to which
Property is sold or transferred by such Person or a Restricted Subsidiary of
such Person and is thereafter leased back from the purchaser or transferee
thereof by such Person or one of its Restricted Subsidiaries.
"Senior Indebtedness" means (i) all obligations consisting of the principal
of and premium, if any, and accrued and unpaid interest in respect of (A)
Indebtedness of the Company for borrowed money and (B) Indebtedness evidenced
by notes, debentures, bonds or other similar instruments permitted under the
Indenture for the payment of which the Company is responsible or liable; (ii)
all Capital Lease Obligations of the Company; (iii) all obligations of the
Company (A) for the reimbursement of any obligor on any letter of credit,
bankers' acceptance or similar credit transaction, (B) under Hedging
Agreements or (C) issued or assumed as the deferred purchase price of property
and all conditional sale obligations of the Company and all obligations under
any title retention agreement permitted under the Indenture; and (iv) all
obligations of other persons of the type referred to in clauses (i) and (ii)
for the payment of which the Company is responsible or liable as Guarantor;
provided that Senior Indebtedness does not include (i) Pari Passu Indebtedness
or Indebtedness of the Company that is by its terms subordinate in right of
payment to the Notes; (ii) any Indebtedness Incurred in violation of the
provisions of the Indenture; (iii) accounts payable or any other obligations
of the Company to trade creditors created or assumed by the Company in the
ordinary course of business in connection with the obtaining of materials or
services; (iv) in-kind obligations relating to net oil and gas balancing
positions; or (v) any liability for federal, state, local or other taxes owed
or owing by the Company.
"Stated Maturity," when used with respect to any security or any installment
of principal thereof or interest thereon, means the date specified in such
security as the fixed date on which the principal of such security or such
installment of principal or interest is due and payable, including pursuant to
any mandatory redemption provision (but excluding any provision providing for
the repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
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"Subsidiary" of a Person means (a) another Person which is a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned
or controlled by (i) the first Person, (ii) the first Person and one or more
of its Subsidiaries, or (iii) one or more of the first Person's Subsidiaries
or (b) another Person which is not a corporation (x) at least 50 percent of
the ownership interest of which and (y) the power to elect or direct the
election of a majority of the directors or other governing body of which are
controlled by Persons referred to in clause (i), (ii) or (iii) above.
"Unrestricted Subsidiary" means (i) each Subsidiary of the Company that the
Company has designated pursuant to the covenant described under "--Certain
Covenants--Restricted and Unrestricted Subsidiaries" as an Unrestricted
Subsidiary and (ii) any Subsidiary of an Unrestricted Subsidiary.
"U.S. GAAP" means United States generally accepted accounting principles as
in effect on the date of the Indenture, unless stated otherwise.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with U.S. GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Redeemable Stock" of any Person means Redeemable Stock of such
Person which ordinarily has voting power for the election of directors (or
persons performing similar functions) of such Person whether at all times or
only so long as no senior class of securities has such voting power by reason
of any contingency.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all of
the Voting Stock of which (except directors' qualifying shares) is at the time
owned, directly or indirectly, by the Company and its other Wholly Owned
Subsidiaries.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company will be discharged from all its
obligations, and the provisions of the Indenture relating to subordination
will cease to be effective, with respect to the Notes (except for certain
obligations to exchange or register the transfer of Notes, to replace stolen,
lost or mutilated Notes, to maintain paying agencies and to hold moneys for
payment in trust) upon the deposit in trust for the benefit of the holders of
the Notes of money or U.S. Government Obligations, or a combination thereof,
which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest on the Notes at Stated Maturity
or on earlier redemption in accordance with the terms of the Indenture and the
Notes. Such defeasance or discharge may occur only if, among other things, the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
(a) the Company has received from, or there has been published by, the United
States Internal Revenue Service a ruling or (b) since the date of the
Indenture there has been a change in the applicable Federal income tax law, in
either case to the effect that holders of the Notes will not recognize gain or
loss for federal income tax purposes as a result of such deposit, defeasance
and discharge and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge were not to occur; and that the resulting
trust will not be an "Investment Company" within the meaning of the Investment
Company Act of 1940 unless such trust is qualified thereunder or exempt from
regulation thereunder.
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The Indenture provides that the Company may omit to comply with certain
covenants, including those described under "--Certain Covenants" and in
clauses (d) and (e) under the first paragraph of "--Merger, Consolidation and
Sale of Assets," that the occurrence of certain Events of Default, which are
described below in clause (c) (with respect to such covenants) and clauses (d)
and (e) under "--Events of Default and Notice" will be deemed not to be or
result in an Event of Default and that the provisions of the Indenture
relating to subordination will cease to be effective. The Company, in order to
exercise such option, will be required to deposit, in trust for the benefit of
the holders of the Notes, money or U.S. Government Obligations, or a
combination thereof, which, through the payment of principal and interest in
respect thereof in accordance with their terms, will provide money in an
amount sufficient to pay the principal of and any premium and interest on the
Notes at Stated Maturity or on earlier redemption in accordance with the terms
of the Indenture and the Notes. The Company will also be required, among other
things, to deliver to the Trustee an Opinion of Counsel to the effect that
holders of the Notes will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit and
defeasance were not to occur; and that the resulting trust will not be an
"Investment Company" within the meaning of the Investment Company Act of 1940
unless such trust is qualified thereunder or exempt from regulation
thereunder. In the event the Company were to exercise this option and the
Notes were declared due and payable because of the occurrence of any Event of
Default, the amount of money and U.S. Government Obligations so deposited in
trust would be sufficient to pay amounts due on the Notes at the time of their
Stated Maturity but may not be sufficient to pay amounts due on the Notes upon
any acceleration resulting from such Event of Default. In such case, the
Company would remain liable for such payments.
EVENTS OF DEFAULT AND NOTICE
The following are summaries of Events of Default under the Indenture with
respect to the Notes: (a) failure to pay any interest on the Notes when due,
continued for 30 days; (b) failure to pay principal of (or premium, if any,
on) the Notes when due; (c) failure to perform any other covenant of the
Company in the Indenture, continued for 60 days after written notice as
provided in the Indenture; (d) a default under any Indebtedness for borrowed
money by the Company or any Restricted Subsidiary which results in
acceleration of the maturity of such Indebtedness, or failure to pay any such
Indebtedness at maturity, in an amount greater than $10 million ($40 million
in the case of Indebtedness of a Foreign Subsidiary the recourse for which is
limited to solely Foreign Subsidiaries) if such Indebtedness is not discharged
or such acceleration is not rescinded or annulled within 10 days after written
notice as provided in the Indenture; (e) one or more final judgments or orders
by a court of competent jurisdiction are entered against the Company or any
Restricted Subsidiary in an uninsured or unindemnified aggregate amount in
excess of $10 million and such judgments or orders are not discharged, waived,
stayed, satisfied or bonded for a period of 60 consecutive days; and (f)
certain events of bankruptcy, insolvency or reorganization.
The Indenture provides that if an Event of Default (other than an Event of
Default described in clause (f) above) with respect to the Notes at the time
Outstanding shall occur and be continuing, either the Trustee or the holders
of at least 25 percent in aggregate principal amount of the Outstanding Notes
by notice as provided in the Indenture may declare the principal amount of the
Notes to be due and payable immediately. If an Event of Default described in
clause (f) above with respect to the Notes at the time Outstanding shall
occur, the principal amount of all the Notes will automatically, and without
any action by the Trustee or any holder, become immediately due and payable.
After any such acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of the
Outstanding Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the nonpayment of
accelerated principal (or other specified amount), have been cured or waived
as provided in the Indenture.
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Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders of the
Notes, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the Outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee with respect to the Notes.
No holder of Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or a trustee,
or for any other remedy thereunder, unless (i) such holder has previously
given to the Trustee written notice of a continuing Event of Default with
respect to the Notes, (ii) the holders of at least 25 percent in aggregate
principal amount of the Outstanding Notes have made written request, and such
holder or holders have offered reasonable indemnity, to the Trustee to
institute such proceeding as trustee and (iii) the Trustee has failed to
institute such proceeding, and has not received from the holders of a majority
in aggregate principal amount of the Outstanding Notes a direction
inconsistent with such request, within 60 days after such notice, request and
offer. However, such limitations do not apply to a suit instituted by a holder
of Notes for the enforcement of payment of the principal of or any premium or
interest on such Notes on or after the applicable due date specified in such
Notes.
MODIFICATION OF THE INDENTURE; WAIVER
The Indenture provides that modifications and amendments of the Indenture
may be made by the Company and the Trustee without the consent of any holders
of Notes in certain limited circumstances, including (a) to cure any
ambiguity, omission, defect or inconsistency, (b) to provide for the
assumption of the obligations of the Company under the Indenture upon the
merger, consolidation or sale or other disposition of all or substantially all
of the assets of the Company, (c) to provide for uncertificated Notes in
addition to or in place of certificated Notes, (d) to comply with any
requirement of the Commission in order to effect or maintain the qualification
of the Indenture under the 1939 Act, or (e) to make any change that does not
adversely affect the rights of any holder of Notes in any material respect.
The Indenture contains provisions permitting the Company and the Trustee,
with the written consent of the holders of not less than a majority in
aggregate principal amount of the Outstanding Notes, to execute supplemental
indentures or amendments adding any provisions to or changing or eliminating
any of the provisions of the Indenture or modifying the rights of the holders
of the Notes, except that no such supplemental indenture, amendment or waiver
may, without the consent of all the holders of Outstanding Notes, among other
things, (a) reduce the principal amount of Notes whose holders must consent to
an amendment or waiver; (b) reduce the rate of or change the time for payment
of interest on any Notes; (c) change the currency in which any amount due in
respect of the Notes is payable; (d) reduce the principal of or any premium on
or change the Stated Maturity of any Notes or alter the redemption or
repurchase provisions with respect thereto; (e) reduce the relative ranking of
any Notes; or (f) release any security that may have been granted in respect
of the Notes.
The holders of a majority in principal amount of the Outstanding Notes may
waive compliance by the Company with certain restrictive provisions of the
Indenture. The holders of a majority in principal amount of the Outstanding
Notes may waive any past default under the Indenture, except a default in the
payment of principal, premium or interest and certain covenants and provisions
of the Indenture which cannot be amended without the consent of the holder of
each Outstanding Note.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will file with the Commission and
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furnish to the holders of Notes all quarterly and annual financial information
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual consolidated
financial statements only, a report thereon by the Company's independent
auditors.
NOTICES
Notices to holders of Notes will be given by mail to the addresses of such
holders as they may appear in the Security Register.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance with
the internal laws of the State of New York without reference to principles of
conflicts of law.
THE TRUSTEE
The Chase Manhattan Bank is the Trustee under the Indenture. The Trustee
maintains normal banking relationships with the Company and its subsidiaries
and may perform certain services for and transact other business with the
Company and its subsidiaries from time to time in the ordinary course of
business.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States Federal
income tax consequences of the purchase, ownership and disposition of the
Notes to initial purchasers thereof who are United States Holders (as defined
below) and the principal United States Federal income and estate tax
consequences of the purchase, ownership and disposition of the Notes to
initial purchasers who are Foreign Holders (as defined below). This discussion
is based on currently existing provisions of the Internal Revenue Code of
1986, as amended (the "Code"), existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and
all of which are subject to change, possibly with retroactive effect, or
different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes and is limited to purchasers
who hold the Notes as capital assets, within the meaning of Section 1221 of
the Code. This discussion also does not address the tax consequences to
Foreign Holders that are subject to United States Federal income tax on a net
basis on income realized with respect to the Notes because such income is
effectively connected with the conduct of a U.S. trade or business. Such
Foreign Holders are generally taxed in a similar manner to United States
Holders, but certain special rules do apply. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular initial purchasers in light of their personal
circumstances or to certain types of initial purchasers (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or persons who have hedged the risk of owning a Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of a Note
that is, for United States Federal income tax purposes, (a) an individual who
is a citizen or resident of the United States, (b) a corporation or other
entity taxable as a corporation created or organized in the United States or
under the laws of the United States or of any state thereof (including the
District of Columbia), or (c) an estate or trust the income of which is
includable in gross income for United States Federal income tax purposes
regardless of its source.
Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a United States Holder as ordinary income, generally at the time it
is received or accrued, in accordance with such holder's regular method of
accounting for United States Federal income tax purposes.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a United
States Holder generally will recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all non-cash
property received on such disposition (except to the extent such cash or
property is attributable to accrued, but unpaid, interest, which will be
taxable as ordinary income) and such United States Holder's adjusted tax basis
in the Note. A United States Holder's adjusted tax basis in a Note generally
will equal the cost of the Note to such United States Holder. Gain or loss
recognized on the disposition of a Note will be long-term capital gain or loss
if, at the time of such disposition, the United States Holder's holding period
for the Note is more than one year.
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Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note and to proceeds of the sale or other
disposition of a Note before maturity. The Company, its agent or a broker, as
the case may be, will be required to withhold from any payment that is subject
to backup withholding United States Federal income tax equal to 31 percent of
such payment if a United States Holder fails to furnish its taxpayer
identification number (social security or employer identification number),
certify that such number is correct, certify that such United States Holder is
not subject to backup withholding or otherwise comply with the applicable
requirements of the backup withholding rules. Certain United States Holders,
including all corporations, are not subject to backup withholding and
information reporting requirements. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as
a credit against such United States Holder's United States Federal income tax
and may entitle the United States Holder to a refund, provided that the
required information is furnished to the Internal Revenue Service ("IRS").
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is
neither a United States Holder nor subject to United States Federal income
taxation with respect to income from the Note on a net income basis.
Payment of Interest on Notes. In general, payments of interest in respect of
a Note received by a Foreign Holder will not be subject to withholding of
United States Federal income tax, provided that (a)(i) the Foreign Holder does
not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Company entitled to vote, (ii) the
Foreign Holder is not a "controlled foreign corporation" as defined in the
Code (generally, a foreign corporation controlled by certain United States
stockholders) that is related to the Company actually or constructively
through stock ownership, and (iii) either (A) the beneficial owner of the
Note, under penalties of perjury, provides the Company or its agent with such
beneficial owner's name and address and certifies on IRS Form W-8 (or a
suitable substitute form) that it is not a United States Holder or (B) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") holds the Note and provides a statement to the
Company or its agent under penalties of perjury in which such financial
institution certifies that such an IRS Form W-8 (or a suitable substitute) has
been received by it from the beneficial owner of the Notes or from another
financial institution between it and the beneficial owner and furnishes the
Company or its agent a copy of such Form W-8 or (b) the Foreign Holder is
entitled to the benefits of an income tax treaty under which interest on the
Notes is exempt from withholding of United States Federal income tax and the
Foreign Holder or such Foreign Holder's agent provides a properly executed IRS
Form 1001 claiming the exemption. Payments of interest not exempt from
withholding of United States Federal income tax as described above will be
subject to such withholding at the rate of 30 percent (subject to reduction
under an applicable income tax treaty). Under the terms of the tax treaty
between Canada and the United States (the "Treaty"), interest paid to a
Foreign Holder that is not otherwise exempt from withholding of United States
Federal income tax as described above is subject to withholding at the reduced
rate of 10 percent, provided that such Foreign Holder is entitled to the
benefits of the Treaty.
Sale, Exchange or Retirement of the Notes. A Foreign Holder generally will
not be subject to United States Federal income tax (and generally no tax will
be withheld) with respect to gain realized (except to the extent attributable
to accrued, but unpaid, interest on the Note, which will be subject to the
treatment discussed in the preceding paragraph) on the sale, exchange,
redemption, retirement at maturity or other disposition of a Note unless the
Foreign Holder is an individual who is present in the United States for 183 or
more days in the taxable year of the sale, redemption, retirement at maturity
or other disposition of the Note and certain other conditions are met.
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<PAGE>
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made
by the Company or a paying agent to Foreign Holders if the certification
described above under "--United States Federal Income Taxation of Foreign
Holders--Payment of Interest on Notes" is received, provided that the payor
does not have actual knowledge that the holder is a United States Holder. If
any payments of principal and interest are made to the beneficial owner of a
Note by or through the foreign office of a foreign custodian, foreign nominee
or other foreign agent of such beneficial owner, or if the foreign office of a
foreign "broker" (as defined in applicable United States Treasury regulations)
pays the proceeds of the sale of a Note effected outside the United States to
the seller thereof, backup withholding and information reporting will not
apply. Information reporting requirements (but not backup withholding) will
apply, however, to a payment by or through a foreign office of a broker of
principal and interest or the proceeds of a sale of a Note effected outside
the United States if that broker (a) is a United States person, (b) derives 50
percent or more of its gross income for certain periods from the conduct of a
trade or business in the United States or (c) is a "controlled foreign
corporation," unless the broker has documentary evidence in its records that
the holder is a Foreign Holder and certain other conditions are met or the
Foreign Holder otherwise establishes an exemption. Payment by a United States
office of a broker is subject to both backup withholding at a rate of 31
percent and information reporting unless the holder certifies in the manner
required as to its Foreign Holder status under penalties of perjury or
otherwise establishes an exemption.
The procedures described above for withholding tax on interest payments, and
some of the associated backup withholding and information reporting rules, are
currently the subject of proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would not substantially change the treatment of Foreign Holders described
above, except that a Form W-8 generally would be required for certification
purposes.
Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of
death is a Foreign Holder will not be included in such Foreign Holder's gross
estate for United States Federal estate tax purposes provided that the
individual does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Company entitled to
vote or hold the Notes in connection with a U.S. trade or business.
87
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, with the Company, to purchase from
the Company the aggregate principal amount of Notes set forth opposite their
respective names. The Underwriters are committed to purchase all of the Notes
if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITERS OF NOTES
------------ ------------
<S> <C>
Salomon Brothers Inc........................................... $ 50,000,000
Dillon, Read & Co. Inc......................................... 25,000,000
Lehman Brothers Inc............................................ 20,000,000
Nesbitt Burns Securities Inc................................... 5,000,000
------------
Total........................................................ $100,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of .50% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of .25% of the principal amount of the Notes on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any debt securities of the Company in an offering to the public (or
in a private offering where holders of the debt securities are granted rights
to have such debt securities registered under the Securities Act of 1933, as
amended (the "Securities Act"), or to exchange such debt securities for other
debt securities that are so registered) for a period of 120 days from the date
of this Prospectus without the prior written consent of Salomon Brothers Inc.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that the Underwriters
currently intend to make a market in the Notes. However, the Underwriters are
not obligated to do so and may discontinue any market making activities at any
time without notice. Accordingly, no assurance can be given about the
development or liquidity of any trading market for the Notes.
Each of Salomon Brothers Inc, Dillon, Read & Co. Inc. ("Dillon Read") and
Nesbitt Burns Securities Inc. has performed various investment banking
services for the Company from time to time, for which it has received
customary fees. As of the date of this Prospectus, certain Managing Directors
and Senior Vice Presidents of Dillon Read owned 120,248 shares of common stock
of the Company in the aggregate. Bryan H. Lawrence, a Managing Director of
Dillon Read, has been a member of the Board of Directors of the Company since
January 1987.
Nesbitt Burns Securities Inc. is an affiliate of Bank of Montreal which is
an agent bank and a lender to the Company under the Bank Facility. Bank of
Montreal will receive from the proceeds of this Offering its proportionate
share of the repayment by the Company of a portion of the borrowings
outstanding under the Bank Facility. In addition, Bank of Montreal, or its
affiliates, participates on a regular basis in various general financing and
banking transactions for the Company.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD"), when 10 percent or more of the net proceeds of a public
offering of debt securities, not including underwriting compensation, are to
be paid to a member of the NASD participating in such public offering of debt
securities or an affiliate of such member, the yield at which the debt
securities are
88
<PAGE>
distributed to the public must be no lower than that recommended by a
"qualified independent underwriter" as defined in Rule 2720 of the Conduct
Rules of the NASD. Nesbitt Burns Securities Inc. is a member of the NASD and
is an affiliate of Bank of Montreal, a lender under the Bank Facility. Bank of
Montreal will receive more than 10 percent of the net proceeds from this
Offering as a result of the use of such proceeds to repay a portion of the
borrowings under the Bank Facility. See "Use of Proceeds." As a result, this
Offering is being made in compliance with Rule 2710(c)(8) of the Conduct Rules
of the NASD which relates to offerings where proceeds are directed to a member
of the NASD. Salomon Brothers Inc will act as a qualified independent
underwriter in connection with this Offering and assume the customary
responsibilities of acting as a qualified independent underwriter in pricing
and conducting due diligence for this Offering. The yield on the Notes sold to
the public will be no lower than that recommended by Salomon Brothers Inc
acting as a qualified independent underwriter in connection with this
Offering.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including certain liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Conner &
Winters, A Professional Corporation, Tulsa, Oklahoma. Certain legal matters
will be passed upon for the Underwriters by Cravath, Swaine & Moore, New York,
New York.
EXPERTS
The audited financial statements of the Company included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of Cadipsa as of, and for the year ended
June 30, 1995, included in the Company's Current Report on Form 8-K dated July
5, 1995 (as amended), which is incorporated herein by reference, have been
audited by Pistrelli, Diaz y Asociados and Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance upon the authority of said firms as experts in
giving said reports. Pistrelli, Diaz y Asociados is a member firm of Andersen
Worldwide SC.
The audited financial statements of Cadipsa as of June 30, 1994, and for the
years ended June 30, 1994 and 1993, included in the Company's Current Report
on Form 8-K dated July 5, 1995 (as amended), which is incorporated herein by
reference, have been audited by Deloitte & Touche, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated herein in reliance upon the authority of said firm as experts in
giving said reports.
The estimated reserve evaluations and related calculations of Netherland,
Sewell set forth or incorporated by reference in this Prospectus have been
included or incorporated by reference herein in reliance upon the authority of
said firm as experts in petroleum engineering.
89
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy and information statements and other
information can be inspected and copied at the public reference facility
referenced above and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and Seven World Trade Center, Suite 1300, New York, New York 10048. Such
reports, proxy statements and other information concerning the Company can
also be inspected and copied at the New York Stock Exchange, 20 Broad Street,
New York, New York 10005. In addition, the Commission maintains a site on the
World Wide Web that contains reports, proxy and information statements and
other information filed electronically by the Company with the Commission
which can be accessed over the Internet at http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments, supplements and exhibits thereto,
referred to as the "Registration Statement") under the Securities Act with
respect to the Notes offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS OF VINTAGE PETROLEUM, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994............ F-3
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993.......................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993.................................................... F-6
Notes to Consolidated Financial Statements for the years ended December
31, 1995, 1994 and 1993................................................ F-7
INTERIM FINANCIAL STATEMENTS OF VINTAGE PETROLEUM, INC. AND SUBSIDIARIES:
Consolidated Balance Sheet as of September 30, 1996 (Unaudited)......... F-23
Consolidated Statements of Income for the nine months ended September
30, 1996 and 1995 (Unaudited).......................................... F-24
Consolidated Statement of Changes in Stockholders' Equity for the nine
months ended September 30, 1996 (Unaudited)............................ F-25
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 (Unaudited)................................ F-26
Notes to Consolidated Financial Statements for the nine months ended
September 30, 1996 and 1995 (Unaudited)................................ F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Vintage Petroleum, Inc.:
We have audited the accompanying consolidated balance sheets of Vintage
Petroleum, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vintage Petroleum, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 5 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, effective January
1, 1993.
Arthur Andersen LLP
Tulsa, Oklahoma
February 22, 1996
F-2
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
A S S E T S
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 2,545 $ 431
Accounts receivable--
Oil and gas sales........................................... 40,256 26,278
Joint operations............................................ 4,616 4,205
Other....................................................... -- 4,300
Prepaids and other current assets............................ 11,665 4,036
-------- --------
Total current assets...................................... 59,082 39,250
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, full cost method..................... 762,582 502,821
Oil and gas gathering systems................................ 12,765 12,531
Other........................................................ 7,733 4,711
-------- --------
783,080 520,063
Less accumulated depreciation, depletion and amortization.... 205,334 153,398
-------- --------
577,746 366,665
-------- --------
OTHER ASSETS, net............................................. 10,711 1,837
-------- --------
$647,539 $407,752
======== ========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Revenue payable.............................................. $ 16,855 $ 12,926
Accounts payable--trade...................................... 15,514 6,559
Other payables and accrued liabilities....................... 18,697 7,222
Current portion of long-term debt............................ 7,930 7,316
-------- --------
Total current liabilities................................. 58,996 34,023
-------- --------
LONG-TERM DEBT, less current portion above.................... 315,846 186,548
-------- --------
DEFERRED INCOME TAXES......................................... 37,753 31,188
-------- --------
OTHER LONG-TERM LIABILITIES................................... 3,922 --
-------- --------
MINORITY INTEREST IN SUBSIDIARY............................... 7,062 --
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
</TABLE>
<TABLE>
<S> <C> <C>
STOCKHOLDERS' EQUITY, per accompanying statements:
Preferred stock, $.01 par, 5,000,000 shares authorized, zero
shares issued and outstanding.............................. -- --
Common stock, $.005 par, 40,000,000 shares authorized,
23,661,162 and 20,162,756 shares issued and outstanding.... 118 101
Capital in excess of par value.............................. 149,725 91,201
Retained earnings........................................... 74,117 64,691
-------- --------
223,960 155,993
-------- --------
$647,539 $407,752
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Oil and gas sales................................ $160,254 $141,357 $113,259
Oil and gas gathering............................ 12,380 14,635 7,861
Gas marketing.................................... 20,912 27,285 36,175
Other income..................................... 1,251 2,375 2,732
-------- -------- --------
194,797 185,652 160,027
-------- -------- --------
COSTS AND EXPENSES:
Lease operating, including production taxes...... 66,771 59,292 44,930
Oil and gas gathering............................ 9,511 12,294 5,869
Gas marketing.................................... 18,839 24,963 34,406
General and administrative....................... 11,601 8,889 6,066
Depreciation, depletion and amortization......... 52,257 45,774 33,335
Interest......................................... 20,178 12,002 6,943
-------- -------- --------
179,157 163,214 131,549
-------- -------- --------
Income before provision for income taxes,
minority interest and cumulative effect of
accounting change............................. 15,640 22,438 28,478
PROVISION FOR INCOME TAXES:
Current.......................................... (955) 1,576 3,962
Deferred......................................... 6,034 6,933 7,727
MINORITY INTEREST IN LOSS OF SUBSIDIARY............ 800 -- --
-------- -------- --------
Income before cumulative effect of accounting
change........................................ 11,361 13,929 16,789
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES...................................... -- -- 1,725
-------- -------- --------
NET INCOME......................................... $ 11,361 $ 13,929 $ 18,514
======== ======== ========
EARNINGS PER SHARE:
Income before cumulative effect of accounting
change.......................................... $ .53 $ .66 $ .81
Cumulative effect of accounting change........... -- -- .08
-------- -------- --------
Net income....................................... $ .53 $ .66 $ .89
======== ======== ========
Weighted average common shares and common
equivalent shares outstanding................... 21,276 21,174 20,830
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN EXCESS
------------- OF PAR RETAINED
SHARES AMOUNT VALUE EARNINGS TOTAL
------ ------ --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992........ 16,392 $ 82 $ 43,955 $34,659 $ 78,696
Net income........................ -- -- -- 18,514 18,514
Issuance of common stock.......... 3,623 18 46,754 -- 46,772
Exercise of stock options and
resulting tax effects............ 138 1 409 -- 410
Cash dividends declared ($.05 per
share)........................... -- -- -- (1,000) (1,000)
------ ---- -------- ------- --------
BALANCE AT DECEMBER 31, 1993........ 20,153 101 91,118 52,173 143,392
Net income........................ -- -- -- 13,929 13,929
Exercise of stock options and
resulting tax effects............ 10 -- 83 -- 83
Cash dividends declared ($.07 per
share)........................... -- -- -- (1,411) (1,411)
------ ---- -------- ------- --------
BALANCE AT DECEMBER 31, 1994........ 20,163 101 91,201 64,691 155,993
Net income........................ -- -- -- 11,361 11,361
Issuance of common stock.......... 2,803 14 55,190 -- 55,204
Exercise of warrants.............. 294 1 1,467 -- 1,468
Exercise of stock options and
resulting tax effects............ 401 2 1,867 -- 1,869
Cash dividends declared ($.09 per
share)........................... -- -- -- (1,935) (1,935)
------ ---- -------- ------- --------
BALANCE AT DECEMBER 31, 1995........ 23,661 $118 $149,725 $74,117 $223,960
====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 11,361 $ 13,929 $ 18,514
Adjustments to reconcile net income to
cash provided by operating activities--
Cumulative effect of change in
accounting for income taxes........... -- -- (1,725)
Depreciation, depletion and
amortization.......................... 52,257 45,774 33,335
Minority interest in loss of
subsidiary............................ (800) -- --
Provision for deferred income taxes.... 6,034 6,933 7,727
----------- ---------- -----------
68,852 66,636 57,851
Decrease (increase) in receivables..... (11,836) 3,005 (9,056)
(Decrease) increase in payables and
accrued liabilities................... (1,012) (9,487) 3,879
Other.................................. (1,805) (1,484) (455)
----------- ---------- -----------
Cash provided by operating
activities.......................... 54,199 58,670 52,219
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment--
Oil and gas properties................. (141,490) (65,136) (140,864)
Gathering systems and other............ (3,256) (1,832) (4,162)
Proceeds from sale of oil and gas
properties............................. 604 711 1,006
Purchase of companies, net of cash
acquired............................... (45,886) -- --
Other................................... 2,777 (4,411) (2,106)
----------- ---------- -----------
Cash used by investing activities.... (187,251) (70,668) (146,126)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock.................... 51,191 -- 44,772
Sale of 9% Senior Subordinated Notes Due
2005................................... 145,137 -- --
Advances on revolving credit facility
and other borrowings................... 178,264 51,134 220,878
Payments on revolving credit facility
and other borrowings................... (237,679) (37,959) (170,885)
Dividends paid.......................... (1,747) (1,308) (865)
----------- ---------- -----------
Cash provided by financing
activities.......................... 135,166 11,867 93,900
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH.......... 2,114 (131) (7)
CASH AND CASH EQUIVALENTS, beginning of
year.................................... 431 562 569
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of year... $ 2,545 $ 431 $ 562
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Consolidation
Vintage Petroleum, Inc. is an independent energy company with operations
primarily in the exploration and production, gas marketing and gathering
segments of the oil and gas industry. Approximately 90 percent of the
Company's operations are within the exploration and production segment based
on 1995 operating income. Its core areas of exploration and production
operations include California, the Gulf Coast, East Texas and Mid-Continent
areas of the United States, and the San Jorge Basin of Argentina. Argentina
exploration and production operations commenced in 1995 as a result of the
acquisitions discussed in Note 6.
The consolidated financial statements include the accounts of Vintage
Petroleum, Inc. and its wholly- and majority-owned subsidiaries,
(collectively, the "Company"). In addition, the Company's interests in various
partnerships and joint ventures have been proportionately consolidated,
whereby the Company's proportionate share of each partnership or joint
venture's assets, liabilities, revenues and expenses is included in the
appropriate accounts in the consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Oil and Gas Properties
Oil and gas properties are accounted for using the full cost method which
provides for the capitalization of all acquisition, exploration and
development costs incurred for the purpose of finding oil and gas reserves,
including salaries, benefits and other internal costs directly attributable to
these activities. The Company capitalized $4.4 million, $2.3 million and $2.1
million of internal costs in 1995, 1994 and 1993, respectively. The
unamortized capitalized costs of oil and gas properties, including estimated
future development and abandonment costs, are amortized using the units-of-
production method based on proved reserves on a country-by-country basis. The
Company's unamortized costs of oil and gas properties are limited, on a
country-by-country basis, to the sum of the future net revenues attributable
to proved oil and gas reserves discounted at 10 percent plus the cost of any
unproved properties. If the Company's unamortized costs in oil and gas
properties exceed this ceiling amount, a provision for additional
depreciation, depletion and amortization is required. At December 31, 1995,
1994 and 1993, the Company's cost of oil and gas properties by country did not
exceed such ceiling amounts. Amortization per equivalent barrel of the
Company's U.S. oil and gas properties was $3.89, $3.82 and $3.71 for the years
ended December 31, 1995, 1994 and 1993, respectively. Amortization per
equivalent barrel of the Company's Argentina oil and gas properties for the
year ended December 31, 1995, was $4.28. The Company had no Argentina
operations prior to 1995.
Revenue Recognition
Natural gas revenues are recorded using the sales method. Under this method,
the Company recognizes revenues based on actual volumes of gas sold to
purchasers. The Company and other joint interest owners may sell more or less
than their entitlement share of the natural gas volumes
F-7
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
produced. A liability is recorded and revenue is deferred if the Company's
excess sales of natural gas volumes exceed its estimated remaining recoverable
reserves.
Hedging Policy
The Company periodically uses hedges (swap agreements) to reduce the impact
of oil and natural gas price fluctuations. Gains and losses on swap agreements
are recognized as an adjustment to sales revenue when the related transactions
being hedged are finalized. Gains or losses from swap agreements that do not
qualify for accounting treatment as hedges are recognized currently as other
income or expense.
Depreciation
Depreciation of property, plant and equipment (other than oil and gas
properties) is provided using both straight-line and accelerated methods based
on estimated useful lives ranging from three to ten years.
Income Taxes
Deferred income taxes are provided on transactions which are recognized in
different periods for financial and tax reporting purposes. Such temporary
differences arise primarily from the deduction of certain oil and gas
exploration and development costs which are capitalized for financial
reporting purposes and differences in the methods of depreciation.
Statements of Cash Flows
During the years ended December 31, 1995, 1994 and 1993, the Company made
cash payments for interest totaling $21.6 million, $11.3 million and $6.0
million, respectively, and cash payments for U.S. income taxes of $0.5
million, $3.1 million and $4.1 million, respectively. No cash payments were
made during 1995 for foreign income taxes and the Company had no foreign
operations prior to 1995.
In late 1993, the Company increased its ownership in certain oil and gas
properties and gathering systems by acquiring 100 percent of its partners'
interests in the Vintage/P Acquisition Limited Partnership and a joint
venture. Total consideration included cash, common stock, a stock subscription
warrant and the assumption of certain net liabilities. The value of the non-
cash consideration was $6.4 million and is not reflected in the Company's 1993
Consolidated Statement of Cash Flows.
During 1995, the Company purchased a majority interest in Cadipsa S.A.
("Cadipsa"--see Note 6). The value of the non-cash consideration is not
reflected in the Company's 1995 Consolidated Statement of Cash Flows. Such
non-cash consideration consisted of $5.7 million of the Company's common
stock, $3.2 million cash payable in 1996, and approximately $58.1 million of
net liabilities and a $7.9 million minority interest added through
consolidation of Cadipsa.
In December 1995, the Company purchased certain oil and gas properties from
Shell (see Note 6) for $32.8 million cash and deferred payments valued at $5.1
million. The $5.1 million of deferred payments represent non-cash
consideration and are not reflected in the Company's 1995 Consolidated
Statement of Cash Flows.
Earnings Per Share
Earnings per share are based on the weighted average common shares and
common share equivalents outstanding, computed using the treasury stock method
assuming the exercise of all common stock options and warrants (except where
the effect is anti-dilutive).
F-8
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
General and Administrative Expense
The Company receives fees for operation of jointly-owned oil and gas
properties and records such reimbursements as reductions of general and
administrative expense. Such fees totaled approximately $2.9 million, $2.3
million and $2.9 million in 1995, 1994 and 1993, respectively.
Revenue Payable
Amounts payable to royalty and working interest owners resulting from sales
of oil and gas from jointly-owned properties and from purchases of oil and gas
by the Company's marketing and gathering segments are classified as revenue
payable in the accompanying financial statements.
Accounts Receivable
The Company's oil and gas, gas marketing and gathering sales are to a
variety of purchasers, including intrastate and interstate pipelines or their
marketing affiliates, independent marketing companies and major oil companies.
The Company's joint operations accounts receivable are from a large number of
major and independent oil companies, partnerships, individuals and others who
own interests in the properties operated by the Company. The Company's other
accounts receivable at December 31, 1994, represents funds in escrow at year
end relating to a potential acquisition. These funds were returned to the
Company during 1995.
2. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
9% Senior Subordinated Notes Due 2005, net of discount.... $149,592 $ --
Revolving credit facility................................. 74,300 172,600
Bank term loan............................................ 36,736 --
5.92% Senior note......................................... 9,948 13,264
11% Subordinated note..................................... -- 8,000
Subsidiary debt--
International Finance Corporation notes................. 28,000 --
Bank of Boston senior note.............................. 20,000 --
Other subsidiary debt................................... 5,200 --
-------- --------
323,776 193,864
Less--Current portion of long-term debt................... 7,930 7,316
-------- --------
$315,846 $186,548
======== ========
</TABLE>
Subsidiary debt relates to borrowings of the Company's foreign subsidiaries,
the recourse of which is solely to such subsidiaries, except for $9.2 million
advanced by the International Finance Corporation which is guaranteed by the
Company.
Aggregate maturities of long-term debt for each of the years ending December
31, 1996, through December 31, 2000, are $7.9 million, $29.9 million, $25.9
million, $59.3 million and $22.6 million, with $178.2 million thereafter.
F-9
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9% Senior Subordinated Notes
On December 20, 1995, the Company issued $150 million of its 9% Senior
Subordinated Notes Due 2005 (the "Notes"). The Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after December
15, 2000. Upon a change in control (as defined) of the Company, holders of the
Notes may require the Company to purchase all or a portion of the Notes at a
purchase price equal to 101 percent of the principal amount thereof, plus
accrued and unpaid interest. The Notes mature on December 15, 2005, with
interest payable semiannually on June 15 and December 15 of each year.
The Notes are unsecured senior subordinated obligations of the Company and
rank subordinate in right of payment to all senior indebtedness (as defined).
The indenture for the Notes contains limitations on, among other things,
additional indebtedness and liens, the payment of dividends and other
distributions, certain investments and transfers or sales of assets. The net
proceeds to the Company from the sale of the Notes of approximately $145.1
million were used to reduce a portion of the outstanding balance under the
Company's revolving credit facility and to repay a short-term note payable
used to retire the 11% Subordinated Note.
Revolving Credit Facility
The Company has available an unsecured revolving credit facility under the
Credit Agreement dated November 3, 1993, as amended (the "Credit Agreement"),
among the Company, and certain banks. The Credit Agreement establishes a
borrowing base (currently $230 million) based on the banks' evaluation of the
Company's U.S. oil and gas reserves. On February 1, 1996, the Company elected
to set the banks' commitment at $180 million in order to reduce fees charged
by the banks.
Outstanding advances under the Company's revolving credit facility bear
interest payable quarterly at a floating rate based on Bank of Montreal's
alternate base rate (as defined) or, at the Company's option, at a fixed rate
for up to six months based on the eurodollar market rate ("LIBOR"). The
Company's interest rate increments above the alternate base rate and LIBOR
vary based on the level of outstanding senior debt and the borrowing base at
the time. In addition, the Company must pay a commitment fee of 0.375 percent
per annum on the unused portion of the banks' commitment. Total outstanding
advances at December 31, 1995, were $74.3 million at an average interest rate
of approximately 7.8 percent.
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's U.S. oil and gas reserves. If
the sum of outstanding senior debt exceeds the borrowing base, as
redetermined, the Company must repay such excess. Any principal advances
outstanding at October 31, 1997, will be payable in 16 equal consecutive
quarterly installments commencing January 31, 1998, with maturity at October
31, 2001.
The terms of the Credit Agreement impose certain restrictions on the Company
regarding the pledging of assets and limitations on, among other things,
additional indebtedness and the payment of dividends and other distributions.
In addition, the Credit Agreement requires the maintenance of a minimum
current ratio (as defined) and tangible net worth (as defined) of $164 million
plus 75 percent of the net proceeds of any future equity offerings.
Bank Term Loan
On January 12, 1995, the Company refinanced with certain banks $36.7 million
of outstanding advances under the revolving credit facility with an unsecured
term loan maturing November 30, 1999.
F-10
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The term loan bears interest at a floating rate (plus a fixed increment) based
on Bank of Montreal's alternate base rate (as defined) or, at the Company's
option, at a fixed rate for up to six months based on LIBOR. The Company has
currently elected a fixed rate based on LIBOR, which on December 31, 1995, was
6.7 percent. The terms and restrictions under the bank term loan are generally
the same as those provided in the Credit Agreement.
International Finance Corporation Notes
Under an Amended and Restated Investment Agreement dated April 28, 1994, as
amended (the "Investment Agreement"), between the International Finance
Corporation ("IFC") and Cadipsa, the Company's majority-owned subsidiary,
outstanding advances were $28.0 million at December 31, 1995. These borrowings
consist of three separate loans having principal payments beginning on
September 15, 1996, with maturity on March 15, 2003. The Investment Agreement
is recourse solely to Cadipsa except for a guarantee of $9.2 million of
principal, plus interest thereon, provided by the Company on behalf of Cadipsa
to the IFC. The guarantee can be released and dividends may be paid out of
profits of Cadipsa once certain conditions and financial ratios are met by
Cadipsa.
Bank of Boston Senior Note
In connection with the BG Acquisition (see Note 6), the Company, through its
wholly-owned subsidiary, Vintage Oil Argentina, Inc. (formerly BG Argentina,
S.A.), entered into a non-recourse $20 Million Credit Agreement dated
September 28, 1995, with the Buenos Aires Branch of The First National Bank of
Boston. This loan is secured by all of the common stock of Vintage Oil
Argentina, Inc. and, upon government approval of the fiduciary assignment
agreement, substantially all of its assets. The Company expects to receive
such government approval, however, a default occurs if such approval is not
received by May 25, 1996. The borrowing limit under the $20 Million Credit
Agreement (currently $20.0 million) is redetermined semiannually by the bank,
beginning September 30, 1996, based on a review of Vintage Oil Argentina,
Inc.'s oil and gas reserves. Such reviews may result in a required repayment
of the amount in excess of the borrowing limit prior to maturity of the loan
on September 29, 1997. Vintage Oil Argentina, Inc. dividends are permitted to
the extent its tangible net worth (as defined) exceeds $14.0 million.
Fair Value of Long-term Debt
Based on the estimated borrowing rates currently available to the Company
for the long-term loans with similar terms and average maturities, the
aggregate fair value at December 31, 1995, of the Company's long-term debt is
approximately $323.2 million compared to the aggregate carrying amount of
$323.8 million.
3. CAPITAL STOCK
Public Offerings and Other Issuances
In January 1993, the Company completed a public offering of 3,910,000 shares
of common stock of which 3,510,000 shares were sold by the Company and 400,000
shares were sold by a stockholder. Net proceeds to the Company were
approximately $44.8 million and were used to reduce a portion of the
indebtedness incurred under the Company's revolving credit facility to acquire
certain oil and gas properties on December 30, 1992.
In December 1993, the Company issued 112,756 shares of common stock valued
at $2.0 million as partial consideration to acquire the sole limited
partnership interest in the Vintage/P Acquisition Limited Partnership.
F-11
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 5, 1995, the Company issued 302,808 shares of common stock valued at
$5.7 million as partial consideration to acquire a controlling interest in
Cadipsa (see Note 6).
On December 20, 1995, the Company completed a public offering of 2,793,700
shares of common stock of which 2,500,000 shares were sold by the Company and
293,700 shares were sold by a stockholder. Net proceeds to the Company were
approximately $49.5 million. The net proceeds were used to repay advances made
under the revolving credit facility to fund the acquisition of a portion of
the Astra/Shell Properties (see Note 6) and to finance a substantial portion
of the acquisition of the remaining portion of the Astra/Shell Properties.
A stock subscription warrant was exercised on December 20, 1995, for the
purchase of 293,700 shares of the Company's common stock at an exercise price
of $5.00 per share yielding net proceeds to the Company of approximately $1.5
million.
Stock Plans and Warrants
Under the 1983 Stock Option Plan, as amended (the "1983 Plan"), incentive
stock options were granted to key employees of the Company. Generally, options
granted under the 1983 Plan are exercisable for a two to seven year period
beginning three years from the date granted. As of December 31, 1995, all
available options have been granted under the 1983 Plan.
Under the 1990 Stock Plan, as amended (the "1990 Plan"), a total of up to
1,500,000 shares of common stock are available for issuance to key employees
of the Company. The 1990 Plan permits the granting of any or all of the
following types of awards: (a) stock options, (b) stock appreciation rights,
and (c) restricted stock. As of December 31, 1995, awards for a total of
339,000 shares of common stock remain available for grant under the 1990 Plan.
The 1990 Plan is administered by the Compensation Committee appointed by the
Board of Directors of the Company (the "Committee"). Subject to the terms of
the 1990 Plan, the Committee has the authority to determine plan participants,
the types and amounts of awards to be granted and the terms, conditions and
provisions of awards. Options granted pursuant to the 1990 Plan may, at the
discretion of the Committee, be either incentive stock options or non-
qualified stock options. The exercise price of incentive stock options may not
be less than the fair market value of the common stock on the date of grant.
In the case of non-qualified stock options, the exercise price may not be less
than 85 percent of the fair market value of the common stock on the date of
grant. Any stock appreciation rights granted under the 1990 Plan will give the
holder the right to receive cash in an amount equal to the difference between
the fair market value of the share of common stock on the date of exercise and
the exercise price. Restricted stock under the 1990 Plan will generally
consist of shares which may not be disposed of by participants until certain
restrictions established by the Committee lapse.
In 1993, the Non-Management Director Stock Option Plan (the "Director Plan")
was approved by the Company's stockholders. Under the Director Plan, 30,000
shares of common stock are available for issuance to the outside directors of
the Company. Each outside director receives an initial option to purchase
5,000 shares of common stock during the director's first year of service to
the Company. Annually thereafter, options to purchase 1,000 shares of common
stock are to be granted to each outside director. Options granted pursuant to
the Director Plan are non-qualified stock options and the option exercise
price is equal to the fair market value of the common stock on the date of
grant.
F-12
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is an analysis of all option activity under the 1983 Plan, the
1990 Plan and the Director Plan for 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Beginning stock options outstanding...... 1,457,000 1,193,000 988,000
Stock options granted.................. 98,000 274,000 343,000
Stock options cancelled................ (20,000) -- --
Stock options exercised................ (401,898) (10,000) (138,000)
---------- ---------- ----------
Ending stock options outstanding......... 1,133,102 1,457,000 1,193,000
========== ========== ==========
Ending stock options exercisable......... 336,701 338,018 224,832
========== ========== ==========
Weighted average exercise price of:
Options exercised during the year...... $ 4.47 $ 4.89 $ 2.02
Ending stock options outstanding....... 14.81 11.64 10.34
Ending stock options exercisable....... 11.04 4.74 4.09
</TABLE>
All of the outstanding options are exercisable at various times in years
1996 through 2005. All incentive stock options and non-qualified options were
granted at fair market value on the date of grant. As of December 31, 1995, no
awards other than incentive and non-qualified stock options have been granted
under the 1990 Plan.
At December 31, 1995, stock subscription warrants (the "Warrants") for the
purchase of 316,300 shares of the Company's common stock at an average
exercise price of $5.42 per share were outstanding. In January 1996, a Warrant
for 306,300 shares of the Company's common stock was exercised at a price of
$5.00 per share and the remaining Warrant for 10,000 shares was cancelled.
At December 31, 1995, a total of 1,804,402 shares of the Company's common
stock are reserved for issuance pursuant to the 1983 Plan, the 1990 Plan and
the Director Plan and upon the exercise of the Warrants.
Preferred Stock
Preferred stock at December 31, 1995, consists of 5,000,000 authorized but
unissued shares. Preferred stock may be issued from time to time in one or
more series, and the Board of Directors, without further approval of the
stockholders, is authorized to fix the dividend rates and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking fund and any other rights, preferences, privileges and restrictions
applicable to each series of preferred stock.
4. COMMITMENTS AND CONTINGENCIES
Rent expense was $0.8 million, $0.5 million and $0.4 million for 1995, 1994
and 1993, respectively. The future minimum commitments under long-term
noncancellable leases for office space are $0.9 million and $0.5 million for
1996 and 1997, respectively.
The Company has $10.1 million in letters of credit outstanding at December
31, 1995. These letters of credit relate primarily to bonding requirements of
various state regulatory agencies for oil and gas operations and various
obligations for acquisition and exploration activities in South America.
During 1995, the Company entered into an exploration contract on Block 19 in
Ecuador for a term of four years. Under the terms of the contract the Company
is required to spend approximately $2.0 million per year for the project.
F-13
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is a defendant in various lawsuits and is a party in
governmental proceedings from time to time arising in the ordinary course of
business. In the opinion of management, none of the various pending lawsuits
and proceedings should have a material adverse effect upon the consolidated
financial statements of the Company.
5. INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). SFAS 109 generally requires that deferred taxes be provided using a
liability approach at currently enacted income tax rates rather than the
deferred approach at historical rates which had previously been required. The
cumulative effect on prior years of adopting the change was recorded in the
quarter ended March 31, 1993, as provided by SFAS 109, and increased net
income by $1.7 million.
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993, consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current............................................... $ (955) $1,576 $ 3,962
Deferred.............................................. 6,034 6,933 7,727
------ ------ -------
$5,079 $8,509 $11,689
====== ====== =======
</TABLE>
A reconciliation of the federal statutory income tax rate to the effective
rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate................................. 35.0% 35.0% 35.0%
State income tax, less federal benefit.................... 3.9 3.9 3.9
Federal income tax credits................................ (7.4) -- --
Effect on prior years of increase in corporate income tax
rate..................................................... -- -- 2.0
All other, net............................................ 1.0 (1.0) 0.1
---- ---- ----
32.5% 37.9% 41.0%
==== ==== ====
</TABLE>
The components of the Company's net deferred tax liability as of December
31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Differences between book and tax basis of property........ $41,699 $34,670
Other..................................................... -- 21
------- -------
41,699 34,691
------- -------
Deferred Tax Assets:
Alternative minimum tax credit carryforward............... 3,538 3,165
Other..................................................... 408 338
------- -------
3,946 3,503
------- -------
$37,753 $31,188
======= =======
</TABLE>
F-14
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings of the Company's foreign subsidiaries, Cadipsa and Vintage Oil
Argentina, Inc., are subject to Argentina income taxes. Due to significant
Argentina net operating loss carryforwards for both companies, the Company
does not expect to pay any foreign income taxes related to these subsidiaries
in the near future. No U.S. deferred tax liability will be recognized related
to the unremitted earnings of these foreign subsidiaries, as it is the
Company's intention, generally, to reinvest such earnings permanently.
As of December 31, 1995, the Company has an alternative minimum tax ("AMT")
credit carryforward of approximately $3.5 million. The AMT credit carryforward
does not expire and is available to offset regular income taxes in future
years, but only to the extent that regular income taxes exceed the AMT in such
years.
6. SIGNIFICANT ACQUISITIONS
In May 1995, the Company acquired certain U.S. oil and gas properties from
Texaco Exploration and Production Inc. for approximately $26.7 million cash
(the "Texaco Acquisition").
Through a series of transactions during the last six months of 1995, the
Company purchased approximately 71.6 percent of the outstanding common stock
of Cadipsa S.A. ("Cadipsa"), a publicly-traded Argentine oil and gas
exploration and production company, for 302,808 shares of the Company's common
stock (valued at $5.7 million) and $12.3 million cash (the "Cadipsa
Acquisition"). Approximately $58.1 million of net liabilities and a $7.9
million minority interest result from the consolidation of Cadipsa as of the
acquisition date. Subsequent to December 31, 1995, the Company purchased an
additional 9.3 percent of Cadipsa for $2.3 million cash. The Company is
pursuing additional purchases of shares of Cadipsa.
On September 29, 1995, the Company purchased 100 percent of the outstanding
common stock of BG Argentina, S.A. ("BG Argentina") from British Gas plc, for
$37 million cash (the "BG Acquisition"). BG Argentina was subsequently renamed
Vintage Oil Argentina, Inc.
On November 3, 1995, the Company purchased a 35 percent interest in certain
Argentina oil and gas properties (the "Astra/Shell Properties") from Astra
Compania Argentina de Petroleo S.A. ("Astra") for $17.9 million cash. On
December 28, 1995, the Company purchased the remaining 65 percent interest in
the Astra/Shell Properties from Shell Compania Argentina de Petroleo S.A.
("Shell") for $32.8 million cash and deferred payments valued at $5.1 million.
The Company accounted for the Cadipsa Acquisition and the BG Acquisition
under the purchase method and has not completed its evaluations of the
purchased assets and assumed liabilities; therefore, it has not completed the
final purchase price allocations for these acquisitions. The consolidated
statements of income include the operating results of the above acquisitions
since their acquisition date.
The Company completed on December 20, 1995, a public offering of 2,793,700
shares of the Company's common stock (the "Common Stock Offering"), of which
2,500,000 shares were sold by the Company and 293,700 shares were sold by a
certain stockholder (see Note 3). The net proceeds to the Company of
approximately $49.5 million were used to fund a substantial portion of the
purchase of the Astra/Shell Properties.
The Company's unaudited pro forma revenues, net income and net income per
share for the years ended December 31, 1995 and 1994, presented below have
been prepared assuming the Common
F-15
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Offering, the Texaco Acquisition, the Cadipsa Acquisition, the BG
Acquisition and the acquisition of the Astra/Shell Properties had been
consummated as of January 1, 1994. However, such pro forma information is not
necessarily indicative of what actually would have occurred had the
transactions occurred on such date.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Revenues (in thousands)................................... $244,921 $255,489
Net income (in thousands)................................. 18,712 9,059
Net income per share...................................... .78 .37
</TABLE>
F-16
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SEGMENT INFORMATION
The Company operates in the oil and gas exploration and production industry
in the United States and South America. Operations in the gathering and gas
marketing industries are in the United States. The following is industry
segment data for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Exploration and production--
U.S.......................................... $146,819 $141,357 $113,259
Argentina.................................... 13,435 -- --
Gas marketing................................. 49,775 61,480 70,705
Gathering..................................... 22,289 17,630 9,445
Other income.................................. 1,251 2,375 2,732
Elimination of intersegment sales............. (38,772) (37,190) (36,114)
-------- -------- --------
$194,797 $185,652 $160,027
======== ======== ========
OPERATING INCOME:
Exploration and production--
U.S.......................................... $ 39,524 $ 38,234 $ 36,634
Argentina.................................... 4,114 -- --
Gas marketing................................. 2,073 2,322 1,769
Gathering..................................... 1,568 1,058 990
Other income.................................. 1,251 2,375 2,732
Corporate expenses............................ (12,712) (9,549) (6,704)
Interest expense.............................. (20,178) (12,002) (6,943)
-------- -------- --------
$ 15,640 $ 22,438 $ 28,478
======== ======== ========
IDENTIFIABLE ASSETS:
Exploration and production--
U.S.......................................... $431,391 $386,824 $363,456
Argentina.................................... 180,488 -- --
Other international.......................... 1,269 -- --
Gas marketing................................. 5,431 5,850 8,415
Gathering..................................... 11,084 8,918 8,728
Corporate..................................... 17,876 6,160 3,862
-------- -------- --------
$647,539 $407,752 $384,461
======== ======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION:
Exploration and production--
U.S.......................................... $ 45,730 $ 43,831 $ 31,695
Argentina.................................... 4,115 -- --
Gathering..................................... 1,301 1,283 1,002
Corporate..................................... 1,111 660 638
-------- -------- --------
$ 52,257 $ 45,774 $ 33,335
======== ======== ========
CAPITAL ADDITIONS:
Exploration and production--
U.S.......................................... $ 88,149 $ 65,136 $147,252
Argentina.................................... 170,947 -- --
Other international.......................... 1,269 -- --
Gathering..................................... 234 632 3,319
Corporate..................................... 3,023 1,200 843
-------- -------- --------
$263,622 $ 66,968 $151,414
======== ======== ========
</TABLE>
F-17
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1995, 1994 and 1993, sales to one crude oil purchaser represented
approximately 17%, 14% and 11%, respectively, of the Company's total revenues.
8. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Revenues....................... $ 41,042 $ 45,230 $ 50,101 $ 58,424
Operating income............... 8,999 11,778 13,041 14,713
Net income..................... 1,608 3,244 2,724 3,786
Net income per share........... .08 .15 .13 .17
1994
Revenues....................... $ 44,635 $ 48,088 $ 48,246 $ 44,683
Operating income............... 8,591 11,583 12,885 10,930
Net income..................... 2,468 3,937 4,403 3,121
Net income per share........... .12 .19 .21 .15
</TABLE>
9. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
Results of Operations from Oil and Gas Producing Activities
The following sets forth certain information with respect to the Company's
results of operations from oil and gas producing activities for the years
ended December 31, 1995, 1994 and 1993. The Company began operations in
Argentina through various acquisitions in the last two quarters of 1995 (see
Note 6). Prior to 1995, all of the Company's oil and gas producing activities
were located in the United States.
<TABLE>
<CAPTION>
1995
---------------------------
U.S. ARGENTINA TOTAL 1994 1993
-------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues...................... $146,819 $13,435 $160,254 $141,357 $113,259
Production (lifting) costs.... 61,565 5,206 66,771 59,292 44,930
Depreciation, depletion and
amortization................. 45,730 4,115 49,845 43,831 31,695
-------- ------- -------- -------- --------
Results of operations before
income taxes................. 39,524 4,114 43,638 38,234 36,634
Income tax expense............ 12,332 -- 12,332 14,529 14,287
-------- ------- -------- -------- --------
Results of operations
(excluding corporate overhead
and interest costs).......... $ 27,192 $ 4,114 $ 31,306 $ 23,705 $ 22,347
======== ======= ======== ======== ========
</TABLE>
F-18
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities
Prior to 1995, the Company had not incurred any significant costs outside of
the United States. The Company's net investment in oil and gas properties at
December 31, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
1995
----------------------------------
U.S. ARGENTINA OTHER TOTAL 1994
-------- --------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Unproved properties not being
amortized...................... $ 8,505 $ -- $1,269 $ 9,774 $ 6,073
Proved properties being
amortized...................... 581,861 170,947 -- 752,808 496,748
-------- -------- ------ -------- --------
Total capitalized costs....... 590,366 170,947 1,269 762,582 502,821
Less accumulated depreciation,
depletion and amortization..... 190,593 4,115 -- 194,708 144,863
-------- -------- ------ -------- --------
Net capitalized costs......... $399,773 $166,832 $1,269 $567,874 $357,958
======== ======== ====== ======== ========
</TABLE>
The following sets forth certain information with respect to costs incurred
(exclusive of general support facilities) in the Company's oil and gas
activities during 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995
---------------------------------
U.S. ARGENTINA OTHER TOTAL 1994 1993
------- --------- ------ -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Acquisition:
Undeveloped properties. $ 6,415 $ -- $1,269 $ 7,684 $ 1,869 $ 610
Producing properties... 38,896 168,762 -- 207,658 36,544 123,906
Costs incurred:
Exploratory............ 2,037 -- -- 2,037 3,349 5,217
Development............ 40,801 2,185 -- 42,986 23,374 17,519
------- -------- ------ -------- ------- --------
Total costs incurred. $88,149 $170,947 $1,269 $260,365 $65,136 $147,252
======= ======== ====== ======== ======= ========
</TABLE>
F-19
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Estimated Quantities of Proved Oil and Gas Reserves (Unaudited)
Proved reserves are estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are those which are expected to be recovered through existing wells with
existing equipment and operating methods. The following is an analysis of the
Company's proved oil and gas reserves which are located in the United States
and Argentina (including its proportionate share of reserves of its limited
partnerships and joint venture) as estimated by the Company's independent
petroleum consultants, Netherland, Sewell & Associates, Inc.:
<TABLE>
<CAPTION>
U.S. ARGENTINA TOTAL
---------------- --------- ----------------
OIL GAS OIL OIL GAS
(MBBLS) (MMCF) (MBBLS) (MBBLS) (MMCF)
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Proved reserves at December 31,
1992............................. 40,209 206,582 -- 40,209 206,582
Revisions of previous estimates... (10) 18,381 -- (10) 18,381
Extensions, discoveries and other
additions........................ 35 4,183 -- 35 4,183
Production........................ (4,785) (22,504) -- (4,785) (22,504)
Purchase of reserves-in-place..... 27,898 68,000 -- 27,898 68,000
Sales of reserves-in-place........ (70) (1,500) -- (70) (1,500)
------ ------- ------ ------- -------
Proved reserves at December 31,
1993............................. 63,277 273,142 -- 63,277 273,142
Revisions of previous estimates... 8,577 4,131 -- 8,577 4,131
Extensions, discoveries and other
additions........................ 6 4,139 -- 6 4,139
Production........................ (6,657) (28,884) -- (6,657) (28,884)
Purchase of reserves-in-place..... 5,645 29,655 -- 5,645 29,655
Sales of reserves-in-place........ (59) (545) -- (59) (545)
------ ------- ------ ------- -------
Proved reserves at December 31,
1994............................. 70,789 281,638 -- 70,789 281,638
Revisions of previous estimates... 7,160 18,405 2,952 10,112 18,405
Extensions, discoveries and other
additions........................ 338 2,015 -- 338 2,015
Production........................ (6,647) (30,610) (961) (7,608) (30,610)
Purchase of reserves-in-place..... 8,840 39,486 65,653 74,493 39,486
Sales of reserves-in-place........ (253) (172) -- (253) (172)
------ ------- ------ ------- -------
Proved reserves at December 31,
1995............................. 80,227 310,762 67,644 147,871 310,762
====== ======= ====== ======= =======
Proved developed reserves at:
December 31, 1993............... 51,187 226,734 -- 51,187 226,734
====== ======= ====== ======= =======
December 31, 1994............... 55,037 220,112 -- 55,037 220,112
====== ======= ====== ======= =======
December 31, 1995............... 63,791 270,427 36,928 100,719 270,427
====== ======= ====== ======= =======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure
requirement under SFAS No. 69. The Standardized Measure does not purport to
present the fair market value of proved oil and gas reserves. This would
require consideration of expected future economic and operating conditions
which are not taken into account in calculating the Standardized Measure.
F-20
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash
inflows were reduced by estimated future production, development and
abandonment costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the Company's tax basis in the associated
proved oil and gas properties. Tax credits and permanent differences were also
considered in the future income tax calculation. Future net cash inflows after
income taxes were discounted using a 10 percent annual discount rate to arrive
at the Standardized Measure.
Prior to 1995, the Company did not have any oil and gas producing activities
outside the United States. Set forth below is the Standardized Measure
relating to proved oil and gas reserves at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
--------------------------------
U.S. ARGENTINA TOTAL 1994
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash inflows............. $1,786,545 $1,083,551 $2,870,096 $1,483,854
Future production costs......... 751,312 409,734 1,161,046 620,615
Future development and
abandonment costs.............. 118,784 119,916 238,700 112,877
---------- ---------- ---------- ----------
Future net cash inflows before
income tax expense............. 916,449 553,901 1,470,350 750,362
Future income tax expense....... 232,036 86,162 318,198 173,875
---------- ---------- ---------- ----------
Future net cash flows........... 684,413 467,739 1,152,152 576,487
10 percent annual discount for
estimated timing of cash flows. 224,078 191,528 415,606 190,766
---------- ---------- ---------- ----------
Standardized Measure of
discounted future net cash
flows.......................... $ 460,335 $ 276,211 $ 736,546 $ 385,721
========== ========== ========== ==========
</TABLE>
F-21
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Gas Reserves (Unaudited)
The following is an analysis of the changes in the Standardized Measure
during 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized Measure--Beginning of year....... $385,721 $339,701 $274,443
Increases (decreases)--
Sales, net of production costs.............. (93,483) (82,065) (68,328)
Net change in sales price, net of production
costs...................................... 131,697 54,864 (101,453)
Discoveries and extensions, net of related
future development and production costs.... 4,585 4,724 6,495
Changes in estimated future development
costs...................................... (31,210) (17,276) (4,709)
Development costs incurred.................. 37,600 20,228 10,195
Revisions of previous quantity estimates.... 59,319 34,428 9,021
Accretion of discount....................... 44,699 35,078 33,594
Net change in income taxes.................. (86,296) (50,189) 50,421
Purchase of reserves-in-place............... 311,449 47,718 152,712
Sales of reserves-in-place.................. (661) (694) (1,838)
Timing of production of reserves and other.. (26,874) (796) (20,852)
-------- -------- --------
Standardized Measure--End of year............. $736,546 $385,721 $339,701
======== ======== ========
</TABLE>
F-22
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
A S S E T S
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 5,339
Accounts receivable--
Oil and gas sales................................................... 43,275
Joint operations.................................................... 5,360
Prepaids and other current assets.................................... 13,536
--------
Total current assets.............................................. 67,510
--------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, full cost method............................. 859,184
Oil and gas gathering systems........................................ 12,872
Other................................................................ 7,681
--------
879,737
Less accumulated depreciation, depletion and amortization............ 256,645
--------
623,092
--------
OTHER ASSETS, net..................................................... 10,756
--------
$701,358
========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Revenue payable...................................................... $ 18,910
Accounts payable--trade.............................................. 14,702
Other payables and accrued liabilities............................... 21,103
Current portion of long-term debt.................................... 7,929
--------
Total current liabilities......................................... 62,644
--------
LONG-TERM DEBT, less current portion above............................ 336,380
--------
DEFERRED INCOME TAXES................................................. 45,735
--------
OTHER LONG-TERM LIABILITIES........................................... 3,081
--------
MINORITY INTEREST IN SUBSIDIARY....................................... 2,286
--------
STOCKHOLDERS' EQUITY, per accompanying statement:
Preferred stock, $.01 par, 5,000,000 shares authorized, zero shares
issued and outstanding.............................................. --
Common stock, $.005 par, 40,000,000 shares authorized, 24,062,462 and
23,661,162 shares issued and outstanding............................ 120
Capital in excess of par value....................................... 152,121
Retained earnings.................................................... 98,991
--------
251,232
--------
$701,358
========
</TABLE>
See notes to unaudited consolidated financial statements.
F-23
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
REVENUES:
Oil and gas sales.......................................... $185,847 $112,809
Oil and gas gathering...................................... 15,310 8,472
Gas marketing.............................................. 21,519 13,631
Other income............................................... 659 1,461
-------- --------
223,335 136,373
-------- --------
COSTS AND EXPENSES:
Lease operating, including production taxes................ 67,606 47,520
Oil and gas gathering...................................... 12,838 6,636
Gas marketing.............................................. 19,885 12,210
General and administrative................................. 12,026 8,258
Depreciation, depletion, and amortization.................. 51,313 36,875
Interest................................................... 22,467 13,379
-------- --------
186,135 124,878
-------- --------
Income before provision for income taxes and minority
interest................................................ 37,200 11,495
PROVISION FOR INCOME TAXES:
Current.................................................... 2,061 687
Deferred................................................... 7,982 3,895
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY............. (361) 662
-------- --------
NET INCOME................................................... $ 26,796 $ 7,575
======== ========
NET INCOME PER SHARE......................................... $ 1.10 $ .36
======== ========
Weighted average common shares and common equivalent shares
outstanding................................................. 24,454 21,322
</TABLE>
See notes to unaudited consolidated financial statements.
F-24
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN EXCESS
------------- OF PAR RETAINED
SHARES AMOUNT VALUE EARNINGS TOTAL
------ ------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995...... 23,661 $ 118 $ 149,725 $ 74,117 $ 223,960
Net income...................... -- -- -- 26,796 26,796
Exercise of warrants............ 306 2 1,530 -- 1,532
Exercise of stock options and
resulting tax effects.......... 96 -- 866 -- 866
Cash dividends declared
($.08 per share)............... -- -- -- (1,922) (1,922)
------ ----- --------- -------- ---------
BALANCE AT SEPTEMBER 30, 1996..... 24,063 $ 120 $ 152,121 $ 98,991 $ 251,232
====== ===== ========= ======== =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-25
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 26,796 $ 7,575
Adjustments to reconcile net income to cash provided by
operating activities--
Depreciation, depletion and amortization............... 51,313 36,875
Minority interest in income (loss) of subsidiary....... 361 (662)
Provision for deferred income taxes.................... 7,982 3,895
--------- ---------
86,452 47,683
Decrease (increase) in receivables..................... (3,763) 3,953
Increase (decrease) in payables and accrued
liabilities........................................... 4,340 (1,531)
Other.................................................. (4,082) (1,201)
--------- ---------
Cash provided by operating activities................ 82,947 48,904
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment--
Oil and gas properties................................. (92,441) (78,427)
Other property and equipment........................... (1,567) (775)
Purchase of additional interest in subsidiary........... (5,213) (41,594)
Other................................................... (1,478) (129)
--------- ---------
Cash used by investing activities.................... (100,699) (120,925)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock.................................... 1,753 129
Advances on revolving credit facility and other
borrowings............................................. 108,048 88,410
Payments on revolving credit facility and other
borrowings............................................. (87,614) (14,061)
Dividends paid.......................................... (2,514) (1,344)
Other................................................... 873 --
--------- ---------
Cash provided by financing activities................ 20,546 73,134
--------- ---------
Net increase in cash and cash equivalents................ 2,794 1,113
Cash and cash equivalents, beginning of period.......... 2,545 431
--------- ---------
Cash and cash equivalents, end of period................ $ 5,339 $ 1,544
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-26
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1. GENERAL
The accompanying financial statements are unaudited. The consolidated
financial statements include the accounts of the Company and its wholly- and
majority-owned subsidiaries. Management believes that all material adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation have been made. These financial statements and notes should be
read in conjunction with the 1995 audited financial statements and related
notes included elsewhere in this Prospectus. Certain reclassifications have
been made to the prior year financial statements to conform to the 1996
presentations. These reclassifications had no effect on previously reported
net income or cash flow.
2. SIGNIFICANT ACCOUNTING POLICIES
Statements of Cash Flows
During the nine months ended September 30, 1996 and 1995, cash payments for
interest totaled $19,141,953 and $14,161,441, respectively. During the nine
months ended September 30, 1996 and 1995, cash payments for U.S. Federal and
state income taxes totaled $700,000 and $545,453, respectively. Cash payments
for Argentina withholding taxes totaling $64,949 were made during the nine
months ended September 30, 1996. No cash payments were made for the nine
months ended September 30, 1995, for foreign income taxes.
Depreciation, Depletion, and Amortization
Amortization per equivalent barrel of the Company's U.S. oil and gas
properties for the nine months ended September 30, 1996 and 1995, was $3.76
and $3.87, respectively. Amortization per equivalent barrel of the Company's
Argentina oil and gas properties for the nine months ended September 30, 1996
and 1995, was $4.18 and $4.29, respectively. The Company had no Argentina
operations prior to July 1995.
Income Taxes
Deferred income taxes are provided on transactions which are recognized in
different periods for financial and tax reporting purposes. Such temporary
differences arise primarily from the deduction of certain oil and gas
exploration and development costs which are capitalized for financial
reporting purposes and differences in the methods of depreciation. The Company
follows the provisions of Statement of Financial Accounting Standards No. 109
when calculating the deferred income tax provision for financial purposes.
Earnings of the Company's foreign subsidiaries, Cadipsa S.A. and Vintage Oil
Argentina, Inc., are subject to Argentina income taxes. Due to significant
Argentina net operating loss carryforwards for both companies, the Company
does not expect to pay any foreign income taxes related to these subsidiaries
in 1996. No U.S. deferred tax liability has been recognized related to the
unremitted earnings of these foreign subsidiaries, as it is the Company's
intention, generally, to reinvest such earnings permanently.
F-27
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT
Long-term debt at September 30, 1996, and December 31, 1995, consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
9% Senior Subordinated Notes Due 2005, net of
discount....................................... $ 149,623 $ 149,592
Bank revolving credit facility.................. 164,800 74,300
Bank term loan.................................. -- 36,736
5.92% Senior note............................... -- 9,948
Subsidiary debt (a)--
International Finance Corporation Notes....... 25,986 28,000
Bank of Boston Senior note.................... -- 20,000
Other subsidiary debt......................... 3,900 5,200
--------- ---------
344,309 323,776
Less--Current portion of long-term debt......... 7,929 7,930
--------- ---------
$ 336,380 $ 315,846
========= =========
</TABLE>
- --------
(a) Subsidiary debt relates to borrowings of the Company's international
subsidiaries and is non-recourse to the Company except for $9.2 million
advanced by the International Finance Corporation.
Bank Revolving Credit Facility
The Company has available an unsecured revolving credit facility under the
Credit Agreement dated August 29, 1996, as amended (the "Bank Facility"),
among the Company and certain banks. The Bank Facility establishes a borrowing
base (currently $305 million) based on the banks' evaluation of the Company's
U.S. and certain Argentina oil and gas reserves.
Outstanding advances under the Bank Facility bear interest payable quarterly
at a floating rate based on Bank of Montreal's alternate base rate (as
defined) or, at the Company's option, at a fixed rate for up to six months
based on the eurodollar market rate ("LIBOR"). The Company's interest rate
increments above the alternate base rate and LIBOR vary based on the level of
outstanding senior debt and the portion of the borrowing base attributable to
the U.S. reserves at the time. In addition, the Company must pay a commitment
fee ranging from 0.250 to 0.375 percent per annum on the unused portion of the
banks' commitment. Total outstanding advances at September 30, 1996, were
$164.8 million at an average interest rate of approximately 6.5 percent.
On a semiannual basis, the Company's borrowing base is redetermined by the
banks based upon their review of the Company's U.S. and certain Argentina oil
and gas reserves. If the sum of outstanding senior debt (excluding debt of the
Company's foreign subsidiaries) exceeds the borrowing base, as redetermined,
the Company must repay such excess. Any principal advances outstanding at
October 1, 1999, will be payable in 12 equal consecutive quarterly
installments commencing January 1, 2000, with maturity at October 1, 2002.
The terms of the Bank Facility impose certain restrictions on the Company
regarding the pledging of assets and limitations on, among other things,
additional indebtedness and the payment of dividends and other distributions.
In addition, the Bank Facility requires the maintenance of a minimum current
F-28
<PAGE>
VINTAGE PETROLEUM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ratio (as defined) and tangible net worth (as defined) of $200 million plus 75
percent of net proceeds of any future equity offerings.
4. SUBSEQUENT EVENTS
On November 5, 1996, the Province of Santa Cruz, Argentina brought suit
against Cadipsa S.A. in the Corte Suprema de Justicia de la Nacion (the
Supreme Court of Justice of the Argentine Republic, Buenos Aires, Argentina),
Dossier No. s-1451, seeking to recover approximately $10.6 million (which sum
includes interest) allegedly due as additional royalties on four concessions
granted in 1990 in which the Company currently owns a 100 percent working
interest. The Company and its predecessors in title have been paying royalties
at an eight percent rate; the Province of Santa Cruz claims the rate should be
12 percent. The amount of such claim will increase at the differential of
these royalty rates until this claim is resolved. With respect to the 50
percent interest in the two concessions that the Company acquired from British
Gas, plc, the Company believes that it is entitled to indemnification by
British Gas, plc for any loss sustained by the Company as a result of this
claim. Such indemnification equals approximately $4.0 million of the $10.6
million claim. The Company has no indemnification from its predecessors in
title with respect to the payment of royalties on the other two concessions.
Although the Company cannot predict the outcome of this litigation, based upon
the advice of counsel, the Company does not expect this claim to have a
material adverse impact on the Company's financial position or results of
operations.
On November 20, 1996, the Company purchased from Exxon Company, U.S.A.
certain producing oil and gas properties and facilities located in south
Alabama for approximately $28.2 million in cash, subject to post-closing
adjustments. Funds for this acquisition were provided by advances under the
Company's Bank Facility. The properties consist of all of Exxon's interests in
two fields totaling approximately 5,000 net acres located in Escambia County
in south Alabama and are now operated by the Company. Current net daily
production from the properties averages approximately 1,450 barrels of oil and
liquids and 2,800 Mcf of gas.
Also during November 1996, the Company agreed to purchase 100% of the
outstanding common stock of Shamrock Ventures Boliviana Ltd. ("Shamrock") from
affiliates of Ultramar Diamond Shamrock Corporation for $29.0 million in cash.
In addition, at closing on January 7, 1997, the Company repaid all of
Shamrock's existing bank debt (approximately $9.2 million). Funds for the
purchase of the stock and the repayment of debt were provided by advances
under the Company's Bank Facility. Shamrock's assets include (i) oil and gas
properties valued at $35.5 million (including the effect of approximately $6.6
million of deferred income taxes recorded under the purchase method of
accounting), and (ii) inventory, receivables, cash and other assets net of
liabilities (other than bank debt repaid at closing) of approximately $9.3
million. The Company has not completed its evaluations of the purchased assets
and assumed liabilities; therefore, it has not completed the final purchase
price allocation. The transaction is subject to government approval. The oil
and gas properties of Shamrock consist of three blocks in the Chaco Plains
area of southern Bolivia. The acquisition of Shamrock represents an extension
to the Company's South American operating area that was initially established
through a series of acquisitions in Argentina during 1995.
F-29
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Definitions....................................................... 2
Incorporation of Documents by Reference................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 13
Forward-Looking Statements................................................ 17
Common Stock Offering..................................................... 18
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
Selected Financial and Operating Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Recent Acquisitions....................................................... 31
Business.................................................................. 33
Management................................................................ 52
Description of Certain Indebtedness....................................... 55
Description of Notes...................................................... 57
Certain U.S. Federal Income Tax Considerations............................ 85
Underwriting.............................................................. 88
Legal Matters............................................................. 89
Experts................................................................... 89
Available Information..................................................... 90
Index to Financial Statements............................................. F-1
</TABLE>
$100,000,000
VINTAGE
PETROLEUM, INC.
8 5/8% SENIOR SUBORDINATED
NOTES DUE 2009
[LOGO OF VINTAGE PETROLEUM, INC. APPEARS HERE]
SALOMON BROTHERS INC
DILLON, READ & CO. INC.
LEHMAN BROTHERS
NESBITT BURNS SECURITIES INC.
PROSPECTUS
DATED JANUARY 30, 1997
