<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1999
REGISTRATION NO. 333-80579
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CALLON PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 64-0844345
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
200 NORTH CANAL STREET, NATCHEZ, MISSISSIPPI 39120
TELEPHONE: (601) 442-1601
(Address, including zip code, and telephone number including
area code, of registrant's principal executive offices)
JOHN S. WEATHERLY
200 NORTH CANAL STREET, NATCHEZ, MISSISSIPPI 39120
TELEPHONE: (601) 442-1601
(Name, address, including zip code, and telephone number
including area code, of agent for service)
Copy to:
<TABLE>
<S> <C>
BUTLER & BINION, L.L.P. VINSON & ELKINS, L.L.P.
1000 LOUISIANA, SUITE 1600 2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002 1001 FANNIN
ATTN: GEORGE G. YOUNG III HOUSTON, TEXAS 77002
TELEPHONE: (713) 237-3605 ATTN: T. MARK KELLY
TELECOPY : (713) 237-3202 TELEPHONE: (713) 758-4592
TELECOPY: (713) 615-5531
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993 check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 25, 1999
$40,000,000
CALLON PETROLEUM COMPANY
[CALLON PETROLEUM COMPANY LOGO]
% SENIOR SUBORDINATED NOTES DUE 2004
------------------------
INVESTING IN THE NOTES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
------------------------
TERMS OF NOTES
- - MATURITY
September 15, 2004.
- - INTEREST
Fixed annual rate of %.
We will pay interest on the notes on March 15, June 15, September 15 and
December 15 of each year. The first interest payment will be made on September
15, 1999, which will represent interest accrued from , 1999.
- - TRADING
The notes have been approved for listing on the New York Stock Exchange under
the symbol "CPE ZR04."
- - OPTIONAL REDEMPTION
We may redeem the notes at any time on or after March 15, 2001 at 100% of
their principal amount plus accrued and unpaid interest.
- - RANKING
The notes are subordinated in right of payment to all of our senior debt and
to the obligations of our subsidiaries. The notes rank equally with our
existing and future senior subordinated indebtedness. The notes are senior to
our outstanding preferred stock.
- - CHANGE OF CONTROL
If a change of control occurs, we must offer to repurchase the notes at 101%
of their principal amount plus accrued and unpaid interest.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
------------------- -------------------
<S> <C> <C>
Public offering price....................................... 100% $40,000,000
Underwriting discount....................................... % $
Proceeds, before expenses................................... % $
</TABLE>
The underwriters expect to deliver the notes in book-entry form only
through the facilities of The Depository Trust Company against payment in New
York, New York on , 1999.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
A.G. EDWARDS & SONS, INC. MORGAN KEEGAN & COMPANY, INC.
Prospectus dated , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
[MAP SHOWING PRINCIPAL AREAS OF OPERATIONS IN THE GULF OF MEXICO.
MAP DIVIDES THE GULF INTO THE SHALLOW MIOCENE AREA, OCS AREA AND
DEEP WATER AREA.]
CORPORATE PROFILE
- Geographic concentration in the Gulf of Mexico.
- Estimated net proved reserves of 183.3 Bcfe with a discounted present value
of $173.9 million as of June 1, 1999.
- Average daily net production of 43.4 MMcfe during the first quarter of 1999,
86% of which was natural gas.
- Reserve life of 12.1 years.
215% RESERVE GROWTH
- Between January 1, 1996 and June 1, 1999, estimated net proved reserves
increased 215% from 58.3 Bcfe to 183.3 Bcfe.
SIGNIFICANT DEEP WATER SUCCESS
- In September 1998, we announced a discovery on our Boomslang prospect, and
in February 1999, we announced a discovery on our Habanero prospect.
- These discoveries represent the largest discoveries in our history and have
added estimated net proved reserves of 86.8 Bcfe at a cost to us of $10.2
million to drill.
SUBSTANTIAL INVENTORY OF PROSPECTS
- We currently have an inventory of 39 exploratory prospects, all of which
have been defined by seismic data and interpretation.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information from this document but does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of this offering and for a
more complete understanding of our business, you should carefully read this
entire document and the documents incorporated by reference in this document,
particularly the section entitled "Risk Factors." When we use the terms
"Callon," "we," "us" or "our," we are referring to Callon Petroleum Company
together with its consolidated subsidiaries and predecessors, unless the context
otherwise requires. If you are not familiar with the ownership of oil and gas
properties or the way in which quantities and values of oil and gas reserves are
described, please read "Glossary of Oil and Gas Terms" included in this
document.
THE COMPANY
Callon has been engaged in the exploration, development, acquisition and
production of oil and gas in the Gulf Coast region since 1950. Our properties
and operations are geographically concentrated in the offshore waters of the
Gulf of Mexico where we have substantial experience. As of June 1, 1999, we had
estimated net proved reserves of 183.3 Bcfe which had a discounted present value
of $173.9 million. Reserves comprising 72% of this discounted present value were
classified as proved developed. Average daily net production during the first
quarter of 1999 was 43.4 MMcfe, of which 86% was natural gas. We operate wells
representing 82% of this production. Net proved reserves as of June 1, 1999
divided by our production from the four quarters ended March 31, 1999, sometimes
referred to as our "reserve life," was 12.1 years.
Our reserves and production have grown rapidly since 1996 as a result of
exploration and development drilling, as well as property acquisitions. Between
January 1, 1996 and June 1, 1999, estimated net proved reserves increased 215%,
and average daily net production increased 70% from the first quarter of 1996 to
the first quarter of 1999.
BUSINESS STRATEGY
Our goals are to increase reserves, production, cash flow and earnings at
low reserve replacement costs. We seek to achieve these goals through the
following strategies:
- Assemble and explore a balanced portfolio of projects in the Gulf of
Mexico composed of:
Controlling working interests in projects with low exploration risk and
low drilling and completion costs targeting reserve deposits of between
3 and 10 Bcf in the shallow Miocene area at depths of less than 4,000
feet;
Significant working interests in projects with higher exploration risk
and higher drilling and completion costs targeting reserve deposits of
between 10 and 100 Bcfe in the outer continental shelf ("OCS") area at
depths of between 7,000 and 17,000 feet; and
Small working interests in projects with high exploration risk and high
drilling and completion costs targeting large reserve deposits in the
deep water area of the Gulf of Mexico.
- Acquire at low costs, additional working interests, gathering systems,
pipelines, production facilities and other infrastructure in areas in
which we operate. Ownership of these facilities enables us to reduce the
costs of completing wells and to control the timing of the development of
our properties.
- Utilize the latest available technology. Our geoscientists and petroleum
engineers have developed an expertise with advanced technologies,
including 3-D seismic interpretation and computer-aided exploration. In
addition, we have developed a proprietary, inexpensive, high-resolution
2-D seismic data processing and interpretation technique to target
shallow Miocene formations.
- Maintain financial flexibility. We seek to maintain a substantial unused
borrowing capacity under our bank credit facility by periodically
refinancing our bank debt in the capital markets by issuing both debt and
equity securities.
3
<PAGE> 5
EXPLORATION OPERATIONS
We explore for oil and gas in the state and federal waters of the Gulf of
Mexico. Since 1996, we have drilled nine gross (5.3 net) productive exploration
wells and nine gross (3.4 net) dry holes in the Gulf of Mexico for a gross
success rate of 50% (61% net). We have also drilled five gross (2.9 net)
development wells in the Gulf of Mexico, all of which were successful. We
currently have one gross (0.9 net) exploration well in the OCS area in progress,
and have an inventory of 39 exploration prospects. Our principal areas of
exploration are summarized below. For a more complete description see "Business
and Properties."
Shallow Miocene Area. In the shallow Miocene area, we explore for gas
deposits using 3-D and conventional 2-D seismic technology, as well as a
proprietary high-resolution 2-D seismic data processing and interpretation
technique which better defines reservoir thickness and continuity. We have an
average working interest in productive wells in the shallow Miocene area of 83%,
all of which we operate. Since 1996, we have drilled three gross (2.7 net)
exploration wells, of which two gross (2.0 net) were productive, and two gross
(1.5 net) development wells, both of which were productive. Our drilling
activities in the shallow Miocene area have added 11.2 Bcf of estimated net
proved reserves at a cost to us of $9.5 million to drill and complete. We have
acquired an extensive infrastructure of production platforms, gathering systems
and pipelines located in our shallow Miocene area. These facilities reduce the
development costs of our successful wells and reduce the time necessary to begin
production from successful wells. In 1997, we also acquired 52.5 Bcf of
estimated net proved reserves in the Mobile Block 864 area for a total
acquisition cost of $48.7 million. As described under "Recent Developments," we
have acquired additional interests in this area. We currently have an inventory
of four exploration prospects in this area, two of which we expect to drill
before year-end 1999.
Outer Continental Shelf Area. We explore for oil and gas deposits in the
OCS area of the Gulf of Mexico using the latest in 3-D seismic technology. The
wells drilled in this area are more expensive than the shallow Miocene wells and
target larger oil and gas deposits. Our weighted average working interest in
productive wells in the OCS area is 65.4%. Since 1996, we have added 28.6 Bcfe
of estimated net proved reserves at a cost to us of $28.3 million to drill and
complete. Since 1996, we have drilled 13 gross (5.5 net) exploration wells in
this area, of which five gross (2.8 net) were productive, and we currently have
one gross (0.9 net) exploration well in progress. We also drilled three gross
(1.4 net) development wells, all of which were successful. We currently have an
inventory of 20 exploration prospects in this area, nine of which we expect to
drill before year-end 2000.
Deep Water Area. We allocate a portion of our capital expenditure budget to
the exploration of deep water regions in the Gulf of Mexico. These wells are
expensive to drill and complete and target large reserve deposits. These wells
are usually located far from production facilities and may require long lead
times to construct pipelines and other facilities necessary to begin production.
To reduce the risks associated with the high cost of these wells, we explore
these prospects with experienced joint venture partners, including Shell
Deepwater Development, Inc. and Murphy Exploration and Production, Inc., as
operators. We have drilled two wells in our deep water area, both of which were
successful. In September 1998, we announced a discovery on our "Boomslang"
prospect, and in February 1999, we announced a discovery on our "Habanero"
prospect. These discoveries represent the largest discoveries in our history and
have added estimated net proved reserves of 86.8 Bcfe at a cost to us of $10.2
million to drill. Costs to complete these wells cannot be determined until we
drill several related prospects. We currently have an inventory of 15 deep water
exploration prospects, four of which we expect to drill before year-end 2000.
4
<PAGE> 6
RECENT DEVELOPMENTS
On June 11, 1999, we acquired Murphy's working interests in nine blocks in
the shallow Miocene area in which we already owned an interest. Included in the
acquisition is a 13.1% working interest in four producing wells in the Mobile
Block 864 unit and a 38.6% average working interest in three additional
producing wells. Murphy will receive a production payment entitling it to 7.6
Bcf of gas from production attributable to the wells over three and a quarter
years. Through this acquisition, we also gained control over exploration of
58,000 gross acres. After giving effect to the acquisition as if it had occurred
on January 1, 1999, our average daily net production would have increased by 5.3
MMcf, or 12.2%, during the first quarter of 1999.
In February 1999, we announced a discovery on our Habanero prospect in the
deep water area. This well was drilled in 2,000 feet of water to a total
measured depth of 21,158 feet. We have an 11.3% working interest in this well,
which had estimated net proved reserves as of June 1, 1999 of 50.9 Bcfe.
In January 1999, we announced a discovery on our Snapper prospect in the
OCS area. This well was drilled in 210 feet of water to a total measured depth
of 8,800 feet. We have a 50.0% working interest in this well, which had 5.0 Bcfe
of estimated net proved reserves as of June 1, 1999.
In September 1998, we announced a discovery on our Boomslang prospect in
the deep water area. This well was drilled in 900 feet of water to a total
measured depth of 13,200 feet. We have a 35.0% working interest in this well,
which had estimated net proved reserves as of June 1, 1999 of 35.9 Bcfe.
SIGNIFICANT PROPERTIES
The following table provides information about estimated net proved
reserves attributable to our principal operating areas as of June 1, 1999.
Estimated net quantities of proved oil and gas reserves and the discounted
present value of the reserves were estimated by our independent reserve
engineers.
<TABLE>
<CAPTION>
ESTIMATED NET PROVED RESERVES PERCENT
------------------------------ DISCOUNTED TOTAL
GAS OIL TOTAL PRESENT VALUE DISCOUNTED
(MMCF) (MBBLS) (MMCFE) ($000) PRESENT VALUE
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Shallow Miocene area................... 57,906 -- 57,906 $ 71,135 40.9%
OCS area............................... 20,839 951 26,546 38,156 21.9%
Deep water area........................ 20,829 10,994 86,791 48,987 28.2%
Other areas............................ 5,399 1,106 12,034 15,639 9.0%
------- ------ ------- -------- -----
Total........................ 104,973 13,051 183,277 $173,917 100.0%
======= ====== ======= ======== =====
</TABLE>
PRINCIPAL OFFICE
Our principal executive offices are located at 200 North Canal Street,
Natchez, Mississippi 39120 and our telephone number is (601) 442-1601.
5
<PAGE> 7
THE OFFERING
Securities Offered......... $40,000,000 principal amount of % Senior
Subordinated Notes due 2004.
Maturity................... September 15, 2004.
Interest Payment Dates..... March 15, June 15, September 15 and December 15.
The first interest payment will be September 15,
1999, which will represent interest accrued from
, 1999.
Optional Redemption........ On or after March 15, 2001, we may redeem all or a
portion of the notes at 100% of their principal
amount plus accrued and unpaid interest.
Ranking.................... The notes:
- are unsecured;
- rank junior to our current and future senior
debt, including debt we may incur under our bank
credit facility, and the liabilities of our
subsidiaries;
- rank equally with our existing and future senior
subordinated debt; and
- are senior to our outstanding preferred stock.
Assuming we had issued the notes and applied the
proceeds as intended as of March 31, 1999, we would
have had no senior indebtedness and $100.2 million
of senior subordinated indebtedness, including the
notes. Also, our subsidiaries had $12.0 million of
liabilities on their balance sheets at March 31,
1999, excluding guaranties of our bank debt.
Restrictive Covenants...... The indenture governing the notes will, among other
things, limit our ability and the ability of our
subsidiaries to:
- incur additional indebtedness;
- place liens on our assets;
- make dividend payments on our common stock or
repurchase any of our capital stock;
- enter into affiliate transactions; and
- merge, consolidate and sell substantially all of
our assets.
The covenants are fully described under
"Description of the Notes -- Certain Covenants."
Change of Control.......... If a change of control occurs, we must offer to
repurchase the notes at 101% of their principal
amount plus accrued and unpaid interest. For a
description of the change of control provisions,
see "Description of the Notes -- Certain
Covenants -- Change of Control."
Use of Proceeds............ The net proceeds we receive from the sale of the
notes, together with our cash flows and borrowings
under our bank credit facility, will be used to
fund our remaining 1999 capital expenditure budget
and a portion of our 2000 capital expenditure
budget. Pending this use of the net proceeds, we
will repay amounts under our bank credit facility,
which may be reborrowed at a later date, and invest
in short-term interest-bearing liquid investments.
Trading.................... The notes have been approved for listing on the New
York Stock Exchange under the symbol "CPE ZR04."
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following is our summary financial data. For further information that
will help you better understand the summary data, see "Selected Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales..................... $ 7,969 $ 11,045 $ 35,624 $ 42,130 $ 25,764
Interest and other.................... 405 447 2,094 1,508 946
-------- -------- -------- -------- --------
Total revenues................ 8,374 11,492 37,718 43,638 26,710
-------- -------- -------- -------- --------
Costs and expenses:
Lease operating expenses.............. 1,608 1,941 7,817 8,123 7,562
Depreciation, depletion and
amortization....................... 3,963 5,570 19,284 16,488 9,832
General and administrative............ 1,061 1,502 5,285 4,433 3,495
Interest.............................. 1,027 651 1,925 1,957 313
Accelerated vesting and retirement
benefits........................... -- -- 5,761 -- --
Impairment of oil and gas
properties......................... -- -- 43,500 -- --
-------- -------- -------- -------- --------
Total costs and expenses...... 7,659 9,664 83,572 31,001 21,202
-------- -------- -------- -------- --------
Income (loss) from operations........... 715 1,828 (45,854) 12,637 5,508
Income tax expense (benefit).......... 243 621 (15,100) 4,200 50
-------- -------- -------- -------- --------
Net income (loss)....................... 472 1,207 (30,754) 8,437 5,458
Preferred stock dividends............... 831 699 2,779 2,795 2,795
-------- -------- -------- -------- --------
Net income (loss) available to common
shares................................ $ (359) $ 508 $(33,533) $ 5,642 $ 2,663
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic................................. $ (.04) $ .06 $ (4.17) $ .91 $ .46
Diluted............................... $ (.04) $ .06 $ (4.17) $ .88 $ .45
STATEMENT OF CASH FLOWS DATA:
Cash provided by operating activities... $ 2,965 $ 9,147 $ 29,721 $ 27,337 $ 14,323
Cash used in investing activities....... 13,730 12,397 54,196 85,159 36,063
Cash provided by (used in) financing
activities............................ 8,615 (673) 15,178 65,750 25,144
BALANCE SHEET DATA (END OF PERIOD):
Working capital......................... $ 576 $ 7,880 $ 1,142 $ 12,719 $ 4,878
Oil and gas properties, net............. 151,963 111,213 141,905 150,494 82,489
Total assets............................ 188,457 191,615 181,652 190,421 118,520
Total debt.............................. 92,231 60,250 81,250 60,250 24,250
Stockholders' equity.................... 82,730 114,788 84,484 113,701 77,864
OTHER FINANCIAL DATA:
Capital expenditures, net............... $ 13,730 $ 12,397 $ 54,196 $ 85,159 $ 36,063
EBITDA.................................. $ 6,116 $ 8,974 $ 27,564 $ 33,209 $ 16,138
Ratio of EBITDA to interest expense..... 10.7x 12.9x 14.3x 17.0x 51.6x
Ratio of earnings to fixed charges...... -- 1.7x -- 3.3x 8.8x
Ratio of total debt to EBITDA........... 3.7x 1.9x 2.9x 1.8x 1.5x
</TABLE>
7
<PAGE> 9
SUMMARY OPERATING AND RESERVE DATA
The following is our summary operating and reserve data. For further
information that will help you better understand the summary data, see "Selected
Financial Data."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------- --------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRODUCTION:
Oil (MBbls)..................................... 90 112 310 462 585
Gas (MMcf)...................................... 3,369 4,036 14,036 13,114 6,269
Total production (MMcfe)........................ 3,909 4,706 15,894 15,887 9,781
AVERAGE SALES PRICE:
Oil (per Bbl)................................... $11.49 $13.85 $ 12.41 $ 18.63 $18.27
Gas (per Mcf)................................... 2.06 2.35 2.26 2.56 2.40
Total production (per Mcfe)..................... 2.04 2.35 2.24 2.65 2.63
AVERAGE COSTS (PER MCFE):
Lease operating expenses (excluding severance
taxes)........................................ $ .35 $ .34 $ .44 $ .42 $ .57
Severance taxes................................. .06 .07 .06 .09 .20
Depreciation, depletion and amortization........ 1.01 1.18 1.19 1.04 1.01
General and administrative (net of management fees)... .27 .32 .33 .28 .36
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 1, ------------------------------
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ESTIMATED NET PROVED RESERVES:
Oil (MBbls)........................................ 13,051 6,898 3,402 3,819
Gas (MMcf)......................................... 104,973 88,030 88,738 50,424
Gas equivalent (MMcfe)............................. 183,277 129,418 109,150 73,338
Estimated future net cash flows before income taxes
(000s)........................................... $280,980 $152,552 $209,260 $216,154
Discounted present value (000s).................... $173,917 $ 99,751 $136,448 $160,171
OTHER RESERVE DATA:
Reserve replacement costs ($/Mcfe)................. $ .58 $ 1.29 $ 1.45 $ .73
Reserve life (years)............................... 12.1 8.1 6.9 7.5
</TABLE>
8
<PAGE> 10
RISK FACTORS
You should carefully consider all of the information we have included in
this document and the documents we have included or incorporated by reference
before purchasing our notes.
OUR SIGNIFICANT DEBT LEVELS AND OUR DEBT COVENANTS MAY LIMIT OUR FUTURE
FLEXIBILITY IN OBTAINING ADDITIONAL FINANCING AND IN PURSUING BUSINESS
OPPORTUNITIES.
Assuming we had issued the notes and applied the proceeds as described in
"Use of Proceeds" as of March 31, 1999, we would have had approximately $100.2
million in long-term debt. The level of our indebtedness will have important
effects on our future operations, including:
- A portion of our cash flow will be used to pay interest and principal on
our debt and will not be available for other purposes.
- Our bank credit facility contains financial tests which we must satisfy
in order to continue to borrow funds under the facility. Failure to meet
these tests may be a default under our bank credit facility.
- Covenants in the notes and in our existing senior subordinated notes
require us to meet financial tests in order to borrow additional money,
which may have the effect of limiting our flexibility in reacting to
changes in our business and our ability to fund future operations and
acquisitions.
- Our ability to obtain additional financing for capital expenditures and
other purposes may be limited.
We have included a more thorough discussion of the covenants in our bank
credit facility and existing senior subordinated notes under "Description of
Bank Credit Facility and Other Indebtedness."
THERE MAY NOT BE SUFFICIENT ASSETS TO PAY AMOUNTS OWED ON THE NOTES IF A DEFAULT
OCCURS.
The notes will be subordinated to our current and future senior debt. In
addition, the notes will rank equally with our existing and future senior
subordinated indebtedness and will be subordinated to the obligations of our
subsidiaries. Upon a liquidation or in a bankruptcy or other similar proceeding,
the holders of our senior debt will be entitled to be paid in full before any
payment may be made to the holders of the notes. In addition, creditors of our
subsidiaries will be paid prior to any use of our subsidiaries' assets to make
payments on the notes. As a result, the holders of notes may receive less,
proportionately, than the holders of senior debt. We cannot make any assurances
that we will have sufficient assets to pay amounts due on the notes. Our
indenture for the notes permits us to incur additional debt in the future,
including the entire amount that will be available for borrowing under our bank
credit facility.
THERE MAY NOT BE A LIQUID MARKET FOR RESALE OF THE NOTES.
The notes will be new securities for which currently there is no trading
market. Even though the notes have been approved for listing on the New York
Stock Exchange, we cannot assure you that a market for the notes will develop,
or that the market will have sufficient liquidity to enable resale of the notes.
WE MAY NOT BE ABLE TO REPURCHASE NOTES UPON A CHANGE OF CONTROL.
If a change of control occurs, each holder of the notes will have the right
to require us to repurchase all or any part of that holder's notes as described
under "Description of the Notes -- Certain Covenants -- Change of Control." Our
bank credit facility prohibits the repurchase of the notes. In order to
repurchase the notes, we would be required to repay our debt under our bank
credit facility or obtain consents from our bank lenders. If we cannot repay the
bank credit facility or obtain the consents, we would not be able to repurchase
the notes. Also, we may not have sufficient funds available or be able to obtain
the financing necessary to repurchase the notes.
If a change of control occurs and we do not offer to repurchase the notes
or if we do not repurchase the notes when we are required to, an event of
default will occur under the indenture governing the notes,
9
<PAGE> 11
which would also be a default under our bank credit facility and other senior
subordinated notes. Each of these defaults could have a material adverse effect
on us and the holders of the notes.
OIL AND GAS PRICES ARE VOLATILE AND HAVE BEEN DEPRESSED RECENTLY.
Our success is highly dependent on prices for oil and gas, which are
extremely volatile. Beginning in 1997 and continuing through earlier this year,
the prices we received for our production generally declined, especially for
oil. Oil prices have recently recovered, but remain low by historic standards.
Any additional substantial or extended decline in the price of oil or gas would
have a material adverse effect on us. Oil and gas markets are both seasonal and
cyclical. The prices of oil and gas depend on factors we cannot control such as
weather, economic conditions and government actions. Prices of oil and gas will
affect the following aspects of our business:
- our revenues, cash flows and earnings;
- our ability to attract capital to finance our operations and the cost of
the capital;
- the amount we are allowed to borrow under our bank credit facility;
- the value of our oil and gas properties; and
- the profit or loss we incur in exploring for and developing our reserves.
WE MAY BE UNABLE TO REPLACE RESERVES WHICH WE HAVE PRODUCED.
Our future success depends upon our ability to find, develop and acquire
oil and gas reserves that are economically recoverable. As is generally the case
in the Gulf Coast region, our producing properties usually have high initial
production rates, followed by a steep decline in production. As a result, we
must locate and develop or acquire new oil and gas reserves to replace those
being depleted by production. We must do this even during periods of low oil and
gas prices when it is difficult to raise the capital necessary to finance these
activities. Without successful exploration or acquisition activities, our
reserves, production and revenues will decline rapidly. We cannot assure you
that we will be able to find and develop or acquire additional reserves at an
acceptable cost.
OUR FOCUS ON EXPLORATORY PROJECTS INCREASES THE RISKS INHERENT IN OUR OIL AND
GAS ACTIVITIES.
Our business strategy focuses on replacing reserves through exploration,
where the risks are greater than in acquisitions and development drilling.
Although we have been successful in exploration in the past, we cannot assure
you that we will continue to increase reserves through exploration.
WE DO NOT CONTROL ALL OF OUR OPERATIONS, ESPECIALLY OUR DEEP WATER OPERATIONS.
We do not operate all of our properties and have limited influence over the
operations of some of these properties, particularly our deep water projects.
Our lack of control could result in the following:
- the operator may initiate exploration or development on a faster or
slower pace than we prefer;
- the operator may propose to drill more wells or build more facilities on
a project than we have funds for or that we deem appropriate, which may
mean that we are unable to participate in the project or share in the
revenues generated by the project even though we paid our share of
exploration costs; and
- if an operator refuses to initiate a project, we may be unable to pursue
the project.
Any of these events could reduce the value of our properties.
COMPETITIVE INDUSTRY CONDITIONS MAY NEGATIVELY AFFECT OUR ABILITY TO CONDUCT
OPERATIONS.
Exploration in the Gulf of Mexico has recently received renewed interest,
especially among major and large independent oil companies. The acquisition of
exploration prospects, producing properties and
10
<PAGE> 12
production facilities in the Gulf of Mexico is highly competitive. Factors which
affect our ability to successfully compete are:
- our access to the capital necessary to drill wells and acquire
properties;
- our access to seismic, geological and other information, and our ability
to retain the personnel necessary to properly evaluate such information;
- the location of, and our ability to access, platforms, pipelines and
other facilities used to produce and transport oil and gas production;
and
- the standards we establish for the minimum projected return on an
investment of our capital.
Our competitors include major integrated oil companies and large
independent energy companies, many of which have greater financial and other
resources.
WE MAY NOT BE ABLE TO REPLACE OUR RESERVES OR GENERATE CASH FLOWS IF WE ARE
UNABLE TO RAISE CAPITAL.
We will be required to make substantial capital expenditures to develop our
existing reserves, and to discover new oil and gas reserves. Historically, we
have financed these expenditures primarily with cash from operations, proceeds
from bank borrowings and proceeds from the sale of debt and equity securities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Expenditures" for a
discussion of our capital budget. We cannot assure you that we will be able to
raise capital in the future. We also make offers to acquire oil and gas
properties in the ordinary course of our business. If these offers are accepted,
our capital needs may increase substantially.
INFORMATION IN THIS PROSPECTUS REGARDING OUR PROSPECTS REFLECTS OUR CURRENT
INTENT AND IS SUBJECT TO CHANGE.
We describe our current prospects and our plans to explore these prospects
in this prospectus. A prospect is a property on which we have identified what
our geoscientists believe, based on available seismic and geological
information, to be indications of hydrocarbons. Our prospects are in various
stages of evaluation, ranging from a prospect which is ready to drill to a
prospect which will require substantial additional seismic data processing and
interpretation. Whether we ultimately drill a prospect may depend on the
following factors:
- receipt of additional seismic data or the reprocessing of existing data;
- material changes in oil or gas prices or the costs and availability of
drilling rigs;
- success or failure of wells drilled in similar formations or which would
use the same production facilities;
- availability and cost of capital;
- changes in the estimates of the costs to drill or complete wells;
- our ability to attract other industry partners to acquire a portion of
the working interest to reduce exposure to costs and drilling risks; and
- decisions of our joint working interest owners.
We will continue to gather data about our prospects, and it is possible
that additional information may cause us to alter our drilling schedule or
determine that a prospect should not be pursued at all. You should understand
that our plans regarding our prospects are subject to change.
11
<PAGE> 13
YOU SHOULD NOT PLACE UNDUE RELIANCE ON RESERVE INFORMATION BECAUSE RESERVE
INFORMATION REPRESENTS ESTIMATES.
Estimating quantities of proved reserves is inherently imprecise and
involves uncertainties and factors beyond our control. The reserve data in this
prospectus represent only estimates. Such estimates are based upon assumptions
about future production levels, future oil and gas prices and future operating
costs. As a result, the quantity of proved reserves may be subject to downward
or upward adjustment. In addition, estimates of the economically recoverable oil
and gas reserves, classifications of such reserves, and estimates of future net
cash flows, prepared by different engineers or by the same engineers at
different times, may vary substantially. Information about reserves constitutes
forward-looking information. See "Forward-Looking Statements" for information
regarding forward-looking information.
WEATHER, UNEXPECTED SUBSURFACE CONDITIONS, AND OTHER UNFORESEEN OPERATING
HAZARDS MAY ADVERSELY IMPACT OUR ABILITY TO CONDUCT BUSINESS.
There are many operating hazards in exploring for and producing oil and
gas, including:
- our drilling operations may encounter unexpected formations or pressures
which could cause damage to equipment or personal injury;
- we may experience equipment failure which curtails or stops production;
and
- we could experience blowouts or other damages to the productive
formations which may require a well to be re-drilled or other corrective
action to be taken.
In addition, any of the foregoing may result in environmental damages for
which we will be liable. Moreover, a substantial portion of our operations are
offshore and are subject to a variety of risks peculiar to the marine
environment such as hurricanes and other adverse weather conditions. Offshore
operations are also subject to more extensive governmental regulation.
We cannot assure you that we will be able to maintain adequate insurance at
rates we consider reasonable to cover our possible losses from operating
hazards. The occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect our financial condition and
results of operations.
THE RECENT DEPRESSED FINANCIAL CONDITIONS IN THE OIL AND GAS INDUSTRY MAY CHANGE
EXPLORATION AND DEVELOPMENT PLANS OR CAUSE DIFFICULTIES IN FINANCING ACTIVITIES.
The recent low prices for oil and gas have limited the access of many
independent oil and gas companies to the capital necessary to finance
activities. Most oil companies have substantially reduced their capital budgets
for 1999 and 2000. As a result, the decision not to drill or complete a well may
be made based on a lack of available capital rather than the quality of the
project. For projects operated by others, we may be unable to control decisions
regarding drilling and completion operations even if those decisions are made
based on capital constraints.
In addition, some of the other working interest owners of our wells may be
unwilling or unable to pay their share of the costs of projects as they become
due. At worst, a working interest owner may declare bankruptcy and refuse or be
unable to pay its share of the cost of a project. In such cases, we could be
required to pay other working interest owner's share of the costs.
WE MAY NOT HAVE PRODUCTION TO OFFSET HEDGES; BY HEDGING, WE MAY NOT BENEFIT FROM
PRICE INCREASES.
Part of our business strategy is to reduce our exposure to the volatility
of oil and gas prices by hedging a portion of our production. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Financial Instruments" for a
discussion of our hedging practices. In a typical hedge transaction, we will
have the right to receive from the other parties to the hedge the excess of the
fixed price specified in the hedge over a floating price based on a
12
<PAGE> 14
market index, multiplied by the quantity hedged. If the floating price exceeds
the fixed price, we are required to pay the other parties this difference
multiplied by the quantity hedged. We are required to pay the difference between
the floating price and the fixed price when the floating price exceeds the fixed
price regardless of whether we have sufficient production to cover the
quantities specified in the hedge. Significant reductions in production at times
when the floating price exceeds the fixed price could require us to make
payments under the hedge agreements even though such payments are not offset by
sales of production. Hedging will also prevent us from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS COULD BE COSTLY
AND COULD NEGATIVELY IMPACT PRODUCTION.
Our operations are subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may:
- require that we acquire permits before commencing drilling;
- restrict the substances that can be released into the environment in
connection with drilling and production activities;
- limit or prohibit drilling activities on protected areas such as wetlands
or wilderness areas; and
- require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells.
Under these laws and regulations, we could be liable for personal injury
and clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for sudden and accidental environmental damages. We do not believe that
insurance coverage for environmental damages that occur over time is available
at a reasonable cost. Moreover, we do not believe that insurance coverage for
the full potential liability that could be caused by sudden and accidental
environmental damages is available at a reasonable cost. Accordingly, we may be
subject to liability or we may be required to cease production from properties
in the event of environmental damages.
FACTORS BEYOND OUR CONTROL AFFECT OUR ABILITY TO MARKET PRODUCTION.
The ability to market oil and gas from our wells depends upon numerous
factors beyond our control. These factors include:
- the extent of domestic production and imports of oil and gas;
- the proximity of the gas production to gas pipelines;
- the availability of pipeline capacity;
- the demand for oil and gas by utilities and other end users;
- the availability of alternative fuel sources;
- the effects of inclement weather;
- state and federal regulation of oil and gas marketing; and
- federal regulation of gas sold or transported in interstate commerce.
Because of these factors, we may be unable to market all of the oil or gas
we produce. In addition, we may be unable to obtain favorable prices for the oil
and gas we produce.
13
<PAGE> 15
WE FACE A THREAT OF BUSINESS DISRUPTION FROM THE YEAR 2000 ISSUE.
The year 2000 issue refers to the inability of computer and other
information technology systems to properly process date and time information,
stemming from the outdated programming practice of using two digits rather than
four to represent the year in a date. The consequence of the year 2000 issue is
that computer and embedded processing systems are at risk of malfunctioning,
particularly during the transition from 1999 to 2000. The effects of the year
2000 issue are exacerbated by the interdependence of computer and
telecommunications systems throughout the world. This interdependence also
exists among Callon and our vendors, customers and business partners, as well as
with regulators in the United States.
Our operations are highly dependant on automation. The risks to us
associated with the year 2000 issue fall into three general areas:
- failure of our financial and administrative systems which could result in
our receiving incorrect information upon which we base decisions;
- failure of the embedded systems which control our highly automated
production facilities; and
- failure of our suppliers and purchasers to correct their year 2000
problems.
For a description of the steps we have taken to address the year 2000
issue, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
FORWARD-LOOKING STATEMENTS
In this prospectus, we have made many forward-looking statements. We cannot
assure you that the plans, intentions or expectations upon which our
forward-looking statements are based will occur. Our forward-looking statements
are subject to risks, uncertainties and assumptions, including those discussed
elsewhere in this prospectus and the documents that are incorporated by
reference into this prospectus. Some of the risks which could affect our future
results and could cause results to differ materially from those expressed in our
forward-looking statements include:
- the volatility of oil and natural gas prices;
- the uncertainty of estimates of oil and natural gas reserves;
- the impact of competition;
- difficulties encountered during the exploration for and production of oil
and natural gas;
- the difficulties encountered in delivering oil and natural gas to
commercial markets;
- changes in customer demand;
- the uncertainty of our ability to attract capital;
- changes in the extensive government regulations regarding the oil and
natural gas business; and
- compliance with environmental regulations.
The information contained in this prospectus, including the information set
forth under the heading "Risk Factors," identifies additional factors that could
affect our operating results and performance. We urge you to carefully consider
those factors.
Our forward-looking statements are expressly qualified in their entirety by
this cautionary statement.
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<PAGE> 16
USE OF PROCEEDS
We expect to receive approximately $38.4 million of net proceeds from this
offering after deducting the underwriters' discount and estimated offering
expenses, assuming an offering price of 100%, underwriting discount of 3.5% and
expenses of $250,000. We intend to use all of the net proceeds, together with
our cash flows and borrowings under our bank credit facility, to fund our
remaining 1999 capital expenditure budget, estimated to be $34.1 million, and a
portion of our 2000 capital expenditure budget. For a more detailed description
of our capital expenditure budget, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Pending the use of funds to pay capital expenditures, we will use
the net proceeds from the sale of the notes to repay borrowings under our bank
credit facility. To the extent proceeds are in excess of amounts outstanding
under our bank credit facility, we will invest in short-term, interest-bearing,
liquid investments. As of June 1, 1999, borrowings of $35.1 million were
outstanding under our bank credit facility, with a weighted average interest
rate of 6.57%.
CAPITALIZATION
The following table sets forth our capitalization, as of March 31, 1999,
and as adjusted to give effect to the sale of the notes and the application of
the estimated net proceeds.
For a description of the application of the net proceeds, see "Use of
Proceeds." You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included and
incorporated by reference in this document. As of June 1, 1999, the outstanding
balance under our bank credit facility was $35.1 million.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
AS
HISTORICAL ADJUSTED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,150 $ 16,500
======== ========
Long-term debt:
Credit facility........................................... $ 26,100 $ 100
10% senior subordinated notes............................. 24,150 24,150
10.125% senior subordinated notes......................... 36,000 36,000
The notes offered hereby.................................. -- 40,000
Stockholders' equity:
Preferred stock, $0.01 par value, 2,500,000 shares
authorized; 1,045,461 shares of Convertible
Exchangeable Preferred Stock, Series A issued and
outstanding with a liquidation preference of
$26,136,525............................................ 10 10
Common stock, $0.01 par value, 20,000,000 shares
authorized; 8,545,517 shares outstanding............... 85 85
Treasury stock (98,577 shares at cost).................... (1,177) (1,177)
Capital in excess of par value............................ 108,296 108,296
Retained earnings (deficit)............................... (24,484) (24,484)
-------- --------
Total stockholders' equity........................ 82,730 82,730
-------- --------
Total capitalization.............................. $168,980 $182,980
======== ========
</TABLE>
15
<PAGE> 17
SELECTED FINANCIAL DATA
The following table shows selected financial data for the five years ended
December 31, 1998 and for the three months ended March 31, 1999 and 1998. The
financial data for each of the three years in the period ended December 31, 1998
has been derived from our audited consolidated financial statements for these
periods which are included and incorporated by reference in this prospectus. The
financial data for the years ended December 31, 1995 and 1994 has been derived
from our audited financial statements. The financial data for each of the
three-month periods ended March 31, 1999 and 1998 has been derived from our
unaudited consolidated financial statements for these periods which are also
included in this prospectus. You should read this data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
and incorporated by reference in this document. The selected financial data is
not necessarily indicative of our future results.
The following information will help you to better understand the selected
and summary financial data.
- Callon was formed on September 16, 1994. Historical information prior to
September 16, 1994 includes financial and operating information of our
predecessors.
- EBITDA is earnings before interest expense, income tax expense,
depreciation, depletion, amortization and other non-cash charges. EBITDA
is presented because it is a widely accepted financial indication of a
company's ability to service and incur debt. EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of our
operating performance or to cash flow as a measure of liquidity.
- EBITDA, used in the debt to EBITDA ratio and the EBITDA to interest
expense ratio, is calculated using EBITDA for the immediately preceding
four quarters. Interest expense, used in the EBITDA to interest expense
ratio, is calculated using interest expense for the immediately preceding
four quarters.
- For purposes of computing the ratio of earnings to fixed charges,
"earnings" are composed of the following:
- consolidated earnings or loss from continuing operations before tax,
excluding undistributed equity earnings of affiliated companies; plus
- fixed charges, excluding capitalized interest.
Fixed charges are comprised of the following:
- interest expense on indebtedness and capitalized interest;
- amortization of debt issuance costs, discounts and premiums; and
- that portion of capital lease expense which is deemed to be
representative of an interest factor.
Earnings did not cover fixed charges by $262,000 in the first quarter of
1999, $45.9 million in 1998 and $313,000 in 1994.
- We use the full-cost method of accounting. Under this method of
accounting, our net capitalized costs to acquire, explore and develop oil
and gas properties may not exceed the standardized measure of our proved
reserves. If these capitalized costs exceed the standardized measure, the
excess is charged to expense. As a result of the significant decline in
oil and gas prices, we recorded a non-cash impairment expense related to
our oil and gas properties in the amount of $43.5 million ($28.7 million
after-tax) during the fourth quarter of 1998. The process used to
calculate the standardized measure is described under "Glossary of Oil
and Gas Terms."
16
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas sales.............. $ 7,969 $ 11,045 $ 35,624 $ 42,130 $ 25,764 $23,210 $13,948
Interest and other............. 405 447 2,094 1,508 946 627 171
-------- -------- -------- -------- -------- ------- -------
Total revenues............ 8,374 11,492 37,718 43,638 26,710 23,837 14,119
-------- -------- -------- -------- -------- ------- -------
Costs and expenses:
Lease operating expenses....... 1,608 1,941 7,817 8,123 7,562 6,732 4,042
Depreciation, depletion and
amortization................. 3,963 5,570 19,284 16,488 9,832 10,376 6,049
General and administrative..... 1,061 1,502 5,285 4,433 3,495 3,880 3,717
Interest....................... 1,027 651 1,925 1,957 313 1,794 624
Accelerated vesting and
retirement benefits.......... -- -- 5,761 -- -- -- --
Impairment of oil and gas
properties................... -- -- 43,500 -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Total costs and
expenses................ 7,659 9,664 83,572 31,001 21,202 22,782 14,432
-------- -------- -------- -------- -------- ------- -------
Income (loss) from operations.... 715 1,828 (45,854) 12,637 5,508 1,055 (313)
Income tax expense (benefit)... 243 621 (15,100) 4,200 50 -- (200)
-------- -------- -------- -------- -------- ------- -------
Net income (loss)................ 472 1,207 (30,754) 8,437 5,458 1,055 (113)
Preferred stock dividends........ 831 699 2,779 2,795 2,795 256 --
-------- -------- -------- -------- -------- ------- -------
Net income (loss) available to
common shares.................. $ (359) $ 508 $(33,533) $ 5,642 $ 2,663 $ 799 $ (113)
======== ======== ======== ======== ======== ======= =======
Net income (loss) per common
share:
Basic.......................... $ (.04) $ .06 $ (4.17) $ .91 $ .46 $ .14 $ (.03)
Diluted........................ $ (.04) $ .06 $ (4.17) $ .88 $ .45 $ .14 $ (.03)
Shares used in computing net
income (loss) per common share:
Basic.......................... 8,477 8,015 8,034 6,194 5,835 5,755 4,346
Diluted........................ 8,477 8,221 8,034 6,422 5,952 5,755 4,346
STATEMENT OF CASH FLOWS DATA:
Cash provided by operating
activities..................... $ 2,965 $ 9,147 $ 29,721 $ 27,337 $ 14,323 $ 9,452 $ 5,347
Cash used in investing
activities..................... 13,730 12,397 54,196 85,159 36,063 24,237 6,423
Cash provided by (used in)
financing activities........... 8,615 (673) 15,178 65,750 25,144 11,765 3,916
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................. $ 576 $ 7,880 $ 1,142 $ 12,719 $ 4,878 $ 4,712 $ 1,896
Oil and gas properties, net...... 151,963 111,213 141,905 150,494 82,489 57,765 43,920
Total assets..................... 188,457 191,615 181,652 190,421 118,520 83,867 73,786
Total debt....................... 92,231 60,250 81,250 60,250 24,250 100 15,363
Stockholders' equity............. 82,730 114,788 84,484 113,701 77,864 75,129 43,431
OTHER FINANCIAL DATA:
Capital expenditures, net........ $ 13,730 $ 12,397 $ 54,196 $ 85,159 $ 36,063 $24,237 $10,412
EBITDA........................... $ 6,116 $ 8,974 $ 27,564 $ 33,209 $ 16,138 $13,582 $ 6,727
Ratio of EBITDA to interest
expense........................ 10.7x 12.9x 14.3x 17.0x 51.6x 7.6x 10.8x
Ratio of earnings to fixed
charges........................ -- 1.7x -- 3.3x 8.8x 1.6x --
Ratio of total debt to EBITDA.... 3.7x 1.9x 2.9x 1.8x 1.5x .0x 2.9x
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Our results of operations are primarily influenced by the prices we receive
for oil and gas production and the costs we incur to produce oil and gas. The
following table shows information about our prices and costs. Prices shown below
include the effects of our hedging activities.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- --------------------------
1999 1998 1998 1997 1996
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
PRODUCTION:
Oil (MBbls)................................... 90 112 310 462 585
Gas (MMcf).................................... 3,369 4,036 14,036 13,114 6,269
Total production (MMcfe)...................... 3,909 4,706 15,894 15,887 9,781
AVERAGE SALES PRICE:
Oil (per Bbl)................................. $11.49 $13.85 $ 12.41 $ 18.63 $18.27
Gas (per Mcf)................................. 2.06 2.35 2.26 2.56 2.40
Total production (per Mcfe)................... 2.04 2.35 2.24 2.65 2.63
AVERAGE COSTS (PER MCFE):
Lease operating expenses (excluding severance
taxes)..................................... $ .35 $ .34 $ .44 $ .42 $ .57
Severance taxes............................... .06 .07 .06 .09 .20
Depreciation, depletion and amortization...... 1.01 1.18 1.19 1.04 1.01
General and administrative (net of management
fees)...................................... .27 .32 .33 .28 .36
</TABLE>
Since 1996, we have completed several acquisitions that have significantly
affected our results of operations. Through a series of four transactions, we
acquired 52.5 Bcf of estimated net proved reserves in the Mobile Block 864 area
for a total acquisition cost of $48.7 million. In June 1999, in exchange for a
production payment, we acquired Murphy's interest in several wells and
undeveloped acreage in this area which, prior to exploration and development
activities, has added an additional 15.6 Bcf of estimated net proved reserves.
Our results in 1998 were also affected by the sale of our Black Bay Complex
properties which are located in Louisiana state waters. We sold these properties
in April 1998 for $9.4 million, the proceeds of which were used to repay amounts
outstanding under our revolving credit facility.
Inflation has not had a material impact on our results of operations and is
not expected to have a material impact on our results of operations in the
future.
Comparison of Results of Operations for the Three Months Ended March 31, 1999
and 1998
Our oil and gas revenues for the first three months of 1999 were $8.0
million, a 28% reduction from $11.0 million for the same period in 1998. On a
Mcfe basis, our first quarter 1999 production decreased 17% from 4.7 Bcfe in
1998 to 3.9 Bcfe in 1999. Our revenues were further reduced by the 13% reduction
in average sales price per Mcfe.
Oil production during the first quarter of 1999 totaled 90.0 MBbls and
generated $1.0 million in revenues compared to 112.0 MBbls and $1.5 million in
revenues for the same period in 1998. The reduction in revenues during the 1999
period resulted from a 17% reduction in the average sales price received and a
20% lower production rate. Average oil prices, including the effects of hedging,
received in the first quarter of 1999 were $11.49 compared to $13.85 in the
first quarter of 1998. The first quarter average daily oil production decreased
from 1.2 MBbls per day in 1998 to 1.0 MBbls per day in 1999.
18
<PAGE> 20
Approximately 442.0 Bbls per day of the reduced production was attributable to
the sale of the Black Bay Complex which was partially offset by the addition of
approximately 22.0 MBbls of oil from our discoveries in the OCS area. Other
properties also experienced a natural decline in production.
Gas production volumes during the first quarter of 1998 totaled 4.0 Bcf and
generated $9.5 million in revenues compared with 3.4 Bcf and $6.9 million in
revenues during the same period in 1999. The first quarter average daily gas
production decreased from 44.8 MMcf per day in 1998 to 37.4 MMcf per day in
1999. The average sales price (including the effects of hedging) for the first
quarter of 1999 was $2.06 per Mcf compared with $2.35 per Mcf for the same
period of 1998. The reduced production volumes were caused by the expected
decline curves of our shallow Miocene and OCS properties.
Lease operating expenses, including severance taxes, for the three-month
period ended March 31, 1999 were $1.6 million, a decrease from the $1.9 million
for the three-month period ended March 31, 1998. On a per Mcfe basis, these
combined expenses remained at $0.41 as a result of lower production volumes and
proportionate decreases in field operating costs.
Depreciation, depletion and amortization for the three month periods ended
March 31, 1999 and 1998 were $4.0 million and $5.6 million, respectively. This
decrease reflects decreased production volumes and a lower overall rate per
Mcfe, primarily as a result of a fourth quarter 1998 full-cost ceiling
impairment. For the three-month period ended March 31, 1999, the per Mcfe amount
was $1.01 compared to $1.18 for the same period in 1998.
General and administrative expenses for the three-month period ended March
31, 1999 were $1.0 million compared to $1.5 million for the three-month period
ended March 31, 1998. This reduction was attributable to first quarter 1999
expenses not including any charges for bonuses under the incentive compensation
plan nor amortization of expenses associated with the vesting of performance
shares as none were awarded or vested during such period. On a per Mcfe basis,
general and administrative expenses decreased from $0.32 in the first quarter of
1998 to $0.27 in the first quarter of 1999.
Interest expense for the first quarter of 1999 increased as a result of
increased long-term debt when compared to the first quarter debt level in 1998.
For the period ended March 31, 1999, interest expense was $1.0 million compared
to $0.7 million for the first quarter of 1998, net of interest capitalized as
property costs.
Income taxes were recorded at the statutory rate of 34% of net income for
both periods.
Preferred stock dividends were $0.8 million for the first quarter of 1999
as compared to $0.7 million for the first quarter of 1998. During the first
quarter of 1999, several preferred stockholders, through private transactions,
agreed to convert 210,350 shares of series A preferred stock into 502,632 shares
of our common stock. Of these shares of common stock, 24,507 shares were issued
in excess of the conversion rate as a result of private negotiations between us
and the holders. These additional shares were treated as a non-cash dividend on
the preferred stock for accounting purposes and were valued at the market value
of the shares on the date of conversion. Cash dividends on the series A
preferred stock will be lower in future quarters since the number of shares
outstanding has been reduced.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Our oil and gas revenues for 1998 were $35.6 million, a 15% reduction from
$42.1 million in 1997. On a Mcfe basis, our 1998 production was the same as that
reported for 1997. The reduction in our revenues was attributable to the 15%
reduction in average sales price (including the effects of hedging) per Mcfe.
Oil revenues declined from $8.6 million to $3.8 million. This decline was
caused in part by reduced oil production, which declined from 462.0 MBbls in
1997 to 310.0 MBbls in 1998 and a decline in average sales prices (including the
effects of hedging) from $18.63 in 1997 to $12.41 in 1998. Approximately 5% of
the reduced production was attributable to the sale of the Black Bay Complex in
1998, and the remainder was attributable to normal production declines.
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<PAGE> 21
Our gas revenues for 1998 were $31.8 million, a reduction of 5% from 1997
revenues of $33.5 million. Gas production in 1998 was 14.0 Bcf, an increase of
7% over 1997 production of 13.1 Bcf. The increase in production was attributable
to the beginning of production from exploration successes in 1998. The increases
in production were more than offset by a reduction in average prices (including
the effects of hedging) from $2.56 per Mcf in 1997 to $2.26 in 1998.
Our lease operating expenses, including severance taxes, decreased from
$8.1 million in 1997 to $7.8 million in 1998. This decrease was attributable to
reduced severance taxes which declined from $1.4 million in 1997 to $0.9 million
in 1998 because more of our production was from federal waters where we do not
incur severance taxes. The other components of operating expenses increased from
$6.7 million in 1997 to $6.9 million in 1998 as a result of a full year of costs
associated with acquisitions in the fourth quarter of 1997 that was partially
offset by a reduction in costs due to the sale of the Black Bay Complex.
Depreciation, depletion and amortization increased as a higher rate was
applied to a relatively constant production volume. Total charges increased from
$16.5 million, or $1.04 per Mcfe, in 1997 to $19.3 million, or $1.19 per Mcfe in
1998. The increase in the noncash charge per Mcfe reflects the increase in
investment in evaluated oil and gas properties during 1998.
Our general and administrative expenses for 1998 were $5.3 million, or $.33
per Mcfe, compared to $4.4 million, or $.28 per Mcfe, in 1997. This 19% increase
was primarily the result of the loss of Black Bay management fees, which
previously reduced general and administrative expenses, and slightly higher
corporate expenses.
Interest expense was $1.9 million for 1998 and $2.0 million for 1997.
In December 1998, we recorded a charge of $5.8 million attributable to the
accelerated vesting of the remaining unvested performance shares previously
granted under our stock option plans and of retirement benefits.
Under the full-cost method of accounting, the net capitalized costs of
proved oil and gas properties are subject to a "ceiling test," which limits such
costs to the discounted present value, net of related tax effects, of proved
reserves. If capitalized costs exceed this limit, the excess is charged to
expense. During the fourth quarter of 1998, we recorded a noncash impairment
provision related to oil and gas properties in the amount of $43.5 million
($28.7 million after-tax) primarily due to the significant decline in oil and
gas prices.
Our 1998 results included a deferred income tax benefit of $15.1 million
primarily due to the $14.8 million deferred income tax benefit related to
impairment of oil and gas properties recorded in 1998. We expect to realize this
benefit for tax purposes in future years by utilizing our net operating loss and
statutory depletion carryforwards. We have evaluated the potential realization
of the deferred income tax benefit recorded above in light of our reserve
quantity estimates, our long-term outlook for oil and gas prices and our
expected level of other future expenses. We believe it is more likely than not,
based upon this evaluation, that we will realize the recorded deferred income
tax asset. However, we cannot assure you that such asset will ultimately be
realized.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Our total oil and gas revenues increased $16.4 million, or 63%, during 1997
to $42.1 million compared to $25.8 million in 1996. This increase in oil and gas
revenues was the result of increased gas production volumes and increased
average sales prices (including the effects of hedging) for both oil and gas.
Our oil revenues for 1997 were $8.6 million based on production volume of
462.0 MBbls sold at an average sales price of $18.63 per Bbl. For 1996, our
revenues were $10.7 million based on 585.0 MBbls of oil sold at an average sales
price (including the effects of hedging) of $18.27. The $2.1 million decline in
oil revenues was largely attributed to normal production declines from several
of our oil producing properties, as well as the divestiture of certain non-core
properties.
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<PAGE> 22
Our gas revenues for 1997 were $33.5 million from production volumes of
13.1 Bcf of gas sold at an average sales price of $2.56 per Mcf. For 1996, our
revenues were $15.1 million from the production of 6.3 Bcf of gas sold at an
average sales price (including the effects of hedging) of $2.40. The 109%
increase in production volume was largely attributed to our 1996 discoveries in
the OCS and shallow Miocene areas.
Lease operating expenses, including severance taxes, increased from $7.6
million in 1996 to $8.1 million in 1997. Separately, severance taxes declined
from $1.9 million in 1996 to $1.4 million in 1997 as a result of lower
production on properties subject to severance taxes. Other operating expenses
increased from $5.6 million in 1996 to $6.7 million in 1997 as a result of the
new offshore producing properties. On a per Mcfe basis, these combined expenses
decreased from $0.77 in 1996 to $0.51 in 1997.
Depreciation, depletion and amortization for 1997 totaled $16.5 million, or
$1.04 per Mcfe. For the same period in 1996, these expenses totaled $9.8
million, or $1.01 per Mcfe.
Our general and administrative expenses for 1997 were $4.4 million, a 27%
increase from the $3.5 million in 1996 as a result of expanded levels of
operations and production. On a per Mcfe basis, these expenses decreased from
$.36 in 1996 to $.28 in 1997.
Interest expense for 1997 was $2.0 million. The substantial increase from
the $.3 million in 1996 was reflective of the issuance of senior subordinated
notes in November 1996 and July 1997.
Income tax expense for 1997 was $4.2 million. This amount represented the
approximate statutory income tax rate, as adjusted for expected future
utilization of our net operating losses and depletion carryovers. For 1996, the
statutory income tax was $1.9 million, which was primarily offset by a reduction
in the deferred tax asset valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources
Our primary sources of capital are cash flows from operations, borrowings
under our bank credit facility, and sales of debt and equity securities. Cash
flow from operations before working capital changes for the first quarter of
1999 and 1998 totaled $5.1 million and $8.3 million, respectively. During the
first three months of 1999, borrowings under our credit facility increased by
$8.0 million. Borrowings under the credit facility increased $18.0 million
during 1998. Also during 1998, we sold properties in the Black Bay Complex for
net cash proceeds of $9.4 million, which was used to reduce the amount
outstanding under our credit facility.
Bank credit facility. Borrowings under the bank credit facility are secured
by mortgages covering substantially all of our producing oil and gas properties.
The credit facility provides for a borrowing base which is adjusted periodically
on the basis of the discounted present value attributable to our proved
producing oil and gas reserves, as determined by the bank. The credit facility
currently provides for a $50.0 million borrowing base. The borrowing base is
currently being reevaluated with the bank. We expect that upon the closing of
the sale of the notes, the borrowing base will be decreased. We may borrow, pay,
reborrow and repay under the credit facility until October 31, 2000, on which
date we must repay in full all amounts then outstanding. At June 1, 1999, the
amount available to be borrowed under our credit facility was $14.9 million. See
"Description of Bank Credit Facility and Other Indebtedness -- Bank Credit
Facility" for more information about the credit facility.
Material sales of debt and equity securities. In November 1996, we issued
$24.2 million of 10% senior subordinated notes and in July 1997, we issued $36
million of 10.125% senior subordinated notes for total net proceeds of $58.4
million. The proceeds of the note offerings were used to repay outstanding
amounts under the bank credit facility. See "Description of Bank Credit Facility
and Other Indebtedness -- Outstanding Notes" for additional information about
our outstanding notes.
On November 25, 1997, we sold 1.8 million shares of our common stock to the
public for total net proceeds of $29.3 million. We used a portion of the
proceeds to repay indebtedness incurred to finance the
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<PAGE> 23
purchase of properties in the shallow Miocene area and the balance to fund a
portion of our 1998 capital expenditure budget.
Capital Expenditures
Capital expenditures for the first three months of 1999 and for the year
1998 were $14.0 million and $64.1 million, respectively. The 1999 amounts were
used primarily to drill and complete four wells, and to complete two previously
drilled wells. The 1998 amount included $9.5 million for the acquisition of
producing properties and equipment, $47.0 million for property development and
drilling activities and $7.3 million for the acquisition of oil and gas
properties for exploration.
Our capital expenditure budget for the last three quarters of 1999 is $34.1
million. The major portion of the capital expenditure budget will be used to
drill and complete seven exploration wells. The total estimated 1999 dry hole
costs to drill these wells are $12.4 million, and the costs to complete these
wells are $9.1 million. The timing and cost to drill these wells will depend
upon numerous factors, many of which are beyond our control.
In addition, we have a non-cash expenditure related to the acquisition of
Murphy's interest in Mobile Block 864. We acquired Murphy's interest for
approximately $15.0 million, financed by a volumetric production payment.
We make offers for producing properties in the ordinary course of our
business. If we were to purchase a producing property, our capital budget could
change materially.
Financial Instruments
We periodically use derivative financial instruments to hedge oil and gas
price risks. In a typical hedge transaction, we will have the right to receive
from counterparties to the hedge, the excess of the fixed price specified in the
hedge over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the fixed price, we are required to pay
the counterparties the difference multiplied by the quantity hedged. We are
required to pay the difference between the floating price and the fixed price
when the floating price exceeds the fixed price regardless of whether we have
sufficient production to cover the quantities specified in the hedge. If there
are significant reductions in production at times when the floating price
exceeds the fixed price, we could be required to make payments under the hedge
agreements even though such payments are not offset by sales of production.
Hedging will also prevent us from receiving the full advantage of increases in
oil or gas prices above the fixed amount specified in the hedge.
We also enter into price "collars" to reduce the risk of changes in oil and
gas prices. Under a collar, no payments are due by either party so long as the
market price is above a floor set in the collar and below a ceiling. If the
price falls below the floor, the counter-party to the collar pays the difference
to us and if the price is above the ceiling, we pay the counter-party the
difference. We enter into hedge transactions to reduce the effect of volatile
oil and gas prices, and do not enter into hedge transactions for speculative
purposes.
As of March 31, 1999, we had hedged approximately 483 MMcf per month
through September 1999, representing 39.0% of our estimated gas production
during this period, pursuant to price collars, with an average NYMEX floor price
of $1.85 per MMBtu (NYMEX) and an average ceiling price of $2.12 per MMBtu. Also
at March 31, 1999, we had open forward natural gas swap contracts of 200 MMcf
per month from April 1999 through September 1999, representing 16.0% of our
estimated gas production during this period, at a fixed contract average price
of $2.35. In addition, we had oil price collar contracts for 24.2 MBbls per
month from April 1999 through December 1999, representing 78.0% of our estimated
oil production during this period, at a ceiling price of $16.15 and a floor of
$13.78. We also had crude oil swap contracts of 10 MBbls per month with a fixed
contract price of $14.10 per month from April 1999 through June 1999,
representing 34.0% of our estimated oil production during this period.
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<PAGE> 24
YEAR 2000 COMPLIANCE
Three years ago, we began our efforts to address the threats to our
business posed by the year 2000 issue. For a description of the business
disruption risks we face from the year 2000 issue, see "Risk Factors."
Overseeing the year 2000 project is the Callon Year 2000 Project Committee which
meets on a periodic basis to review project status, provide necessary management
input and resolve project issues on a timely basis. A formal review is presented
to our board of directors periodically.
Our plan is divided into three phases. Phase one involves a physical
inventory of all hardware, software and devices containing date-oriented
firmware. Phase two requires that we prioritize issues, obtain or devise
solutions and make repairs or replace equipment as necessary. The third phase of
the plan calls for the development of contingency plans to address, among other
things, the failure of our business partners to adequately address their year
2000 problems.
We have completed phase one and have substantially completed phase two. We
are continuing to work on phase three and expect completion in the third quarter
of 1999.
Accounting systems. Our core financial accounting software is maintained by
one major vendor of oil and gas industry software. The vendor has indicated that
it believes our system is year 2000 compliant.
Embedded chips. A substantial portion of our exploration and production
facilities are automated. These facilities rely on one or more "embedded chips"
to control and measure flow rates, pressures, emissions and other critical
functions. Failure of embedded chips may cause production to stop, spills of
hydrocarbons or other materials and other problems. This problem is complicated
because many of the embedded chips are linked in systems, where the failure of
one part of the system will adversely affect the entire facility.
We believe we have identified all of the embedded systems affecting our
material facilities, tested them for year 2000 compliance and made appropriate
remediation. We therefore do not expect that our embedded systems will suffer
material interruptions caused by year 2000 related failures of our systems. It
must be noted, however, that our facilities have numerous embedded chips many of
which are not easy to locate. In addition, while we believe the testing of chips
will uncover year 2000 failures, until the year 2000 occurs, there is no way to
be sure that the repairs we made will work, or that all of the embedded chips
which must work together in systems will function properly. Because of the
complexity of the year 2000 problem, we cannot assure you that we will not have
a material business interruption caused by the year 2000 problem.
Vendors and customers. We could be adversely affected if our suppliers,
customers or other business partners experience year 2000 failures. For example,
if our electrical supplier fails to deliver electricity to our facilities or if
refineries are unable to receive our oil production, we will suffer losses. We
have requested information from all of our material business partners regarding
their year 2000 readiness. It appears that all of our material business partners
are aware of the year 2000 issues and are attempting to uncover and remedy
potential failures. Where we were not satisfied with the results of our
inquiries, we are attempting to develop contingency plans. However, we do not
believe contingency plans will protect us from loss if there are material year
2000 failures of our business partners. Additionally, we are unable to
independently verify that our business partners are, in fact, taking appropriate
steps to remedy problems. Accordingly, no assurances can be made that year 2000
failures will not adversely affect our business.
Estimated compliance costs. Our total costs incurred to date and estimated
remaining costs for consultants, software and hardware applications for the year
2000 project are less than $200,000. We do not separately account for the
internal costs incurred for our year 2000 compliance efforts, which consist
principally of payroll and related benefits for our informations system
personnel.
Risks of non-compliance. The most reasonably likely "worst case" impact of
the year 2000 issue on our operations could be:
- hydrocarbon spills or other accidents which could result in environmental
pollution, personal injuries or loss of life;
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<PAGE> 25
- equipment failures which could curtail, delay or cancel our operations;
- impairment of our ability to deliver our production to, or receive
payment from, third parties gathering and/or purchasing our production
from affected facilities;
- impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to our planned or ongoing
operations, thereby necessitating deferral or shut-in of our operations;
and
- our inability to execute financial transactions with our banks or other
third parties whose systems fail or malfunction.
We have no reason to believe that any of these contingencies will occur or
that our principal vendors, customers and business partners will not be year
2000 compliant.
DISCLOSURES ABOUT MARKET RISKS
Our revenues are derived from the sale of our oil and natural gas. The
prices of oil and gas are extremely volatile, and experience large fluctuations
as a result of relatively small changes in supplies. For a description of the
effects of the volatility of oil and gas prices on our operations, see "Risk
Factors."
From time to time we enter into arrangements to reduce the effect of
changes in oil and gas prices upon our revenues as described above under
"Liquidity and Capital Resources -- Financial Instruments."
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<PAGE> 26
BUSINESS AND PROPERTIES
Callon has been engaged in the exploration, development, acquisition and
production of oil and gas in the Gulf Coast region since 1950. Our properties
and operations are geographically concentrated in the offshore waters of the
Gulf of Mexico where we have substantial experience. As of June 1, 1999, we had
estimated net proved reserves of 183.3 Bcfe which had a discounted present value
of $173.9 million. Reserves comprising 72% of this discounted present value were
classified as proved developed. Average daily net production during the first
quarter of 1999 was 43.4 MMcfe, of which 86% was natural gas. We operate wells
representing 82% of this production. As of June 1, 1999, our reserve life was
12.1 years.
Our reserves and production have grown rapidly since 1996 as a result of
exploration and development drilling, as well as property acquisitions. Between
January 1, 1996 and June 1, 1999, estimated net proved reserves increased 215%,
and average daily net production increased 70% from the first quarter of 1996 to
the first quarter of 1999.
Our activities are concentrated in the Gulf of Mexico, where we conduct
operations in three areas:
- The shallow Miocene area, where we have controlling working interests in
projects with low exploration risk and low drilling and completion costs,
targeting reserve deposits of between 3 and 10 Bcf at depths of less than
4,000 feet. Wells are typically drilled from existing platforms or near
existing pipelines so that they can be brought on line quickly and
inexpensively. We have an average net working interest of 83% in, and
operate all of, our shallow Miocene wells.
- The outer continental shelf area, where we have significant working
interests in projects with higher exploration risk and higher drilling
and completion costs, targeting reserve deposits of between 10 and 100
Bcfe at depths of between 7,000 and 17,000 feet. We have a weighted
average net working interest of 65.4%, and operate wells representing
61.5% of our estimated net proved reserves, in the OCS area.
- The deep water area, where we have small working interests in projects
with high exploration risk and high drilling and completion costs,
targeting large reserve deposits. We do not operate wells in the deep
water area, and we intend to own less than a 15.0% interest in our deep
water wells.
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The following table provides information about our estimated net proved
reserves in these areas as of June 1, 1999.
<TABLE>
<CAPTION>
PERCENT
ESTIMATED NET PROVED RESERVES DISCOUNTED TOTAL
------------------------------ PRESENT DISCOUNTED
PRIMARY GAS OIL TOTAL VALUE PRESENT
AREA NAME OPERATOR (MMCF) (MBBLS) (MMCFE) ($000) VALUE
- --------- ----------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SHALLOW MIOCENE AREA:
Mobile Block 864 Area............. Callon 52,719 -- 52,719 $ 66,607 38.3%
Chandeleur Block 40............... Callon 3,739 -- 3,739 3,456 2.0%
Other............................. Callon 1,448 -- 1,448 1,072 0.6%
------- ------ ------- -------- -----
Total................... 57,906 -- 57,906 71,135 40.9%
------- ------ ------- -------- -----
OCS AREA:
BRETON SOUND:
Main Pass 26 SL 15827............. Callon 5,180 363 7,355 9,374 5.4%
Main Pass 31 SL 12002............. Callon 1,619 32 1,813 3,313 1.9%
Main Pass 36 SL 14964
"Garfield"..................... Callon 4,183 161 5,149 7,550 4.3%
Other Breton Sound................ Callon 714 217 2,018 1,909 1.1%
------- ------ ------- -------- -----
Total Breton Sound........ 11,696 773 16,335 22,146 12.7%
------- ------ ------- -------- -----
OTHER OCS:
High Island Block A-494
"Snapper"...................... PetroQuest 4,953 -- 4,953 7,723 4.4%
Eugene Island Block 335........... Murphy 3,003 174 4,050 6,698 3.9%
Vermilion Block 130............... Murphy 1,187 4 1,208 1,589 0.9%
------- ------ ------- -------- -----
Total Other OCS........... 9,143 178 10,211 16,010 9.2%
------- ------ ------- -------- -----
Total................... 20,839 951 26,546 38,156 21.9%
------- ------ ------- -------- -----
DEEP WATER AREA:
Ewing Bank Block 994 "Boomslang".. Murphy 8,282 4,601 35,889 14,341 8.2%
Garden Banks Block 341
"Habanero"..................... Shell 12,547 6,393 50,902 34,646 19.9%
------- ------ ------- -------- -----
Total................... 20,829 10,994 86,791 48,987 28.2%
------- ------ ------- -------- -----
OTHER AREAS......................... Various 5,399 1,106 12,034 15,639 9.0%
------- ------ ------- -------- -----
Total................... 104,973 13,051 183,277 $173,917 100.0%
======= ====== ======= ======== =====
</TABLE>
SHALLOW MIOCENE PROPERTIES
In the shallow Miocene area, we explore for gas deposits using 3-D and
conventional 2-D seismic technology, as well as a proprietary high-resolution
2-D seismic technology which better defines reservoir thickness and continuity.
We have an average working interest in productive wells in the shallow Miocene
area of 83.0%, all of which we operate. Since 1996, we have drilled three gross
(2.7 net) exploration wells, of which two gross (2.0 net) were productive, and
two gross (1.5 net) development wells, both of which were productive. Our
drilling activities in the shallow Miocene area have added 11.2 Bcf of estimated
net proved reserves at a cost to us of $9.5 million to drill and complete. We
have acquired an extensive infrastructure of production platforms, gathering
systems and pipelines located in our shallow Miocene area. These facilities
reduce the development costs of our successful wells and reduce the time
necessary to begin production from successful wells. In 1997, we also acquired
52.5 Bcf of estimated net proved reserves in the Mobile Block 864 area for a
total acquisition cost of $48.7 million. We have acquired additional interests
in this area. We currently have an inventory of four exploration prospects in
this area, two of which we expect to drill before year-end 1999.
We own 110,000 gross (94,000 net) acres in 18 federal blocks and various
state leases in the shallow Miocene area, and have an average 83.0% net working
interest in 21 producing wells which had average net daily production of 24.8
MMcf during the first quarter of 1999. Since 1996, we have acquired 3,000
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miles of seismic data in this area. The following is a description of the
current areas in which we have activities in the shallow Miocene area.
Mobile Block 864 Area
The Mobile Block 864 area is located offshore Alabama in federal waters.
During 1997, we consummated four acquisitions of producing properties and
developed and undeveloped acreage in this area for a total of $48.7 million. In
June 1999, we acquired additional interests in the area in exchange for a
production payment requiring us to deliver 7.6 Bcf of gas over the next three
and one quarter years. In total, we own an average 81.1% working interest in ten
blocks. Production from a reservoir that underlies four of the blocks has been
unitized. We now own a 66.4% working interest in the four well unit and the unit
production facilities. We also own a 100% working interest in three additional
producing wells in this area. We are the operator of the Mobile Block 864 unit.
Estimated net proved reserves at June 1, 1999, including the Murphy transaction
which closed on June 11, were 57.9 Bcf with a discounted present value of $67.0
million. Net average daily production during the first quarter of 1999 was 14.0
MMcf.
Production from three wells in the area is currently constrained by the
compression of the unit production facilities. We plan to upgrade the facilities
to increase production capacity during 1999.
Chandeleur Block 40
Chandeleur Block 40 is located offshore Louisiana in federal waters. In
December 1995, we acquired an additional working interest in Chandeleur Block
40, increasing our interest to 52.3%. When we assumed operations of the field,
two wells were producing 5.5 MMcf per day of gas from the 3,800-foot sand. In
February 1996, we shut-in one well and successfully reworked the other and
increased average field production to 10.5 MMcf per day of natural gas. During
the fourth quarter of 1996, we drilled a development well in the field. The well
resulted in a field extension which added 5.0 Bcf in estimated net proved
reserves as of December 31, 1996. We are the operator of Chandeleur Block 40.
Estimated net proved reserves at June 1, 1999 were 3.7 Bcf with a discounted
present value of $3.5 million. Net average daily production during the first
quarter of 1999 was 3.4 MMcf.
OUTER CONTINENTAL SHELF PROPERTIES
We explore for oil and gas deposits in the OCS area of the Gulf of Mexico
using the latest in 3-D seismic technology. The wells drilled in this area are
more expensive than the shallow Miocene wells and target larger oil and gas
deposits. Our weighted average working interest in productive wells in the OCS
area is 65.4%. Since 1996, we have added 28.6 Bcfe of estimated net proved
reserves at a cost to us of $28.3 million to drill and complete. Since 1996, we
have drilled 13 gross (5.5 net) exploration wells in this area, of which five
gross (2.8 net) were productive. We also drilled three gross (1.4 net)
development wells, all of which were successful, and we currently have one gross
(0.9 net) exploration well in progress. We currently have an inventory of 20
exploration prospects in this area, nine of which we expect to drill before
year-end 2000.
We own 169,000 gross (61,000 net acres) in 32 federal blocks and various
state leases in the OCS area, including the Breton Sound, and have an average
75% working interest in 19 producing wells which during March 1999 had average
net daily production of 16.7 MMcfe. Since 1996, we have acquired 450 square
miles of 3-D seismic data in this area. The following is a description of the
current areas in which we have activities in the OCS.
Breton Sound Area
The Breton Sound area, located in Louisiana state waters, has been a
significant operating area for us since 1997. We have acquired an extensive
infrastructure of pipelines, platforms and other production facilities in this
area. We own an 84.2% weighted average working interest in 13 wells in this
area, all of which we operate, producing from depths of between 6,000 and 13,000
feet. Nine of these wells are burdened by an 80.8% net profits interest held by
an institutional investor. During March 1999, net average
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<PAGE> 29
daily production from this area was 13.8 MMcfe. Our Garfield well is scheduled
to commence production by the end of June 1999.
The following is a description of several of our properties in this area:
Main Pass 26/SL 15827. We negotiated a farm-in agreement in 1998 for a
97.0% working interest after identifying a prospect on the Main Pass 26
Block based upon a seismic survey we completed in 1996. In August 1998, we
drilled a well to a depth of 10,450 feet. The SL 15827 well was producing
during March 1999 at a net average daily rate of 3.7 MMcf and 229.0 Bbls of
oil. Estimated net proved reserves attributable to this well as of June 1,
1999 were 7.4 Bcfe with a discounted present value of $9.4 million. We
operate this well.
Main Pass 31/SL 12002. Based upon a 1996 seismic survey that we
completed, we negotiated two separate farm-in agreements for a 100.0%
working interest covering a prospect on Main Pass Block 31. In August 1997,
the SL 12002 was drilled to a vertical depth of 10,900 feet. We completed
the well and placed it on production in December 1997 after flowlines were
laid to a facility we operate at Main Pass Block 32. The well produced 1.9
Bcf and 72.0 MBbls of condensate before being recompleted in the fourth
quarter of 1998. The well was brought back on-line during the first quarter
of 1999 and produced at net average daily rates of 6.9 MMcf and 227.0 Bbls
per day. Estimated net proved reserves attributable to this well as of June
1, 1999 were 1.8 Bcfe with a discounted present value of $3.3 million. We
operate this well.
Main Pass 36/SL 14964 "Garfield." We acquired a 50.0% working interest
in a prospect on Main Pass Block 36 from Conoco in July 1998. In August
1998, we completed the Garfield well, which has 40 feet of net gas pay in
three zones from 13,300 feet to 16,500 feet and was tested at 14.0 MMcf and
900.0 Bbls of condensate per day. Production is scheduled to begin by the
end of June 1999. Estimated net proved reserves attributable to this well
as of June 1, 1999 were 5.1 Bcfe with a discounted present value of $7.6
million. We operate this well.
Other OCS Areas
In 1997 we expanded our operations in the OCS area beyond Breton Sound
primarily through an exploration joint venture with Murphy Exploration and
Production, Inc. Since 1996, we have generally limited our working interests in
these prospects to 25.0%. Recently, however, we have sought to increase our
interests in these prospects and, in some cases, acquire operations. Estimated
net proved reserves at June 1, 1999 were 10.2 Bcfe with a discounted present
value of $16.0 million. Net average daily production during the first quarter of
1999 was 2.9 MMcfe. The following is a description of several of the significant
properties we own in the OCS area outside of Breton Sound.
High Island Block A-494, "Snapper." In January 1999, we announced a
discovery on our Snapper prospect, which was drilled to a total depth of
8,800 feet. We own a 50.0% working interest in this well, which we
purchased in 1998 from PetroQuest Energy Inc., the operator. The well is
scheduled to begin production by the end of June 1999 through production
facilities designed to handle 15.0 MMcf per day. Estimated net proved
reserves attributable to this well at June 1, 1999 were 5.0 Bcf with a
discounted present value of $7.7 million.
Eugene Island Block 335. In 1997, we drilled three wells on Eugene
Island Block 335, which we acquired in an OCS lease sale. We own a 20.0%
working interest in the wells, which are operated by Murphy. During March
of 1999, the three wells produced at a net average daily rate of 2.5 MMcfe.
Estimated net proved reserves attributable to these wells at June 1, 1999
were 4.1 Bcfe with a discounted present value of $6.7 million.
Vermilion Block 130. In March 1998, we drilled a successful well on
this block, which we acquired in an OCS lease sale, to a total depth of
14,134 feet. We own a 25.0% working interest in this well, which is
operated by Murphy. During the first quarter of 1999, the well produced at
a net average daily rate of 0.4 MMcfe from one of three proved zones.
Estimated net proved reserves attributable to this well at June 1, 1999
were 1.2 Bcfe with a discounted present value of $1.6 million.
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<PAGE> 30
DEEP WATER PROPERTIES
We allocate a portion of our capital expenditure budget to the exploration
of deep water regions in the Gulf of Mexico. These wells are expensive to drill
and complete and target large reserve deposits. These wells are usually located
far from production facilities and may require long lead times to construct
pipelines and other facilities necessary to begin producing reserves we
discover. To reduce the risks associated with the high cost of these wells, we
explore these prospects with experienced joint venture partners, including Shell
Deepwater Development, Inc. and Murphy Exploration and Production, Inc. as
operators. We have drilled two wells in our deep water area, both of which were
successful. In September 1998, we announced a discovery on our "Boomslang"
prospect, and in February 1999, we announced a discovery on our "Habanero"
prospect. These discoveries represent the largest discoveries in our history and
have added estimated net proved reserves of 86.8 Bcfe at a cost to us of $10.2
million to drill. Costs to complete these wells cannot be determined until we
drill several related prospects. We currently have an inventory of 15 deep water
exploration prospects, four of which we expect to drill before year-end 2000.
We own 132,000 gross (24,000 net) acres in 23 blocks in the deep water
areas of the Gulf of Mexico. The following is a description of the two deep
water prospects which have been drilled to date, both of which were successful
and represent the largest discoveries in our history.
Ewing Bank Block 994 "Boomslang." In September 1998, we announced a
discovery on our Boomslang prospect which we acquired in an OCS lease sale.
This well was drilled in 900 feet of water to a total depth of 13,200 feet.
We own a 35.0% working interest in the well, which is operated by Murphy.
Estimated net proved reserves at June 1, 1999 were 35.9 Bcfe, with a
discounted present value of $14.3 million. Prior to designing production
facilities for Boomslang, we plan to drill the Sidewinder prospect. See
"Exploration and Development Activities -- Deep Water Area" for a
description of the Sidewinder prospect.
Garden Banks Block 341 "Habanero." In February 1999, we announced a
discovery on our Habanero prospect which we acquired from Shell in exchange
for other interests we held on the block. This well was drilled in 2,000
feet of water to a total depth of 21,158 feet. We own an 11.3% working
interest in the well, which is operated by Shell. Estimated net proved
reserves at June 1, 1999 were 50.9 Bcfe, with a discounted present value of
$34.6 million. Prior to designing production facilities for Habanero, we
plan to drill the South Moccasin prospect. See "Exploration and Development
Activities -- Deep Water Area," for a description of the South Moccasin
prospect.
OTHER PROPERTIES
We own various small royalty and working interests in several onshore
areas, which as of June 1, 1999 had total net proved reserves of 12.0 Bcfe with
a discounted present value of $15.6 million. Over 50% of these reserves and
their related discounted present value were attributable to our interest in the
Big Escambia Creek gas field located in south Alabama which is operated by
Exxon.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The following is a summary of our anticipated drilling plans through 2000.
We continually review our drilling plans in light of changing circumstances.
Factors which may cause us to change our drilling plans are described under
"Risk Factors."
Shallow Miocene Area
We currently have an inventory of four exploration prospects in this area.
We expect to drill two of these prospects, Mobile Block 953 #2 and Mobile Block
908 #4, before year-end 1999. We currently have not scheduled any drilling
activities for the shallow Miocene area in 2000. Total estimated gross drilling
costs are estimated to be $2.1 million ($2.0 million net) and estimated gross
completion costs are $7.3 million ($6.3 million net) for these two wells.
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<PAGE> 31
Mobile Block 953 #2. This shallow Miocene prospect is scheduled to drill in
late June 1999 in 70 feet of water. Production from the prospect will be handled
by our Mobile 864 Unit which is located nearby. Net costs to drill this prospect
will be $1.1 million. We own a 100.0% working interest in the prospect, which
will target reserve deposits at 2,250 feet. We will be the operator of this
well.
Mobile Block 908 #4. This shallow Miocene prospect is scheduled to drill in
July 1999 in 70 feet of water. The prospect is adjacent to our Mobile 864 Unit
through which production will be handled. Net costs to drill this prospect will
be $0.9 million. We own an 89.0% working interest in the prospect, which will
target reserve deposits at 2,250 feet. We will be the operator of this well.
OCS Area
We currently have an inventory of 20 exploration prospects in this area. We
expect to drill two of these prospects, Ship Shoal Block 319 and South Marsh
Island Block 261, before year-end 1999, and an additional seven prospects before
year-end 2000. Total estimated gross drilling costs are $40.6 million ($10.6
million net) and estimated gross completion costs are $204.7 million ($54.3
million net) for these nine wells.
Ship Shoal Block 319. We expect to drill a well on this prospect, located
in 300 feet of water offshore Louisiana, in the fourth quarter of 1999. Net
costs to drill this well, which is targeting reserve deposits at 9,000 feet, are
estimated to be $0.6 million. We currently own a 25.0% working interest in the
block. We are negotiating a farm-in of the remaining interest in the block under
which we would own a 100% working interest in the block and become operator.
South Marsh Island Block 261. We currently have three drilling prospects on
South Marsh Island Block 261, all of which are located in 30 feet of water. We
expect to begin drilling the first of these three wells in the fourth quarter of
1999 for estimated costs of $1.8 million per well. We own a 100.0% working
interest in and will operate these wells, but we may bring in an industry
partner and reduce our interest to approximately 50.0%. The wells will target
reserve deposits at 7,500 feet.
In addition, we drilled our "Parodi" prospect located on Main Pass Block
32, SL 16429 to a total depth of 15,305 feet and encountered a potentially
productive reservoir. Completion efforts during 1997 and 1998 encountered
mechanical difficulties. Based on additional seismic data, we plan to drill from
the existing well bore to a higher structural location in the reservoir. We
currently own a 92.4% working interest. We have not scheduled any further
drilling activities on this well as we are seeking an industry partner to
participate in the drilling operations estimated to cost $2.9 million gross. We
will operate the well and retain an approximate 50.0% working interest.
Deep Water Area
We currently have an inventory of 15 exploration prospects in this area. We
expect to drill two of these prospects, Sidewinder and Medusa, before year-end
1999 and two of these prospects, South Moccasin and Anvil, before year-end 2000.
Total estimated gross drilling costs are $84.0 million ($12.4 million net) for
these four wells. Costs to complete the wells will depend on the reserves
discovered and the decisions made by us and our partners in these prospects
regarding the appropriate production facilities to construct.
Sidewinder. Prior to designing production facilities for the Boomslang
prospect on Ewing Bank Block 994, we plan to drill the Sidewinder prospect,
located in 1,200 feet of water on Ewing Bank Block 995 and Green Canyon Blocks
24 and 25 immediately to the southeast of Boomslang. We own a 15.0% working
interest in this prospect which is scheduled to be drilled in the fourth quarter
of 1999. We are targeting reserves at a depth of approximately 16,000 feet.
Murphy is the operator of this well. Estimated net costs to drill this well are
$3.0 million.
Medusa. The Medusa prospect is located in 2,300 feet of water on
Mississippi Canyon Blocks 538 and 582. We own a 25.0% working interest in this
prospect which is scheduled to be drilled in the fourth
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quarter of 1999. We are targeting reserves at a depth of approximately 13,000
feet. Murphy is the operator of this well. Estimated net costs to drill this
well are $4.3 million.
South Moccasin. Prior to designing production facilities for the Habanero
prospect on Garden Banks Block 341, we plan to drill the South Moccasin
prospect, located in 1,800 feet of water on Garden Banks Blocks 297 adjacent to
our Habanero discovery. We own a 12.5% working interest in this prospect which
is scheduled to be drilled in 2000. We are targeting reserves at a depth of
approximately 22,000 feet. Estimated net costs to drill this well are $2.1
million.
Anvil. Anvil is located in 5,500 feet of water on Mississippi Canyon Blocks
815/816. We own a 10.0% working interest in this prospect which is scheduled to
be drilled in 2000. We are targeting reserves at a depth of approximately 17,250
feet. Vastar is the operator of this well. Estimated net costs to drill this
well are $3.0 million.
OCS Lease Sales
In March 1999, we, along with our joint venture partners, bid on 13
deepwater blocks and were the apparent high bidder on nine blocks. Eight of the
nine blocks have been awarded. Our net cost to acquire these blocks is $3.4
million.
OIL AND GAS RESERVES
The following table sets forth certain information about our estimated net
proved reserves as of the dates set forth below. These estimates were prepared
by Huddleston & Co., Inc., our independent reserve engineers.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 1, ------------------------------
1999 1998 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Proved developed:
Oil (Bbls)....................................... 1,988 2,079 2,976 3,385
Gas (Mcf)........................................ 83,878 76,895 88,010 49,491
Proved undeveloped:
Oil (Bbls)....................................... 11,063 4,819 426 434
Gas (Mcf)........................................ 21,095 11,135 728 933
Total proved:
Oil (Bbls)....................................... 13,051 6,898 3,402 3,819
Gas (Mcf)........................................ 104,973 88,030 88,738 50,424
Estimated future net cash flows before income taxes
(000s)........................................... $280,980 $152,552 $209,260 $216,154
======== ======== ======== ========
Discounted present value (000s).................... $173,917 $ 99,751 $136,448 $160,171
======== ======== ======== ========
</TABLE>
Huddleston & Co., Inc., our independent reserve engineers, prepared the
estimates of the proved reserves and the future net cash flows (and present
value thereof) attributable to such proved reserves. Reserves were estimated
using oil and gas prices and production and development costs in effect on
December 31 of 1996, 1997 and 1998 and on June 1 of 1999, without escalation,
and were otherwise prepared in accordance with the SEC regulations regarding
disclosure of oil and gas reserve information.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond our control or the control of the
reserve engineers. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner, and the accuracy of any reserve or cash flow estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Estimates by different engineers often vary, sometimes
significantly. In addition, physical factors, such as the results of drilling,
testing and production subsequent to the date of an estimate, as well as
economic factors, such as an increase or decrease in product prices that renders
production of such reserves more or less economic, may justify revision of such
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<PAGE> 33
estimates. Accordingly, reserve estimates are different from the quantities of
oil and gas that are ultimately recovered.
We have not filed any reports with other federal agencies which contain an
estimate of total proved net oil and gas reserves.
PRODUCTIVE WELLS AND DRILLING ACTIVITY
The following table sets forth the wells we drilled and completed during
the periods indicated. All but three of these wells were drilled in the federal
and state waters of the Gulf of Mexico.
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED DECEMBER 31,
ENDED -----------------------------------------------
JUNE 1, 1999 1998 1997 1996
------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development:
Oil........................... -- -- 2 .40 -- -- 1 .09
Gas........................... -- -- -- -- 1 1.00 2 1.52
Non-Productive................ -- -- -- -- -- -- -- --
-- ---- -- ---- -- ---- -- ----
Total................. -- -- 2 .40 1 1.00 3 1.61
== ==== == ==== == ==== == ====
Exploration:
Oil........................... 1 .11 1 .35 -- -- -- --
Gas........................... 3 1.78 3 2.14 2 1.20 1 1.00
Non-Productive................ -- -- 2 1.25 6 1.91 -- --
-- ---- -- ---- -- ---- -- ----
Total................. 4 1.89 6 3.74 8 3.11 1 1.00
== ==== == ==== == ==== == ====
</TABLE>
We owned working and royalty interests in approximately 289 gross (7.4 net)
producing oil and 316 gross (26.9 net) producing gas wells as of June 1, 1999. A
well is categorized as an oil well or a natural gas well based upon the ratio of
oil to gas reserves on a Mcfe basis. However, substantially all of our wells
produce both oil and gas. At June 1, 1999, we had two gross (1.1 net)
exploratory gas wells in progress. One gross (0.2 net) in-progress well has
since been determined to be a dry hole.
LEASEHOLD ACREAGE
The following table shows our approximate developed and undeveloped (gross
and net) leasehold acreage at June 1, 1999.
<TABLE>
<CAPTION>
LEASEHOLD ACREAGE
-----------------------------------
DEVELOPED UNDEVELOPED
---------------- ----------------
LOCATION GROSS NET GROSS NET
- -------- ------- ------ ------- ------
<S> <C> <C> <C> <C>
Shallow Miocene area..................................... 87,439 75,269 22,275 18,819
OCS area................................................. 20,286 9,501 149,110 51,892
Deep water area.......................................... 11,520 2,664 115,200 20,592
Other.................................................... 8,612 4,070 4,480 2,256
------- ------ ------- ------
Total.......................................... 127,857 91,504 291,065 93,559
======= ====== ======= ======
</TABLE>
As of June 1, 1999, we also owned various royalty and overriding royalty
interests in 1,336 net developed acres and 6,862 net undeveloped acres. In
addition, we owned 5,464 net developed and 134,536 net undeveloped mineral
acres. Since June 1, 1999, we have acquired an additional 5,760 gross (1,152
net) undeveloped acres in our deep water area.
MAJOR CUSTOMERS
For the year ended December 31, 1998, Dynegy Marketing & Trade, PG&E Energy
Trading Corp., and Columbia Energy Services purchased 23%, 26% and 22%,
respectively, of our natural gas and oil production. All three customers
purchased production primarily from Callon-owned interests in federal outer
continental shelf leases, Chandeleur Block 40, Main Pass 163, Main Pass 164/165,
Mobile
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Block 864 and Mobile Block 952/955 fields. Because of the nature of oil and gas
operations and the marketing of production, we believe that the loss of these
customers would not have a significant adverse impact on our ability to sell our
production.
TITLE TO PROPERTIES
We believe that the title to our oil and gas properties is good and
defensible in accordance with standards generally accepted in the oil and gas
industry, subject to such exceptions which, in our opinion, are not so material
as to detract substantially from the use or value of such properties. Our
properties are typically subject, in one degree or another, to one or more of
the following:
- royalty interests and other burdens under oil and gas leases;
- contractual obligations (including, in some cases, development
obligations) arising under operating agreements;
- farmout agreements, production sales contracts and other agreements that
may affect the properties or their titles;
- interests which entitle a person to receive a portion of our production
after we have received a specified amount of production;
- liens that arise in the normal course of operations, such as those for
unpaid taxes, statutory liens securing obligations to unpaid suppliers
and contractors and contractual liens under operating agreements; and
- pooling, unitization and communitization agreements, declarations and
orders; and easements, restrictions, rights-of-way and other matters that
commonly affect property.
To the extent that such burdens and obligations affect our rights to
production revenues, they have been taken into account in calculating our net
revenue interests and in estimating the size and value of our reserves. We
believe that the burdens and obligations affecting our properties are
conventional in the industry for properties of the kind owned by us.
CORPORATE OFFICES
Our headquarters are located in Natchez, Mississippi, in approximately
51,500 square feet of owned space. We also maintain owned or leased field
offices in the area of the major fields in which we operate properties or have a
significant interest. Replacement of any of our leased offices would not result
in material expenditures as alternative locations to our leased space are
anticipated to be readily available.
EMPLOYEES
We had 109 employees as of March 31, 1999, none of whom are currently
represented by a union. We believe that we have good relations with our
employees. We employ eight petroleum engineers and four petroleum geoscientists.
LITIGATION
We are a defendant in various legal proceedings and claims which arise in
the ordinary course of our business. We do not believe the ultimate resolution
of any such actions will have a material affect on our financial position or
results of operations.
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FEDERAL REGULATIONS
Our operations are subject to regulation by federal and state government.
These regulations apply to:
- the sale and transportation of oil and gas we produce;
- the conduct of our operations on federal, state and Indian leases; and
- the effect our operations may have on the environment.
Each of these categories is discussed below.
Sales and Transportation of Oil and Gas. Prior to January 1, 1993, prices
for natural gas were subject to extensive regulation by the federal government.
Effective January 1, 1993, the federal government repealed these regulations.
Thus, we can sell all of our gas production at market prices, subject to
applicable contract provisions.
The rates, terms and conditions applicable to the interstate transportation
of natural gas by pipelines are regulated by the Federal Energy Regulatory
Commission ("FERC").
Historically, large interstate natural gas pipelines would purchase gas
supplies from producers in the field and would sell to local distributors and
industrial customers under long-term contracts. Because the pipelines controlled
the market for natural gas, producers could not get their product to the market,
and the market could not buy gas direct from the producers without going through
the pipelines. Since 1985, the FERC has implemented regulations intended to
increase competition and make natural gas transportation, including
transportation offshore, more accessible to gas buyers and sellers by requiring
pipelines to separate or "unbundle" their transportation services from their
activities in buying and selling natural gas.
On April 26, 1992, the FERC promulgated Order 636, an extensive set of
regulations requiring all interstate pipelines to restructure their services.
The intent of Order 636 is to provide equal access and transportation services
for all gas supplies from all regulated pipelines. Order 636 has fostered robust
competition among all facets of the natural gas transportation industry by and
among producers, transporters, marketers and consumers.
While Order 636 does not directly regulate natural gas producers such as
Callon, it does affect how we get our production to market. The courts have
largely affirmed the significant features of Order 636 and numerous related
orders pertaining to the individual pipelines, although certain appeals remain
pending and the FERC continues to review and modify the regulations. In
particular, the FERC has recently begun a broad review of its transportation
regulations, including:
- how its regulations operate in conjunction with state proposals for
retail gas marketing restructuring;
- whether to eliminate cost-of-service based rates for short-term
transportation;
- whether to allocate all short-term capacity on the basis of competitive
auctions; and
- whether changes to its long-term transportation service policies may be
appropriate to avoid a market bias toward short-term contracts.
We do not believe that we will be affected by any action taken by the
courts or by the FERC materially differently than other natural gas producers
and marketers with which we compete.
Although to date the FERC has imposed light-handed regulation on off-shore
gathering facilities, it has the authority to exercise jurisdiction over
gathering facilities, if necessary, to permit non-discriminatory access to
service. Much of our production comes from the OCS, and we rely upon our own gas
gathering facilities as well as gas gathering services provided by others, both
of which could be subject to FERC scrutiny in the future.
We can sell crude oil and condensate at market prices not subject at this
time to price controls. The price that we receive from the sale of these
products will be affected by its quality and the cost of
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<PAGE> 36
transporting the products to market. The rates, terms, and conditions applicable
to the interstate transportation of oil and related products by pipelines are
also regulated by the FERC. In 1995, the FERC implemented rules that provide a
simplified, generally applicable method of regulating oil pipeline rates by use
of an index for setting rate ceilings. We do not believe that these rules affect
us any differently than other producers and marketers with which we compete.
With respect to the transportation of oil and condensate offshore in federal
waters, the FERC requires that all pipelines provide open and non-
discriminatory access to both owner and non-owner shippers.
Federal, State or Indian Leases. In the event we conduct operations on
federal, state or Indian oil and gas leases (including our offshore leases), our
operations must comply with numerous regulatory restrictions, including various
nondiscrimination statutes and royalty requirements. In addition, we must obtain
permits issued by the Bureau of Land Management ("BLM") or Minerals Management
Service ("MMS") or other appropriate federal or state agencies to conduct our
operations offshore or onshore on federal or Indian lands.
Federal leases, in addition to relatively standard terms, require
compliance with detailed MMS and BLM regulations and orders, which are subject
to change. In addition to permits required by other federal agencies (such as
the Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS or BLM prior to commencement
of offshore or onshore drilling. The MMS has promulgated regulations requiring
offshore production facilities to meet stringent engineering and construction
specifications. The MMS also has regulations restricting the flaring or venting
of natural gas, and has proposed to amend such regulations to prohibit the
flaring of liquid hydrocarbons and oil without prior authorization. Similarly,
the MMS has approved other regulations governing plugging and various
obligations of offshore lessees, and the MMS generally requires that lessees
have a substantial net worth or post bonds or other acceptable assurances that
such obligations will be met. Under certain circumstances, the MMS may require
the suspension or termination of any of our operations on federal leases. Any
such suspension or termination could materially and adversely affect our
financial condition, cash flows and operations.
The Mineral Leasing Act of 1920 prohibits direct or indirect ownership of
any interest in federal onshore oil and gas leases by a foreign citizen of a
country that denies "similar or like privileges" to citizens of the United
States. Such restrictions on citizens of a "non-reciprocal" country include
ownership or holding or controlling stock in a corporation that holds a federal
onshore oil and gas lease. If this restriction is violated, the corporation's
lease can be canceled in a proceeding instituted by the United States Attorney
General. Although the regulations of the BLM provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect. We
own interests in numerous federal onshore oil and gas leases. Because we are a
publicly-traded company with limited control over the ownership of our equity
interests, it is possible that holders of our equity interests may be citizens
of foreign countries which at some time in the future might be determined to be
non-reciprocal.
STATE REGULATIONS
Most states regulate the production and sale of oil and natural gas,
including requirements for obtaining drilling permits, the method of developing
new fields, the spacing and operation of wells and the prevention of waste of
oil and gas resources. In addition, the rates which we can charge for gas
produced, consumed and transported in any one state, the transportation of gas
in the state, and the costs of construction and operation of a pipeline in the
state may be impacted by state rules and regulations. The impact of such
requirements and regulations would not be any more adverse to us than they would
be to other similar owners or operators conducting business in the state.
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<PAGE> 37
ENVIRONMENTAL REGULATIONS
General. Our activities are subject to existing federal, state and local
environmental laws and regulations. These laws and regulations govern the
environmental condition of properties, the disposal and release of production
wastes, oil spills, air emissions and occupational safety.
- Environmental Condition of Properties. We own or lease numerous
properties that have been used for production of oil and gas for many
years. Although we have utilized operating and disposal practices
standard in the industry at the time, hydrocarbons or other solid wastes
or hazardous wastes may have been disposed or released on or under these
properties. In addition, many of these properties have been operated by
third parties. We have had no control over treatment by third parties of
hydrocarbons or other solid wastes and the manner in which they disposed
of or released these substances. State and federal laws applicable to oil
and gas wastes and properties have gradually become stricter over time
and will most likely continue to place further restrictions on oil and
gas field operations. Under any such new laws, we could be required to
remove or remediate previously disposed wastes (including wastes disposed
or released by prior owners or operators) or property contamination
(including groundwater contamination by prior owners or operators). We
could also be required to perform remedial plugging operations to prevent
future contamination.
- Production Wastes. We generate wastes, including hazardous wastes, that
are subject to the federal Resource Conservation and Recovery Act
("RCRA") and comparable state laws. It is possible that wastes generated
by our oil and gas operations that are currently exempt from treatment as
"hazardous wastes" may in the future be designated as "hazardous wastes"
under RCRA or comparable state laws. Any designation of these currently
exempt wastes as "hazardous wastes" would subject our wastes to more
rigorous and costly disposal requirements.
Our operations are also potentially subject to the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), which
imposes liability without regard to fault or legality of the original
conduct on persons for a release of a "hazardous substance" into the
environment. These persons include the owner and operator of a site and
persons that disposed or arranged for the disposal of the hazardous
substances found at a site. Persons found responsible under CERCLA may be
liable for the costs of actions conducted at sites by the U.S.
Environmental Protection Agency and, in some cases, third parties in
response to threats to the public or environment. Neither Callon nor its
predecessors have been designated as a potentially responsible party by
the EPA under CERCLA with respect to any such site.
- Oil Pollution. There are a variety of regulations imposed on "responsible
parties" related to the prevention of oil spills and liability for
damages resulting from such spills in United States waters, including the
Oil Pollution Act of 1990 (the "OPA"). A "responsible party" includes the
lessee or permittee of an offshore lease and the owner or operator of
associated drilling and production platforms. Liability is assigned to
each responsible party for oil removal costs and a variety of public and
private damages. While liability limits apply in some circumstances, few
defenses exist to the liability imposed by the OPA.
We are required to provide evidence of financial ability under the OPA
and recently adopted MMS rules to cover potential liabilities associated
with a potential spill. The OPA and MMS rules require responsible parties
for offshore facilities in the OCS and in some state waters that have a
worst case oil spill potential of more than 1,000 barrels to provide
financial assurance in amounts of $35 million under OPA rules and $10
million under MMS rules. This financial assurance amount may be increased
to $150 million if warranted by specific risks posed by the operations or
if the worst case oil spill potential at the facility exceeds regulatory
threshold levels. We currently comply with these OPA and MMS requirements
and do not anticipate that we will experience difficulty in satisfying
any future requirements for demonstrating financial responsibility.
- Air Emissions. Our operations are subject to local, state and federal
laws and regulations for the control of emissions from sources of air
pollution. Failure to comply strictly with air laws,
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regulations or permits generally may result in the payment of monetary
fines and correction of any identified deficiencies. Alternatively,
regulatory agencies could require that we temporarily or permanently
cease production operations at specific facilities or that we forego
construction or operation of certain air emission sources. We believe
that in such cases we would have enough existing capacity to continue our
operations without a material adverse effect on any particular producing
field.
- OSHA. Our operations are subject to worker safety and health requirements
under the federal Occupational Safety and Health Act and comparable state
laws. Under these laws, we are required to organize and/or disclose
information about hazardous materials used or produced in our operations.
Certain of this information must be provided to employees, state and
local governmental authorities and local citizens.
We believe that absent the occurrence of an extraordinary event, compliance
with existing laws and regulations relating to the protection of the environment
will not have a material effect upon our capital expenditures, earnings or
existing assets and operations. We cannot predict what effect additional
environmental regulation, legislation or enforcement policies, and claims for
damages resulting from our operations could have on our activities. Although we
believe that compliance with environmental regulations will not have a material
adverse effect, risks of substantial costs and liabilities are inherent in oil
and gas production operations, and we cannot assure you that significant costs
and liabilities will not be incurred. Moreover, it is possible that other
developments, such as stricter or reinterpreted environmental laws and
regulations, and claims for damages to property or persons resulting from oil
and gas production, would result in substantial costs and liabilities to Callon.
We cannot predict what proposals, if any, might actually be enacted by Congress
or the various state legislatures and what effect, if any, these proposals might
have on our operations.
37
<PAGE> 39
MANAGEMENT
Our certificate of incorporation currently provides for a board of
directors divided into three classes of nearly equal size, designated as Class
I, Class II and Class III. Directors are elected to serve three-year terms.
INFORMATION ABOUT OUR DIRECTORS AND EXECUTIVE OFFICERS
The following is information about our directors and executive officers.
<TABLE>
<CAPTION>
POSITION
NAME AGE SINCE PRESENT POSITION
- ---- --- -------- ----------------
<S> <C> <C> <C>
John S. Callon........................ 79 1994 Director, Class II; Chairman of the
Board
Fred L. Callon........................ 49 1994 Director, Class III; President; Chief
Executive Officer
Dennis W. Christian................... 52 1994 Director, Class III; Senior Vice
President; Chief Operating Officer
John S. Weatherly..................... 47 1994 Senior Vice President and Chief
Financial Officer
James O. Bassi........................ 45 1997 Vice President; Controller
Thomas E. Schwager.................... 48 1997 Vice President
H. Michael Tatum...................... 70 1994 Vice President; Secretary
Kathy G. Tilley....................... 53 1996 Vice President
Stephen F. Woodcock................... 47 1997 Vice President
Rodger W. Smith....................... 50 1999 Treasurer
Leif Dons............................. 49 1999 Director, Class II
Robert A. Stanger..................... 59 1995 Director, Class I
John C. Wallace....................... 60 1994 Director, Class I
B. F. Weatherly....................... 55 1994 Director, Class II
Richard O. Wilson..................... 69 1995 Director, Class I
</TABLE>
The following is a brief description of the background and principal
occupation of each director and executive officer:
JOHN S. CALLON is our Chairman of the Board of Directors. Effective January
2, 1997, John S. Callon resigned as our Chief Executive Officer, a position he
had held since 1980. Mr. Callon founded our company in 1950, and has held an
executive office with us since that time. He has served as a director of the
Mid-Continent Oil and Gas Association and as the President of the Association's
Mississippi-Alabama Division. He has also served as Vice President for
Mississippi of the Independent Petroleum Association of America. He is a member
of the American Petroleum Institute. Mr. Callon is the uncle of Fred L. Callon.
FRED L. CALLON is our President and Chief Executive Officer. Prior to
January 1997, he was our President and Chief Operating Officer, a position which
he had held since 1984. Before that, he was employed by us in various positions
since 1976. He graduated from Millsaps College in 1972 and received his M.B.A.
degree from the Wharton School of Finance in 1974. Following graduation and
before joining us, he was employed by Peat, Marwick, Mitchell & Co., certified
public accountants. He is a certified public accountant and is a member of the
American Institute of Certified Public Accountants and the Mississippi Society
of Certified Public Accountants. He is the nephew of John S. Callon.
DENNIS W. CHRISTIAN is our Senior Vice President and Chief Operating
Officer. Prior to January 1997, he was our Senior Vice President of Operations
and Acquisitions and had held that or similar positions with us since 1981.
Prior to joining us, he was resident manager in Stavanger, Norway for Texas
Eastern Transmission Corporation. Mr. Christian received his B.S. degree in
petroleum engineering in 1969 from Louisiana Polytechnic Institute. His previous
experience includes five years with Chevron U.S.A. Inc.
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<PAGE> 40
JOHN S. WEATHERLY is our Senior Vice President and Chief Financial Officer.
Prior to April 1996, he was our Vice President, Chief Financial Officer and
Treasurer and had held those positions since 1983. Prior to joining us in 1980,
he was employed by Arthur Andersen LLP as audit manager in the Jackson,
Mississippi office. He received his B.B.A. degree in accounting in 1973 and his
M.B.A. degree in 1974 from the University of Mississippi. He is a certified
public accountant and a member of the American Institute of Certified Public
Accountants and the Mississippi Society of Certified Public Accountants. John S.
Weatherly and B. F. Weatherly are brothers.
JAMES O. BASSI is our Vice President and Controller. Prior to being
appointed to that position in November 1997, he was our Corporate Controller
from June 1997 and prior thereto was our Manager of the accounting department of
Callon and Callon Petroleum Operating. Mr. Bassi has been employed by Callon and
its predecessors for over ten years. Prior to his employment with us, he was
employed by Arthur Andersen LLP. He received his B.S. degree in accounting in
1976 from Mississippi State University. He is a member of the American Institute
of Certified Public Accountants and the Mississippi Society of Certified Public
Accountants.
THOMAS E. SCHWAGER is our Vice President of Engineering and Operations.
Prior to being appointed to that position in November 1997, he had held
engineering positions with us since 1981. Prior to joining us, Mr. Schwager held
various engineering positions with Exxon Company USA in Louisiana and Texas. He
received his B.S. degree in petroleum engineering from Louisiana State
University in 1972. He is a registered professional engineer in the state of
Louisiana and is a member of the Society of Petroleum Engineers.
H. MICHAEL TATUM is our Vice President and Secretary, and is responsible
for management of administrative matters. Mr. Tatum has held this position with
us since 1969. He graduated from Southern Methodist University in 1967 and is a
member of the American Society of Corporate Secretaries and the Society for
Human Resource Management.
KATHY G. TILLEY is our Vice President of Acquisitions and New Ventures, a
position she has held since April 1996. She was first employed by us in December
1989 as manager of acquisitions and prior thereto, held that or similar
positions as a consultant to us since 1981. Ms. Tilley received her B. A. degree
in economics from Louisiana State University in 1967.
STEPHEN F. WOODCOCK is our Vice President of Exploration. He was appointed
to that position in November 1997. He has been employed by us since 1995,
serving as manager of geology and geophysics. Before that, he was manager of
geophysics for CNG Producing Company and division geophysicist for Amoco
Production Company. Mr. Woodcock received his Masters degree in geophysics from
Oregon State University in 1975.
RODGER W. SMITH is our Treasurer. Prior to being appointed to that position
in April, 1999, he was our Manager of Budget and Analysis. Before that, Mr.
Smith was Manager of exploration and production accounting and has been employed
by Callon and its predecessors since 1983. Prior to his employment with us, he
was employed by International Paper Company as a plant controller. He received
his B.S. degree in accounting from the University of Southern Mississippi in
1973.
LEIF DONS has since 1997 been Senior Vice President, Business Development
of Fred. Olsen Energy ASA, a publicly held Norwegian company engaged in the
offshore energy service industry. From 1992 until 1997, Mr. Dons was employed by
Kvaerner ASA in various positions, including the fields of international
operations and the commercialization of new technology, and as resident country
manager responsible for Israel and Palestine. From 1983 until 1991, he served as
the managing director of Norwegian Oil Consortium A/S & Co., an oil company with
producing properties in Norway. He negotiated the sale of that company in 1991.
From 1973 until 1983, Mr. Dons held various positions as an analyst, staff
engineer and economist at the Pulp and Paper Research Institute, Norway and Saga
Petroleum ASA. Mr. Dons received a Master of Science degree in engineering from
the Norwegian Institute of Technology in 1973.
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<PAGE> 41
ROBERT A. STANGER has been the managing general partner since 1978 of
Robert A. Stanger & Company, Inc., a Shrewsbury, New Jersey-based firm engaged
in publishing financial material and providing investment banking services to
the real estate and oil and gas industries. He is a director of Citizens
Utilities, Stamford, Connecticut, a provider of telecommunications, electric,
gas, and water services and Electric Lightwaves, Inc., Seattle, Washington, a
regional fiber optic telephone company. Previously, Mr. Stanger was Vice
President of Merrill Lynch & Co. He received his B.A. degree in economics from
Princeton University in 1961. Mr. Stanger is a member of the National
Association of Securities Dealers and the New York Society of Security Analysts.
JOHN C. WALLACE is a Chartered Accountant having qualified with Coopers and
Lybrand in Canada in 1963, after which he joined Baring Brothers & Co., Limited
in London, England. For more than the last eleven years, he has served as
Chairman of Fred. Olsen Ltd., a London-based corporation which he joined in
1968, and which specializes in the business of shipping and property
development. He is a director of Fred. Olsen Energy ASA, a publicly held
Norwegian service company engaged in the offshore energy service industry;
Harland & Wolff PLC, Belfast, a shipbuilding yard for the offshore oil and gas
industry; and Ganger Rolf ASA and Bonheur ASA, Oslo, both publicly-traded
shipping companies. He is also an executive officer of NOCO Management, Ltd., a
general partner of NOCO Enterprises, L.P. and of other companies associated with
Fred. Olsen Interests.
B. F. WEATHERLY is a principal of Amerimark Capital Group, Houston, Texas,
an investment banking firm and a general partner of CapSource Fund, L. P.,
Jackson Mississippi, an investment fund. He is an executive officer of NOCO
Management Ltd., the general partner of NOCO Enterprises, L.P. Prior to
September 1996, he was Executive Vice President, Chief Financial Officer and a
director of Belmont Constructors, Inc., a Houston, Texas-based industrial
contractor formerly associated with Fred. Olsen Interests. He holds a Master of
Accountancy degree from University of Mississippi. He has previously been
associated with Arthur Andersen LLP, and has served as a Senior Vice President
of Weatherford International, Inc. B. F. Weatherly and John S. Weatherly are
brothers.
RICHARD O. WILSON is an Offshore Consultant. In his 42 years of working in
offshore drilling and construction, he spent two years with Zapata Offshore and
21 years with Brown & Root, Inc. working in various managerial capacities in the
Gulf of Mexico, Venezuela, Trinidad, Brazil, the Netherlands, the United Kingdom
and Mexico. He was a director and senior group vice president of Brown & Root,
Inc. and senior vice president of Halliburton, Inc. For the last 18 years he has
been associated with the Fred. Olsen Interests where he served as Chairman of
OGC International PLC, Dolphin A/S and Dolphin Drilling Ltd., and Belmont
Constructors, Inc. Since the sale of OGC International PLC to Halliburton, Inc.
in 1997, he has been a consultant to Brown & Root, Inc. on oil and gas projects
in Brazil, Bolivia, Mexico and Ecuador. He holds a B.S. degree in civil
engineering from Rice University. Mr. Wilson is a Fellow in the American Society
of Civil Engineers and a member of the Institute of Petroleum, London, England.
All of our officers and directors are United States citizens, except Mr.
Wallace, who is a citizen of Canada, and Mr. Dons, who is a citizen of Norway.
BENEFICIAL OWNERSHIP OF OUR COMMON AND PREFERRED STOCK
The following table shows the ownership of our common stock and series A
preferred stock by the following:
- our five most highly compensated executive officers;
- all of our directors;
- all of our executive officers and directors as a group; and
- anyone who is known by us to beneficially own 5% or more of our
outstanding common stock or preferred stock;
40
<PAGE> 42
Based on SEC rules, shares of common stock which an individual or group has
the right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group. These shares are not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other person show on this table.
Unless otherwise indicated, each person named in the following table has
the sole power to vote and dispose of the shares listed next to their name.
Information in the tables and accompanying text has been obtained from filings
made with the SEC or, in the case of our directors and executive officers, has
been provided by such individuals. Unless otherwise indicated, the information
provided below is based on information available to us as of May 15, 1999.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
---------------------- ----------------------
NAME AND ADDRESS NUMBER OF NUMBER OF
OF BENEFICIAL OWNERS SHARES PERCENTAGE SHARES PERCENTAGE
- -------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS:
John S. Callon.................................. 298,902 3.46% 0 --
Fred L. Callon.................................. 791,346 9.10% 0 --
Dennis W. Christian............................. 161,185 1.86% 0 --
John S. Weatherly............................... 149,660 1.73% 0 --
Thomas E. Schwager.............................. 47,652 * 0 --
Kathy G. Tilley................................. 102,980 1.19% 0 --
NON-EMPLOYEE DIRECTORS:
Leif Dons....................................... 0 -- 0 --
Robert A. Stanger............................... 40,856 * 0 --
John C. Wallace................................. 2,004,779 23.35% 0 --
B.F. Weatherly.................................. 147,664 1.72% 0 --
Richard O. Wilson............................... 68,877 * 1,000 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(15 PERSONS).................................... 3,845,438 40.82% 1,000 *
CERTAIN BENEFICIAL OWNERS:
Fred. Olsen Energy ASA.......................... 1,839,386 21.52% 0 --
Fred. Olsensgate 2
0152 Oslo, Norway
State Street Research & Management Company...... 827,400 9.68% 0 --
One Financial Center, 30th Floor
Boston, Massachusetts 02111-2690
The Guardian Life Insurance Company of
America...................................... 748,060 8.27% 220,000 21.04%
201 Park Avenue South
New York, New York 10003
Brinson Partners, Inc........................... 554,000 6.48% 0 --
209 South LaSalle
Chicago, Illinois 60604-1295
UBS AG.......................................... 554,000 6.48% 0 --
Bahnhofstrasse 45
8021, Zurich, Switzerland
Dimensional Fund Advisors Inc................... 505,800 5.92% 0 --
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
</TABLE>
- ---------------
* Under 1%.
41
<PAGE> 43
JOHN S. CALLON. The shares beneficially owned by John S. Callon include
105,000 shares held in a family limited partnership and 90,000 shares subject to
options under our 1994 Stock Incentive Plan. The shares beneficially owned by
John S. Callon do not include 58,501 shares owned by John S. Callon's wife over
which he disclaims beneficial ownership. NOCO Enterprises, L.P. Fred. Olsen
Energy ASA and Fred. Olsen Ltd. as of May 15, 1999, owned 107,297, 1,839,386 and
14,971 shares of common stock, respectively. John S. Callon, who is party to an
agreement regulating the voting and transfer of common shares with NOCO
Enterprises, L.P., Fred. Olsen Energy ASA and Fred. Olsen Ltd. disclaims
beneficial ownership of the NOCO Enterprises, L.P. Fred. Olsen Energy ASA and
Fred. Olsen Ltd. shares.
FRED L. CALLON. The shares beneficially owned by Fred L. Callon include
268,012 shares held as custodian for certain minor Callon family members; 78,430
shares held as trustee of certain Callon family trusts; 57,442 shares held as
trustee of shares held by the Callon Petroleum Company Employee Savings and
Protection Plan; 80,000 shares subject to options under our 1994 Stock Incentive
Plan and 75,000 shares subject to options under our 1996 Stock Incentive Plan.
The shares beneficially owned by Fred L. Callon do not include 25,037 shares
owned by Fred L. Callon's wife over which he disclaims beneficial ownership.
NOCO Enterprises, L.P., Fred. Olsen Energy ASA and Fred. Olsen Ltd., as of May
15, 1999, owned 107,297, 1,839,386 and 14,971 shares of common stock,
respectively. Fred L. Callon, who is party to an agreement regulating the voting
and transfer of common shares with NOCO Enterprises, L.P., Fred. Olsen Energy
ASA and Fred. Olsen Ltd. disclaims beneficial ownership of the NOCO Enterprises,
L.P., Fred. Olsen Energy ASA and Fred. Olsen Ltd. shares. Mr. Callon's address
is 200 North Canal Street, P.O. Box 1287, Natchez, Mississippi 39120.
DENNIS W. CHRISTIAN. The shares beneficially owned by Dennis W. Christian
include 60,000 shares subject to options under our 1994 Stock Incentive Plan and
69,500 shares subject to options under our 1996 Stock Incentive Plan.
JOHN S. WEATHERLY. The shares beneficially owned by John S. Weatherly
include 217 shares held as custodian for his minor children; 60,000 shares
subject to options under our 1994 Stock Incentive Plan and 61,500 shares subject
to options under our 1996 Stock Incentive Plan.
THOMAS E. SCHWAGER. The shares beneficially owned by Thomas E. Schwager
include 20,000 shares subject to options under our 1994 Stock Incentive Plan and
13,200 shares subject to options under our 1996 Stock Incentive Plan.
KATHY G. TILLEY. The shares beneficially owned by Kathy G. Tilley include
30,000 shares subject to options under our 1994 Stock Incentive Plan and 48,000
shares subject to options under our 1996 Stock Incentive Plan.
ROBERT A. STANGER. The shares beneficially owned by Robert A. Stanger
include 20,000 shares subject to options under our 1994 Stock Incentive Plan and
20,000 shares subject to options under our 1996 Stock Incentive Plan.
JOHN C. WALLACE. The shares beneficially owned by John C. Wallace include
107,297 shares owned by NOCO Enterprises, L.P.; 14,971 shares owned by Fred.
Olsen Ltd.; 1,839,386 shares owned by Fred. Olsen Energy ASA; 20,000 shares
subject to options under our 1994 Stock Incentive Plan and 20,000 shares subject
to options under our 1996 Stock Incentive Plan. See "Fred. Olsen Energy ASA"
below. Mr. Wallace's address is 65 Vincent Square, London, SW1P 2RX, England.
B.F. WEATHERLY. The shares beneficially owned by B.F. Weatherly include
107,297 shares owned by NOCO Enterprises, LP; 20,000 shares subject to options
under our 1994 Stock Incentive Plan and 20,000 shares subject to options under
our 1996 Stock Incentive Plan. See "Fred. Olsen Energy ASA" below.
RICHARD O. WILSON. The shares beneficially owned by Richard O. Wilson
include 26,604 shares held in a family limited partnership; 2,273 shares
issuable upon conversion of 1,000 shares of series A preferred stock held in the
family partnership; 20,000 shares subject to options under our 1994 Stock
Incentive Plan and 20,000 shares subject to options under our 1996 Stock
Incentive Plan.
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<PAGE> 44
ALL DIRECTORS AND EXECUTIVE OFFICERS. The shares beneficially owned by all
of our directors and executive officers as a group include 465,000 shares
subject to options under our 1994 Stock Incentive Plan exercisable within 60
days; 408,700 shares subject to options under our 1996 Stock Incentive Plan
exercisable within 60 days; and 148,203 shares awarded as performance shares or
restricted stock which vested in February, 1999.
FRED. OLSEN ENERGY ASA. The following information and the information in
the foregoing table is based on information disclosed on a Schedule 13D dated
August 20, 1997 and as otherwise disclosed to us by Fred. Olsen Energy ASA.
Fred. Olsen Energy ASA has the sole power to vote and the sole power to dispose
of 1,839,386 shares of our common stock. Ganger Rolf ASA, a public joint stock
company organized and existing under the laws of the Kingdom of Norway and the
owner of 28.81% of the outstanding capital stock of Fred. Olsen Energy ASA and
Bonheur ASA, a public joint stock company organized and existing under the laws
of the Kingdom of Norway and the owner of 28.81% of the outstanding capital
stock of Fred. Olsen Energy ASA, together have the power to direct the vote and
disposition of the shares of our common stock owned by Fred. Olsen Energy ASA.
AS Quatro, a joint stock company organized and existing under the laws of the
Kingdom of Norway and the owner of 1.66% of the outstanding capital stock of
Ganger Rolf ASA and 42.10% of the outstanding capital stock of Bonheur ASA and
AS Cinco, a joint stock company organized and existing under the laws of the
Kingdom of Norway and the owner of 11.99% of the outstanding capital stock of
Ganger Rolf ASA, each disclaims beneficial ownership of the shares of our common
stock owned by Fred. Olsen Energy ASA. John C. Wallace, one of our directors, is
a director of Fred. Olsen Energy ASA and a director of Ganger Rolf ASA, Bonheur
ASA, AS Quatro and AS Cinco and, as a result, may by deemed to share the power
to vote and dispose of, and therefore be a beneficial owner of the shares of
common stock owned by Fred. Olsen Energy ASA. The principal business address and
principal executive offices of Ganger Rolf ASA, Bonheur ASA, AS Quatro and AS
Cinco are located at Fred. Olsensgate 2, 0152 Oslo, Norway.
STATE STREET RESEARCH & MANAGEMENT COMPANY. The following information and
the information in the foregoing table is based upon a Schedule 13G, filed with
the SEC on February 8, 1999 by State Street Research & Management Company. State
Street Research & Management Company has sole voting power with respect to
700,400 shares of common stock and sole dispositive power with respect to all of
the shares it beneficially owns.
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA. The following information
and the information in the foregoing table is based upon a Schedule 13G/A, filed
with the SEC on February 11, 1998, by The Guardian Life Insurance Company of
America and certain of its affiliates. The common stock beneficially owned by
The Guardian Life Insurance Company of America includes 500,060 shares issuable
upon conversion of 220,000 shares of series A preferred stock.
BRINSON PARTNERS, INC. The following information and the information in the
foregoing table is based on a Schedule 13G, filed with the SEC on February 11,
1999, by UBS AG and Brinson Partners, Inc. Both UBS AG and Brinson Partners,
Inc. possess shared voting and dispositive power with respect to the shares
beneficially owned by them.
DIMENSIONAL FUND ADVISORS INC. The information in the foregoing table is
based upon a Schedule 13G, filed with the SEC on February 11, 1999, by
Dimensional Fund Advisors Inc.
STOCKHOLDERS' AGREEMENT
In connection with the formation of Callon in 1994, certain members of the
Callon family (including John S. Callon and Fred L. Callon) and NOCO
Enterprises, L.P. entered into a stockholders' agreement, which was subsequently
amended to include Fred. Olsen Energy ASA and Fred. Olsen Ltd. Under the
stockholders' agreement, which is dated September 16, 1994, the members of the
Callon family, on the one hand and NOCO Enterprises, L.P., Fred. Olsen Energy
ASA and Fred. Olsen Ltd. on the other hand, each elect two directors to Callon's
board of directors. Specifically, in the stockholders' agreement, the members of
the Callon family, NOCO Enterprises, L.P., Fred. Olsen Energy ASA and Fred.
Olsen Ltd. agree to use their best efforts, including voting the shares of
common stock which they own, to cause
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<PAGE> 45
Callon's board of directors to be composed of at least four members. Two of
these members are selected by the members of the Callon family and two of these
members are selected by NOCO Enterprises, L.P., Fred. Olsen Energy ASA and Fred.
Olsen Ltd. The stockholders' agreement also contains restrictions on transfer of
shares of common stock owned by the members of the Callon family, NOCO
Enterprises, L.P. Fred. Olsen Energy ASA and Fred. Olsen Ltd. and prohibits the
members of the Callon family, NOCO Enterprises, L.P., Fred. Olsen Energy ASA and
Fred. Olsen Ltd. from taking certain actions which would result in certain
changes of control or fundamental changes, without the consent of the other
party. The Callon family, NOCO Enterprises, L.P., Fred. Olsen Energy ASA and
Fred. Olsen Ltd. own an aggregate of 43.34% of our common stock.
DESCRIPTION OF THE NOTES
We will issue % Senior Subordinated Notes due 2004 under an indenture
between us and American Stock Transfer & Trust Company, as trustee. The
following description is a summary of selected provisions of the indenture and
the notes. We have not restated the indenture in its entirety. We filed the form
of the indenture as an exhibit to our registration statement. You should read
the indenture because the indenture, and not this description, will control your
rights as a holder of the notes. You can find the definitions of certain terms
used in this description under the subheading "Certain Definitions." Unless
otherwise specifically noted in the following discussion, references to
"Callon," "we" or "us" means Callon Petroleum Company without its Subsidiaries.
In the summary below, we have included references to the applicable section
numbers of the indenture so that you can easily locate these provisions.
Capitalized terms used in the summary have the meanings specified in the
indenture.
The notes represent our direct unsecured obligations and rank equally with
all our existing senior subordinated notes. The notes are subordinated to our
Senior Indebtedness as discussed under the subheading "Subordination" and are
structurally subordinated to all liabilities of our Subsidiaries. Assuming we
had issued the notes and applied the proceeds as intended as of March 31, 1999,
we would have had $100.2 million of Senior Indebtedness. As of March 31, 1999,
our Subsidiaries had liabilities of $12.0 million, excluding guarantees of
Senior Indebtedness. The indenture will permit us to incur additional Senior
Indebtedness subject only to certain limitations described under the subheading
"Certain Covenants -- Incurrence of Indebtedness." Our Credit Facility
constitutes Senior Indebtedness. All indebtedness under our Credit Facility is
secured by substantially all of our and our Subsidiaries' producing oil and gas
properties.
As of the date of the indenture, all of our Subsidiaries will be
"Restricted Subsidiaries." However, under the circumstances described in the
definition of "Unrestricted Subsidiaries," located under the subheading "Certain
Definitions," we will be permitted to designate certain of our Subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the indenture.
PRINCIPAL, INTEREST, AND MATURITY OF THE NOTES
We will issue notes with a maximum aggregate principal amount of
$40,000,000. The notes will mature on September 15, 2004, unless we elect to
redeem them earlier.
Interest on the notes will accrue at the rate of % per annum, and we will
pay interest quarterly on the 15th day of March, June, September and December,
commencing on September 15, 1999. We will make each interest payment to the
holders of record of the notes on the 1st day of March, June, September and
December immediately preceding such interest payment. Interest on the notes will
accrue from the date of original issuance and, thereafter, from the date we most
recently paid interest.
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<PAGE> 46
REGISTRATION, TRANSFER, AND PAYMENT OF INTEREST AND PRINCIPAL
Book-Entry Notes
We will issue the notes in the form of a global note that will be deposited
with The Depository Trust Company, New York, New York ("DTC"). This means that
we will not issue certificates to each holder. One global note will be issued to
DTC which will keep an electronic record of its participants whose clients have
purchased the notes. The participant will then keep a record of its clients who
purchased the notes. Unless a global note is exchanged in whole or in part for a
certificated note, a global note may not be transferred; except that DTC, its
nominees, and their successors may transfer a global note as a whole to one
another.
DTC and its participants will show beneficial interests in and make
transfers of beneficial interests in global notes only through their records.
We, the trustee and the paying agent will not maintain, review or supervise
these records. [Sections 308 and 312] The laws of some states require that
certain persons take physical delivery in definitive form of securities which
they own. If these laws apply, they may limit the ability to transfer beneficial
interests in the global note.
DTC will hold the notes through its nominee, Cede & Co. We will wire
principal and interest payments either directly to Cede & Co. or to the trustee
or other paying agent for payment to Cede & Co. We, the trustee and the paying
agent will treat Cede & Co. as the owner of the global notes for all purposes
and will have no direct responsibility if Cede & Co. fails to distribute those
payments to owners of beneficial interest in the global notes. [Section 308]
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit participants' accounts on the payment date according to
their holdings of beneficial interests in the global notes as shown on DTC's
records. In addition, it is DTC's current practice to assign any consenting or
voting rights to participants whose accounts are credited with notes on a record
date by using an omnibus proxy. Customary practices between participants and
owners of beneficial interests will govern payments by participants to owners of
beneficial interests in the global notes and voting by participants, as is the
case with notes held for the account of customers registered in "street name."
However, those payments will be the responsibility of the participants and not
of DTC, the trustee, the paying agent or us.
We will issue certificated notes in exchange for a global note with the
same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
and we have not appointed a successor depositary within 90 days; or
- DTC requests an exchange and an event of default has occurred and is
continuing. [Section 312]
Certificated Notes
If we issue certificated notes, they will be registered in the name of the
holder of the note. The notes may be transferred or exchanged, pursuant to
administrative procedures in the indenture, without the payment of any service
charge (other than any tax or other governmental charge) by contacting the
trustee. [Section 305]
Principal of, interest and any premium on certificated notes will be paid
at designated places. Payment may be made by check mailed (or at our option, by
wire transfer) to the persons in whose names the notes are registered on the
days specified in the indenture. [Section 1001]
About DTC
DTC has provided us the following information:
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking law, a member of the United States Federal Reserve System, a
"clearing corporation" within the meaning of the New York
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Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants deposit with DTC. DTC also records the
settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through computerized records for
participants' accounts. This eliminates the need to exchange certificates.
Participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through
a participant. The rules that apply to DTC and it participants are on file
with the SEC.
DTC is owned by a number of its participants and by the New York Stock
Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
SUBORDINATION
The payment of principal, premium, if any, and interest on the notes will
be subordinated to the prior payment in full of all of our Senior Indebtedness.
[Section 1301]
The holders of Senior Indebtedness will be able to receive payment in full
of all amounts due in respect of Senior Indebtedness, before the holders of
notes will be able to receive any payment with respect to the notes, other than
payments in the form of Permitted Junior Securities, and payments made pursuant
to the terms described under the subheading "Consolidation, Merger and Sale of
Assets," if there is a distribution to our creditors:
- in our liquidation or dissolution;
- in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to us, our creditors or our property;
- in an assignment for the benefit of our creditors; or
- in any marshalling of our assets and liabilities. [Section 1302]
We also may not make any payment in respect of the notes, other than
payments of Permitted Junior Securities, if:
- a Payment Event of Default on Specified Senior Indebtedness occurs and is
continuing beyond any applicable grace period; or
- any other default occurs and is continuing on Specified Senior
Indebtedness that permits holders of the Specified Senior Indebtedness to
accelerate its maturity, and we receive or the trustee receives a notice
of such default (a "Payment Blockage Notice") from the holders of any
Specified Senior Indebtedness.
We will resume making payments on the notes and any missed payments:
- in the case of a Payment Event of Default, upon the date that we cure or
obtain the waiver of such default; and
- in case of a Non-payment Event of Default, the earlier of the date that
we cure or obtain the waiver of such Non-payment Event of Default or 179
days after the date on which we receive or the trustee receives the
applicable Payment Blockage Notice, or the date on which the holders that
initiated the Payment Blockage Notice terminate the payment blockage
period, unless the maturity of any Specified Senior Indebtedness has been
accelerated.
No new Payment Blockage Notice may be delivered unless and until 360
consecutive days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice. No Non-payment
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Event of Default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to us or the trustee can be made the basis for a
subsequent Payment Blockage Notice. [Section 1303]
Any payments that we fail to make on the notes when due or within an
applicable grace period will constitute an Event of Default under the indenture
that entitles holders of the notes to accelerate the maturity of the notes.
[Sections 501 and 502]
If the trustee or any holder of a note receives any payment or property
prohibited by the subordination provisions of the indenture, the payment and
property must be paid over to us or the person making payments to our creditors.
[Sections 1302 and 1303]
As a result of the subordination provisions described above, in the event
of our bankruptcy, liquidation or reorganization, holders of the notes may
recover less ratably than our creditors that are holders of Senior Indebtedness.
See "Risk Factors."
The subordination provisions described above will not apply to the notes
upon a legal or covenant defeasance described under the subheading "Legal
Defeasance and Covenant Defeasance."
CERTAIN COVENANTS
Restricted Payments
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
- declare or pay any dividend or make any other payment or distribution on
account of our or any of our or our Restricted Subsidiaries' capital
stock (other than dividends or distributions payable solely in shares of
our capital stock); or
- purchase, redeem or retire any of our or our Restricted Subsidiaries'
capital stock or any warrants, rights or options to purchase or acquire
any shares of such capital stock (all such payments and other actions set
forth in the two clauses above being collectively referred to as
"Restricted Payments"),
if, at the time of and after giving effect to such Restricted Payment:
- an Event of Default would have occurred; or
- such Restricted Payment, together with the aggregate amount of all other
Restricted Payments (excluding Permitted Restricted Payments) made by us
and our Restricted Subsidiaries after the date of the Indenture, would
exceed the sum of:
(1) 50% of our Consolidated Net Income subsequent to June 30, 1999, with
100% reduction for a loss; plus
(2) the cumulative net proceeds received by us from the issuance and sale
after the date of the indenture of our capital stock, including in
such net proceeds the face amount of any indebtedness that has been
converted into our common stock after the date of the indenture.
So long as no Event of Default has occurred and is continuing, the
preceding provisions will not prohibit:
- Restricted Payments in an aggregate amount not to exceed $10 million;
- the payment of regular periodic dividends on shares of our series A
preferred stock or other series of our preferred stock; and
- the repurchase, redemption, other acquisition or retirement of any shares
of any class of our or any of our Restricted Subsidiaries' capital stock
in exchange for, or out of the aggregate net cash proceeds of a
substantially concurrent issuance and sale (other than to a Restricted
Subsidiary) of shares of our common stock.
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All such payments and other actions set forth in the three clauses above
being collectively referred to as "Permitted Restricted Payments." Permitted
Restricted Payments shall not reduce the amount that would otherwise be
available for Restricted Payments, except in the case of dividends declared or
paid on shares of our preferred stock (other than the series A preferred stock)
which dividends will reduce the amount available under clauses (1) and (2)
above. The amount of any Restricted Payments payable in property will be the
fair market value of such property as determined by our board of directors.
[Section 1006]
Incurrence of Indebtedness
We will not, and will not permit any of our Restricted Subsidiaries to,
create, incur, assume, guarantee or become liable ("incur"), with respect to any
Indebtedness for Money Borrowed (including Acquired Indebtedness but excluding
Permitted Indebtedness), if, immediately after we incur such debt (including
giving effect to the retirement of any existing Indebtedness for Money Borrowed
from the proceeds of such additional Indebtedness for Money Borrowed):
- the ratio of:
(1) the aggregate amount of our and our Restricted Subsidiaries'
outstanding Indebtedness for Money Borrowed as of the end of our
immediately preceding fiscal quarter, determined on a consolidated
basis under GAAP, to
(2) the Consolidated EBITDA for our immediately preceding four fiscal
quarters,
would exceed 10.0 to 1.0; or
- the ratio of:
(1) Consolidated EBITDA for our immediately preceding four fiscal
quarters, to
(2) Consolidated Interest Expense for our immediately preceding four
fiscal quarters,
would be less than 1.1 to 1.0.
We will also not permit any Restricted Subsidiary to incur any Indebtedness
for Money Borrowed, except to us or another Restricted Subsidiary, that is
expressly subordinate in right of payment to any other Indebtedness for Money
Borrowed of such Restricted Subsidiary. [Section 1007]
Liens
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien on any
asset now owned or hereafter acquired of any kind to secure any Pari Passu
Indebtedness or Subordinated Indebtedness, unless,
- the Lien is a Permitted Lien; or
- prior to, or at the same time that we incur a Lien, we directly secure
the notes equally and ratably, provided that:
(1) if such secured indebtedness is Pari Passu Indebtedness, the Lien
securing such Pari Passu Indebtedness is subordinate to, or pari passu
with, the Lien securing the notes; and
(2) if such secured indebtedness is Subordinate Indebtedness, the Lien
securing such Subordinated Indebtedness is subordinate to the Lien
securing the notes at least to the same extent as such Subordinated
Indebtedness is subordinated to the notes.
This covenant does not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the properties or assets that were
subject to such Lien prior to the acquisition by us or such Restricted
Subsidiary and we did not create, incur or assume any such Lien in contemplation
of such transaction. [Section 1008]
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Ranking of Future Indebtedness
We will not incur or permit to remain outstanding any Indebtedness for
Money Borrowed, including Acquired Indebtedness and Permitted Indebtedness,
which is expressly subordinate to any Senior Indebtedness, other than
Subordinated Indebtedness or Pari Passu Indebtedness. The incurrence of any
unsecured Senior Indebtedness is not, because of its unsecured status, deemed to
be subordinate in right of payment to any secured Senior Indebtedness. [Section
1013]
Dividend and Other Payment Restrictions Affecting Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or cause any encumbrance or restriction on the
ability of any Restricted Subsidiary to:
- pay dividends in cash or make any other distribution on its capital stock
to us or any other Restricted Subsidiary;
- pay any indebtedness owed to us or any other Restricted Subsidiary;
- make loans, advances or capital contributions to us or any other
Restricted Subsidiary; or
- transfer any of its properties to us or another Restricted Subsidiary.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
- an agreement governing Acquired Indebtedness of any acquired Person that
becomes a Restricted Subsidiary, provided, than any restriction or
encumbrance under such agreement existed at the time of acquisition, was
not put in place in anticipation of such acquisition, and is not
applicable to any Person other than the Person or property of the Person
so acquired;
- customary provisions of any of our or our Restricted Subsidiaries' leases
or licenses relating to the property covered that we or a Restricted
Subsidiary entered into in the ordinary course of business;
- applicable law;
- the indenture, the Credit Facility or other indebtedness or other
agreements existing on the date of original issuance of the notes;
- an agreement entered into for the sale or disposition of the stock,
business or properties of a Restricted Subsidiary;
- purchase money obligations, but only to the extent such purchase money
obligations restrict or prohibit the transfer of the property so
acquired;
- customary non-assignment provisions in installment purchase contracts;
- the requirements of a lender or purchaser of any indebtedness of a
Restricted Subsidiary in connection with a financing of the acquisition
of property, including the purchase of asset portfolios and the
underwriting or origination of mortgage loans, by such Restricted
Subsidiary to the extent such restriction applies to the transfer to us
or any other Restricted Subsidiary of such property acquired after the
date of the indenture;
- an agreement that extends, refinances, renews or replaces any agreement
described in the foregoing clauses; and
- Liens containing customary limitations on the transfer of collateral
which are not prohibited as described in the "Liens" covenant and do not
restrict the ability of a Restricted Subsidiary to transfer any of its
property or assets to us or another Restricted Subsidiary. [Section 1014]
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Transactions with Affiliates
We will not, and will not permit any of our Restricted Subsidiaries to,
enter into any transaction or series of related transactions involving payments
in excess of $50,000, with any of our Affiliates, other than ourselves or a
Restricted Subsidiary, unless our board of directors:
- determines that the transaction is on terms that are no less favorable to
us or the relevant Restricted Subsidiary than would be available at such
time in a comparable transaction in arm's length dealings with an
unrelated person; and
- the board of directors adopts a resolution evidencing such determination.
The preceding paragraph will not apply to:
- Restricted Payments that are permitted by the provisions of the Indenture
described above under "Restricted Payments;"
- fees and compensation paid to, and indemnity provided on behalf of, our
and our Restricted Subsidiaries' officers, directors, employees or
consultants; or
- payments for goods and services purchased in the ordinary course of
business on an arm's length basis. [Section 1015]
Change of Control
Upon the occurrence of a Change of Control, we are obligated to make an
offer to purchase all of the outstanding notes for a purchase price equal to
101% of the principal amount of the notes plus accrued and unpaid interest, if
any, on the notes to the date the offer is consummated. We are required to
purchase all notes tendered and not withdrawn.
In order to effect the Change of Control offer, we must mail to each holder
of the notes a notice of the Change of Control offer no later than 30 days after
the Change of Control occurs. We must consummate the offer on a business day not
less than 30 days nor more than 60 days after the mailing of the notice of the
Change of Control. We are required to keep the offer open for at least 20
business days. The notice governs the terms of the offer and states the
procedures that holders of notes must follow to accept the offer.
We will not be required to make a Change of Control offer upon a Change of
Control if a third party makes a Change of Control offer that meets the
requirements of the indenture, and purchases all notes validly tendered and not
withdrawn under the Change of Control offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of our and our Restricted Subsidiaries' assets taken as a whole. Although there
is a limited 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 us to repurchase their
notes as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of our and our Restricted Subsidiaries' assets taken as a whole
may be uncertain.
We will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations, to the extent these laws or regulations are
applicable, in connection with the repurchase of the notes as a result of a
Change of Control. [Section 1016]
REPORTS
As long as we are a reporting company under the Securities Exchange Act of
1934, we will furnish holders of the notes with our annual reports containing
audited consolidated financial statements and our interim reports containing our
quarterly unaudited consolidated summary financial data. If we cease to be a
reporting company, we will furnish holders of the notes with our audited
consolidated financial statements and our quarterly unaudited consolidated
summary financial statements. [Section 704]
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
- failure to pay any interest on the notes when due for 30 days, whether or
not prohibited by the subordination provisions of the indenture;
- failure to pay the principal of (or premium, if any, on) the notes when
due as provided in the indenture, whether or not prohibited by the
subordination provisions of the indenture;
- failure to comply with the covenants under "-- Certain
Covenants -- Change of Control;"
- failure to perform, or a breach of, any other covenant set forth in the
indenture for 30 days after receipt of written notice from the trustee or
holders of at lest 25% in aggregate principal amount of the outstanding
notes specifying the default and requiring that we remedy such default;
- failure to pay at Stated Maturity of our or any Restricted Subsidiaries'
Indebtedness for Money Borrowed having an outstanding principal amount
due at Stated Maturity greater than $2.5 million for a period of 30 days
beyond any applicable grace period;
- an event of default as defined in any mortgage, indenture or instrument
of ours or a Restricted Subsidiary that has resulted in acceleration of
Indebtedness for Money Borrowed which, together with the principal amount
of any other Indebtedness for Money Borrowed so accelerated, exceeds $2.5
million at any time, and we do not cure or obtain the waiver of such
default and such acceleration is not rescinded or annulled within 30 days
from the occurrence of such acceleration;
- certain events of insolvency, receivership or reorganization of us or any
Material Subsidiary; and
- failure by us or any Material Subsidiary to satisfy a final judgment for
the payment of money in excess of $2.5 million for a period of 30 days
without a stay of execution. [Section 501]
If an Event of Default arising from certain events of insolvency,
receivership or reorganization occurs and is continuing, all outstanding notes
will become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing,
- the trustee or the holders of at least 25% in aggregate principal amount
of the then outstanding notes may declare all the notes to be due and
payable immediately; and
- the trustee, upon the request of the holders of not less than 25% in
aggregate principal amount of the then outstanding notes, shall declare
all of the notes to be due and payable. [Section 502]
After a declaration of acceleration under the indenture, but before the
trustee obtains a judgment for payment of the money due, the holders of a
majority in aggregate principal amount of the outstanding notes may rescind such
declaration by written notice to us and the trustee, if:
- we have paid or deposited with the trustee a sum sufficient to pay:
(1) all sums paid or advanced by the trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
trustee, its agents and counsel;
(2) all overdue interest on the notes;
(3) the principal of any notes which have become due otherwise than by
such declaration of acceleration and interest at the rate borne by the
notes; and
(4) to the extent that payment of such interest is lawful, interest upon
overdue interest and principal at the rate borne by the notes (without
duplication);
- the rescission would not conflict with any judgment of a court of
competent jurisdiction; and
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<PAGE> 53
- we have cured or obtained the waiver of all Events of Default, other than
the nonpayment of principal of (or premium, if any, on) or interest on
the notes that has become due solely by such declaration of acceleration.
[Section 502]
A Holder of a note may institute proceedings for the enforcement of the
payment of the principal, premium, if any, and interest on such note on or after
the respective due dates expressed in such note. No Holder of any note will have
any right to institute any other proceedings with respect to the indenture,
unless:
- such holder has notified the trustee of a continuing Event of Default;
- the holders of at least 25% in aggregate principal amount of the
outstanding notes have made written request and offered reasonable
indemnity to the trustee to institute such proceedings as trustee under
the indenture;
- the trustee has not received directions inconsistent with such written
request by holders of a majority in aggregate principal amount of the
outstanding notes; and
- the trustee has failed to institute such proceedings within 60 days of
receipt of such notice. [Section 507 and 508]
If a default or Event of Default occurs and is continuing and is known to
the trustee, the trustee shall mail to each holder of notes notice of the
default or Event of Default within 90 days after the occurrence of such default
or Event of Default. The trustee may withhold from holders of the notes notice
of any continuing Event of Default, except an Event of Default relating to the
payment of principal (premium, if any) or interest, if it determines in good
faith that withholding notice is in their interest. [Section 602]
The holders of a majority in aggregate principal amount of the notes then
outstanding may on behalf of the holders of all of the notes waive any existing
Event of Default and its consequences, except a continuing Event of Default in
the payment of principal of (or premium, if any, on) or interest on the notes or
of a provision of the indenture that cannot be modified or amended without the
consent of the holder of each note affected as described below under the
subheading "Modification of Indenture; Waiver of Covenants." [Section 513]
We are required to deliver to the trustee annual and quarterly statements
regarding compliance with the indenture. Upon becoming aware of any default or
Event of Default, we are required to deliver to the trustee a statement
specifying such default or Event of Default. [Section 1011]
REDEMPTION AT OPTION OF THE COMPANY
We may redeem the notes, in whole or part, at 100% of their principal
amount plus accrued interest, on or after March 15, 2001 by giving not less than
30 nor more than 60 days' notice to the holders. If we elect to redeem less than
all of the notes, the trustee will select which notes, or portions of notes not
to be less than $1,000, to redeem. On the redemption date, interest will cease
to accrue on the notes or portions of notes called for redemption. [Article 11]
MODIFICATION OF INDENTURE; WAIVER OF COVENANTS
We generally may amend the indenture with the written consent of a majority
in principal amount of the outstanding notes. [Section 902] The holders of a
majority in principal amount of the outstanding notes may also waive our
compliance with certain covenants. [Section 1012] We must, however, obtain the
consent of each holder of notes affected by an amendment or waiver which does
any of the following:
- changes the maturity date of the principal of, or the due date of any
installment of interest on, any note;
- reduces the principal of, or the rate of interest on, any note;
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<PAGE> 54
- changes the place of payment or the currency in which any portion of the
principal of (or premium, if any, on), or interest on, any note is
payable;
- impairs the right to institute suit for enforcement of any such payment;
- reduces the percentage of holders of the outstanding notes necessary to
modify the indenture;
- modifies the foregoing requirements or reduces the percentage of
outstanding notes necessary to waive any past default or certain
covenants; or
- reduces the relative ranking of the notes. [Section 902]
CONSOLIDATION, MERGER AND SALE OF ASSETS
The indenture generally permits a consolidation, merger, or sale of all or
substantially all of our assets to another entity, subject to our obligation to
offer to repurchase the notes in the case of a transaction that is a Change of
Control as long as it does not cause a default or an Event of Default. If this
happens, the remaining or acquiring entity:
- if other than us, must be formed in a U.S. jurisdiction and must assume
our obligations under the indenture; and
- must be able to incur $1.00 of Indebtedness for Money Borrowed in
compliance with the incurrence of indebtedness covenant in the indenture
immediately after the merger. [Section 801]
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Legal Defeasance
As long as we take steps to ensure that you will receive all of your
payments under the notes and are able to transfer the notes, we can elect to
legally release ourselves from any obligations on the notes (called "legal
defeasance") other than:
- the rights of holders of outstanding notes to receive payment in respect
of the principal of (and premium, if any) and interest on such notes when
such payments are due;
- our obligation to replace any temporary notes, register the transfer or
exchange of any notes, replace mutilated, destroyed, lost or stolen notes
and maintain an office or agency for payments in respect of the notes;
- the rights, powers, trusts, duties and immunities of the trustee; and
- the legal defeasance provisions of the indenture. [Section 1202]
To accomplish legal defeasance, the following must occur:
- We must irrevocably deposit in trust for the benefit of all holders of
notes money and/or U.S. government or U.S. government agency notes or
bonds that will generate enough cash to make interest, principal and any
other payments on the notes on their various due dates.
- There must be a change in current U.S. federal tax law or an IRS ruling
that lets us make that deposit without causing you to be taxed on the
notes any differently than if we did not make the deposit and just repaid
the notes ourselves. (Under current U.S. federal tax law, the deposit and
our legal release from the securities would be treated as though we took
back your notes and gave you your share of the cash and notes or bonds
deposited in trust. In that event, you could recognize gain or loss on
the notes you give back to us.)
- We must deliver to the trustee a legal opinion of our counsel confirming
the tax law change described above and that all of the conditions to
legal defeasance in the indenture have been fulfilled.
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We will not be able to achieve legal defeasance if there is a continuing
Event of Default under the indenture or if doing so would violate any other
material agreements to which we are a party. If we ever did accomplish legal
defeasance, as described above, you would have to rely solely on the trust
deposit for repayment on the notes. You could not look to us for repayment in
the unlikely event of any shortfall. [Section 1204]
Covenant Defeasance
Under current U.S. federal tax law, we can make the same type of deposit
described above and be released from certain covenants relating to the notes.
The release from these covenants is called "covenant defeasance." In that event,
you would lose the protection of these covenants but would gain the protection
of having money and securities set aside in trust to repay the notes. [Section
1203] In order to achieve covenant defeasance, we must do the following:
- deposit in trust for the benefit of all holders of the notes money and/or
U.S. government or U.S. government agency notes or bonds that will
generate enough cash to make interest, principal and any other payments
on the notes on their various due dates.
- deliver to the trustee a legal opinion of our counsel confirming that
under current U.S. federal tax law we may make that deposit without
causing you to be taxed on the notes any differently than if we did not
make the deposit and just repaid the notes ourselves. The opinion must
also state that all of the conditions to covenant defeasance in the
indenture have been fulfilled.
We will not be able to achieve covenant defeasance if there is a continuing
Event of Default under the indenture or if doing so would violate any other
material agreements to which we are a party. The indenture describes the
covenants that we may fail to comply with without causing an Event of Default if
we accomplish covenant defeasance. [Section 1204]
If we elect to make a deposit resulting in covenant defeasance, the amount
of money and/or U.S. government obligations deposited in trust should be
sufficient to pay amounts due on the notes at the time of their maturity.
However, if the maturity of the notes is accelerated due to the occurrence of an
Event of Default, the amount in trust may not be sufficient to pay all amounts
due on the notes. We will remain liable for the shortfall as described in the
indenture. [Article 12]
SATISFACTION AND DISCHARGE OF THE INDENTURE
We will have no further obligations under the indenture as to all
outstanding notes, other than surviving rights of registration of transfers of
the notes, when:
- all notes have been delivered to the trustee for cancellation; or all
notes have become due and payable or, within one year, will become due
and payable or be redeemed and we have deposited with the trustee funds
sufficient to pay interest, principal and any other payments on all
outstanding notes on their various due dates;
- we have paid all other sums then due and payable under the indenture by
us; and
- we have delivered to the trustee an officers' certificate and an opinion
of counsel, which, taken together, state that we have complied with all
conditions precedent under the indenture relating to the satisfaction and
discharge of the indenture. [Sections 401 and 402]
GOVERNING LAW
Legal interpretations of the indenture and notes will be made using the
laws of the State of New York. [Section 113]
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CONCERNING THE TRUSTEE
American Stock Transfer & Trust Company will act as trustee under the
indenture. The indenture provides for indemnification of the trustee by us under
certain circumstances. [Section 607]
The indenture limits the rights of the trustee to obtain payments of claims
in certain cases if it becomes our creditor. While the trustee is permitted to
engage in other transactions, if the trustee acquires any conflicting interests
governed by the Trust Indenture Act of 1939, the trustee must either eliminate
such conflict or resign. [Section 613 and 614]
The trustee is the transfer agent and registrar for our common stock and
series A preferred stock. Also, the trustee is the trustee under our 2001
Indenture and 2002 Indenture.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
(Section 101)
"Acquired Indebtedness" means Indebtedness for Money Borrowed of a Person
existing at the time such Person becomes a Restricted Subsidiary or assumed in
connection with the acquisition by us or a Restricted Subsidiary of assets from
such Person, and not incurred in connection with, or in anticipation of, such
Person becoming a Restricted Subsidiary or such acquisition. Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or, indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Average Life" means, with respect to any Indebtedness for Money Borrowed,
as at any date of determination the quotient obtained by dividing:
- the sum of the products of:
(1) the number of years (and any parts thereof from the date of
determination to the date or dates of each successive scheduled
principal payment (including, without limitation, any sinking fund or
mandatory redemption payment requirements) of such Indebtedness for
Money Borrowed multiplied by;
(2) the amount of each such principal payment; by
- the sum of all such principal payments.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person to pay rent or other amounts under the lease of (or other agreement
conveying the right to use) real or personal property which obligations are
required to be classified and accounted for as capital lease obligations on a
balance sheet of such Person under GAAP and, for purposes of the indenture, the
amount of such obligations at any date shall be the capital amount thereof at
such date, determined in accordance with GAAP.
"Change of Control" means the occurrence of any of the following:
- the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of our and our Restricted
Subsidiaries' assets taken as a whole to any "person" (as such term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934);
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- the adoption of a plan relating to our liquidation or dissolution;
- the consummation of any transaction (including, without limitation, any
purchase, sale, acquisition, disposition, merger or consolidation) the
result of which is that any "person" (as defined above) becomes the
"beneficial owner" (as such term is described in Rule 13d-3 and Rule
13d-5 under the Securities Exchange Act of 1934), directly or indirectly,
of more than 50% of the aggregate voting power of all classes of our
Voting Stock, provided that the sale of our Voting Stock, preferred
stock, or rights to acquire our Voting Stock or preferred stock to an
underwriter in connection with a firm commitment underwriting shall not
constitute a Change of Control; or
- the first day on which a majority of the members of our board of
directors are not Continuing Directors.
"Consolidated EBITDA" means, for any period, determined in accordance with
GAAP on a consolidated basis for us and our Restricted Subsidiaries, the sum of
Consolidated Net Income, plus depreciation, depletion, amortization and other
non-cash charges, income tax expense, and Consolidated Interest Expense, for
such period, each as deducted in determining such Consolidated Net Income.
"Consolidated Interest Expense" means, for any period, the interest expense
for such period, which is required to be shown as such on both our and our
Restricted Subsidiaries' financial statements, on a consolidated basis, prepared
in accordance with GAAP.
"Consolidated Net Income" means, for any period, the amount of our and our
Restricted Subsidiaries' consolidated net income (loss) for such period,
determined in accordance with GAAP; provided, however, that there shall be
included in Consolidated Net Income any net extraordinary gains or losses for
such period (less all fees and expenses related thereto); and, provided,
further, that there shall not be included in Consolidated Net Income:
- any net income (loss) of a Restricted Subsidiary for any portion of such
period during which it was not a Consolidated Subsidiary;
- any net income (loss) of businesses, properties or assets acquired or
disposed of (by way of merger, consolidation, purchase, sale or
otherwise) by us or any Restricted Subsidiary for any portion of such
period prior to the acquisition thereof or subsequent to the disposition
thereof; or
- any net income for such period resulting from transfers of assets
received by us or any Restricted Subsidiary from an Unrestricted
Subsidiary.
"Consolidated Subsidiary" means a Restricted Subsidiary the financial
statements of which are consolidated with our financial statements.
"Continuing Directors" means, as of any date of determination, any member
of our board of directors who:
- was a member of our board of directors on the date of the indenture; or
- was nominated for election or elected to our board of directors with the
approval of a majority of the Continuing Directors who were members of
our board at the time of their nomination or election.
"Credit Facility" means that certain Amended and Restated Credit Agreement,
dated as of October 31, 1996, among us, Callon Petroleum Operating Company,
Callon Offshore Production, Inc., the several banks and other financial
institutions from time to time parties thereto (the "Banks"), and The Chase
Manhattan Bank, as agent for the Banks, as the same may be amended, modified,
supplemented, extended, restated, replaced, renewed or refinanced from time to
time.
"Event of Default" has the meaning specified under "Events of Default and
Remedies."
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles board of
the American Institute of Certified Public
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Accountants and statements' and pronouncements of the Financial Accounting
Standards Board in effect on the date of the indenture.
"Indebtedness for Money Borrowed" means any of the following of our or any
Restricted Subsidiary's obligations:
- any obligation, contingent or otherwise, for borrowed money or for the
deferred purchase price of property, assets, securities or services
(including, without limitation, any interest accruing subsequent to an
Event of Default;
- all obligations (including the notes) evidenced by bonds, notes,
debentures or other similar instruments;
- all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired (even though
the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such
property), except any such obligation that constitutes a trade payable
and an accrued liability arising in the ordinary course of business, if
and to the extent any of the foregoing indebtedness would appear as a
liability upon a balance sheet prepared in accordance with GAAP;
- all Capitalized Lease Obligations;
- our liabilities actually due and payable under bankers acceptances and
letters of credit;
- all indebtedness of the type referred to in the preceding five clauses
secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or
security interest in our or any Restricted Subsidiary's property
(including, without limitation, accounts and contract rights), even
though neither we nor any Restricted Subsidiary has assumed or become
liable for the payment of such indebtedness; and
- any guarantee or endorsement (other than for collection or deposit in the
ordinary course of business) or discount with recourse of, or other
agreement, contingent or otherwise, to purchase, repurchase, or otherwise
acquire, to supply, or advance funds or become liable with respect to,
any indebtedness or any obligation of the type referred to in any of the
preceding six clauses, regardless of whether such obligation would appear
on a balance sheet.
Provided, however, that Indebtedness for Money Borrowed shall not include:
- Production Payments and Reserve Sales;
- any liability for gas balancing incurred in the ordinary course of
business;
- our or a Restricted Subsidiary's accounts payable or other obligations in
the ordinary course of business in connection with the obtaining of goods
or services; and
- any liability under any and all:
(1) employment or consulting agreements or employee benefit plans or
arrangements; and
(2) futures contracts, forward contracts, swap, cap or collar contracts,
option contracts, or other similar derivative agreements.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing) upon or with respect to any property of any kind. A Person shall be
deemed to own subject to a Lien any property which such Person has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.
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"Material Subsidiary" means any Restricted Subsidiary whose assets or
revenues comprise at least five percent (5%) of our and our Restricted
Subsidiaries' assets or revenues on a consolidated basis as of the end of, or
for, our most recently completed fiscal quarter, as determined from time to
time.
"Non-payment Event of Default" means any event (other than a Payment Event
of Default), the occurrence of which (with or without notice or the passage of
time) entitles one or more Persons to accelerate the maturity of any Specified
Senior Indebtedness.
"Pari Passu Indebtedness" means any of our Indebtedness for Money Borrowed
that is pari passu in right of payment to the notes.
"Payment Event of Default" means any default in the payment or required
prepayment of principal of (or premium, if any, on) or interest on any Specified
Senior Indebtedness when due (whether at final maturity, upon scheduled
installment; upon acceleration or otherwise).
"Permitted Indebtedness" means any of the following:
- Indebtedness for Money Borrowed outstanding on the date of the indenture
(and not repaid or defeased with the proceeds of the offering of the
notes);
- Our Indebtedness for Money Borrowed to a Restricted Subsidiary and
Indebtedness for Money Borrowed of a Restricted Subsidiary to us or a
Restricted Subsidiary; provided, however, that upon any event which
results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of any such Indebtedness for Money
Borrowed (except to us or a Restricted Subsidiary), such Indebtedness for
Money Borrowed shall be deemed, in each case, to be incurred and shall be
treated as an incurrence for purposes of the "Incurrence of Indebtedness"
covenant at the time the Restricted Subsidiary in question ceased to be a
Restricted Subsidiary;
- any guarantee of Senior Indebtedness incurred in compliance with the
"Incurrence of Indebtedness" covenant, by us or a Restricted Subsidiary;
and
- any renewals, substitutions, refinancings or replacements (each, for
purposes of this clause, a "refinancing") by us or a Restricted
Subsidiary of any Indebtedness for Money Borrowed outstanding on the date
of the indenture (and not repaid or defeased with the proceeds of the
offering of the notes), including any successive refinancings by us or
such Restricted Subsidiary, so long as:
(1) any such new Indebtedness for Money Borrowed shall be in a principal
amount that does not exceed the principal amount (or, if such
Indebtedness for Money Borrowed being refinanced provides for an
amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of
the date of determination) so refinanced plus the amount of any
premium required to be paid in connection with such refinancing
pursuant to the terms of the Indebtedness for Money Borrowed
refinanced or the amount of any premium reasonably determined by us or
such Restricted Subsidiary as necessary to accomplish such
refinancing, plus the amount of our or such Restricted Subsidiary's
expenses incurred in connection with such refinancing; and
(2) in the case of any refinancing of our Indebtedness for Money Borrowed
that is not Senior Indebtedness, such new Indebtedness for Money
Borrowed is either pari passu with the notes or subordinated to the
notes at least to the same extent as the Indebtedness being
refinanced; and
(3) such new Indebtedness for Money Borrowed has an Average Life equal to
or longer than the Average Life of the Indebtedness for Money Borrowed
being refinanced and a final Stated Maturity equal to or later than
the final Stated Maturity of the Indebtedness for Money Borrowed being
refinanced.
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"Permitted Junior Securities" means any of our or any successor obligor's
equity securities or subordinated debt securities with respect to the Senior
Indebtedness provided for by a plan of reorganization or readjustment that, in
the case of any such subordinated debt securities, are subordinated in right of
payment to all Senior Indebtedness that may at the time be outstanding to
substantially the same degree as, or to a greater extent than, the notes are so
subordinated as provided in the indenture.
"Permitted Liens" means any of the following types of Liens:
- Liens existing as of the date the notes are first issued (except to the
extent such Liens secure any Pari Passu Indebtedness or Subordinated
Indebtedness that is repaid or defeased with proceeds of the offering of
the notes), and any renewal, extension or refinancing of any such Lien
provided that thereafter such Lien extends only to the properties that
were subject to such Lien prior to the renewal, extension or refinancing
thereof;
- Liens securing the notes; and
- Liens in favor of us.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"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, which reserves 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 and/or subject to the obligation of the grantor or
transferor to indemnify for environmental matters.
"Restricted Subsidiary" means any Subsidiary, whether existing on or after
the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary
or is designated as an Unrestricted Subsidiary pursuant to the terms of the
indenture;
"Senior Indebtedness" means the principal amount of, and interest on and
all other amounts due on or in connection with:
- any of our Indebtedness for Money Borrowed, whether now outstanding or
hereafter created, incurred, assumed or guaranteed, unless in the
instrument creating or evidencing such Indebtedness for Money Borrowed or
pursuant to which such Indebtedness for Money Borrowed is outstanding it
is provided that such indebtedness is subordinate in right of payment or
in rights upon liquidation to any other of our Indebtedness for Money
Borrowed; and
- all renewals, extensions and refundings of any such indebtedness.
"Specified Senior Indebtedness" means:
- all of our Senior Indebtedness in respect of the Credit Facility and any
renewals, amendments, extensions, supplements, modifications, deferrals,
refinancings, or replacements (each, for purposes of this definition, a
"refinancing") thereof by us, including any successive refinancings
thereof by us; and
- any other Senior Indebtedness and any refinancings thereof by us having a
principal amount of at least $5 million as of the date of determination
and provided that the agreements, indentures or other instruments
evidencing such Senior Indebtedness or pursuant to which such Senior
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Indebtedness was issued specifically designates such Senior Indebtedness
as "Specified Senior Indebtedness" for purposes of the indenture.
For purposes of this definition, a refinancing of any Specified Senior
Indebtedness shall be treated as Specified Senior Indebtedness only if the
Senior Indebtedness issued in such refinancing ranks or would rank pari passu
with the Specified Senior Indebtedness refinanced and only if the Senior
Indebtedness issued in such refinancing is permitted by the covenant described
under "Certain Covenants -- Limitation of Indebtedness for Money Borrowed."
"Stated Maturity" with respect to any note or any installment of principal
thereof or interest thereon means the date established by the indenture as the
fixed date on which the principal of such note or such installment of principal
or interest is due and payable, and, when used with respect to any other
Indebtedness for Money Borrowed or any installment of interest thereon, means
the date specified in the instrument evidencing or governing such Indebtedness
for Money Borrowed as the fixed date on which the principal of such Indebtedness
for Money Borrowed or such installment of interest is due and payable.
"Subordinated Indebtedness" means our Indebtedness for Money Borrowed which
is expressly subordinated in right of payment to the notes, including, without
limitation, the convertible debentures described under "Description of Capital
Stock -- Convertible Debentures."
"Subsidiary" means any corporation of which at the time of determination we
or one or more Subsidiaries own or control directly or indirectly more than 50%
of the Voting Stock.
"2001 Indenture" means that certain indenture dated as of November 27, 1996
between Callon and American Stock Transfer & Trust Company, as trustee, as the
same may have been amended or supplemented from time to time prior to the date
hereof.
"2002 Indenture" means that certain indenture dated as of July 31, 1997
between Callon and American Stock Transfer & Trust Company, as trustee, as the
same may have been amended or supplemented from time to time prior to the date
hereof.
"Unrestricted Subsidiary" means:
- any Subsidiary that at the time of determination will be designated an
Unrestricted Subsidiary by the board of directors as provided below; and
- any Subsidiary of an Unrestricted Subsidiary.
The board of directors may designate any Subsidiary as an Unrestricted
Subsidiary so long as neither we nor any Restricted Subsidiary is directly or
indirectly liable pursuant to the terms of any Indebtedness for Money Borrowed
of such Subsidiary or have any assets or properties which are subject to any
Lien securing any Indebtedness for Money Borrowed of such Subsidiary. Any such
designation by the board of directors shall be evidenced to the trustee by
filing a board resolution with the trustee giving effect to such designation.
The board of directors may designate any Unrestricted Subsidiary as a Restricted
Subsidiary if, immediately after giving effect to such designation:
- no Event of Default shall have occurred and be continuing; and
- we could occur $l.00 of additional Indebtedness for Money Borrowed (other
than Permitted Indebtedness) under the "Incurrence of Indebtedness"
covenant.
"Voting Stock" means stock, interests, participations, rights in or other
equivalents in the equity interests (however designated) with respect to a
corporation having general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such
corporation, provided that, for the purposes hereof, stock which carries only
the right to vote conditionally on the happening of an event shall not be
considered Voting Stock whether or not such event shall have happened.
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DESCRIPTION OF BANK CREDIT FACILITY AND OTHER INDEBTEDNESS
BANK CREDIT FACILITY
Borrowings under our bank credit facility are secured by mortgages covering
substantially all of our producing oil and gas properties. Currently, the credit
facility provides for a $50 million borrowing base which is adjusted
periodically on the basis of a discounted present value of future net cash flows
attributable to our proved producing oil and gas reserves. Our borrowing base is
currently being evaluated by our bank and we expect our borrowing base to be
reduced in connection with the offering of the notes. Under our bank credit
facility, the interest rate is equal to the lender's prime rate plus 0.125% but
increases to prime plus 0.50% if we borrow more than 50% of our borrowing base.
At our option, we may fix the interest rate on all or a portion of the
outstanding principal balance at 1.125% above a defined "Eurodollar" rate for
periods up to six months which increases to 1.5% if we borrow more than 50% of
our borrowing base. The weighted average interest rate for the total debt
outstanding at December 31, 1998 and 1997 was 6.68% and 8.50%, respectively.
Under the credit facility, a quarterly commitment fee of 0.25% is assessed on
the unused portion of the borrowing base which increases to 0.375% if we borrow
more than 50% of our borrowing base. We may borrow, pay, reborrow and repay
under the credit facility until October 31, 2000, on which date we must repay in
full all amounts then outstanding.
Borrowings under the bank credit facility are guaranteed by our material
subsidiaries. The bank credit facility has several customary covenants
including, but not limited to, covenants that limit our ability to:
- repurchase capital stock;
- guaranty borrowings or borrow additional funds;
- prepay other indebtedness;
- merge;
- sell property;
- engage in transactions with our affiliates;
- hedge our production; and
- make acquisitions.
We are also required by the bank to maintain several financial ratios and
conditions so that the bank can monitor our financial stability.
OUTSTANDING NOTES
On November 27, 1996, we sold $24.2 million aggregate principal amount of
10% Senior Subordinated Notes due December 15, 2001. Payments of principal,
interest and premium, if any, under these notes are subordinate to all of our
existing and future senior indebtedness. These notes rank equally with the notes
offered in this prospectus. The 10% notes are not entitled to the benefit of any
mandatory sinking fund payments and are subject to redemption at anytime on or
after December 15, 1997, at our option, at par plus accrued and unpaid interest
to the date fixed for redemption.
On July 31, 1997, we sold $36 million aggregate principal amount of our
10.125% Series A Senior Subordinated Notes due September 15, 2002 through a
private placement transaction. On September 10, 1997, we commenced an offer to
exchange the notes for a like principal amount of 10.125% Series B Senior
Subordinated Notes due September 15, 2002. The form and terms of the series B
notes are identical in all material respects to the terms of the series A notes,
except the series A notes have certain transfer restrictions and provisions
relating to registration rights. Payments of principal, interest and premium, if
any, under the series A and series B notes are subordinate to all of our
existing and future senior indebtedness and rank equally with the notes offered
in this prospectus. The series A and series B notes are not entitled to the
benefit of any mandatory sinking fund payments and are subject to
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redemption at anytime on or after September 15, 2000, at our option, at par plus
accrued and unpaid interest to the date fixed for redemption.
Our outstanding notes contain covenants substantially similar to the notes.
However, several covenants contained in the indenture for the 10.125% notes are
more restrictive than covenants contained in the indenture for the 10% notes and
the notes offered in this document. If we violate these covenants we may trigger
cross-default and cross-acceleration provisions contained in the indentures for
the 10% notes and the notes. See "Description of the Notes -- Certain
Covenants."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 20,000,000 shares of common stock, $0.01
par value. As of March 31, 1999, 8,545,517 shares of common stock were issued
and outstanding.
Holders of common stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of stockholders.
Holders do not have the right to cumulate their votes in the election of
directors. Holders of common stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for our securities. In the event of
our liquidation, dissolution or winding up, holders of common stock are entitled
to share equally and ratably in all of the assets remaining, if any, after
satisfaction of all our debts and liabilities, and of the preferential rights of
any series of preferred stock then outstanding. The outstanding shares of common
stock are validly issued, fully paid and nonassessable. Holders of common stock
are entitled to receive dividends when, as and if declared by the board of
directors out of funds legally available therefor. American Stock Transfer &
Trust Company is transfer agent and registrar for the common stock.
PREFERRED STOCK
We are authorized to issue 2,500,000 shares of preferred stock, $0.01 par
value per share. Our board of directors has the authority to divide the
preferred stock into one or more series and to fix and determine the relative
rights and preferences of the shares of each such series, including dividend
rates, terms of redemption, sinking funds, the amount payable in the event of
our voluntary liquidation, dissolution or winding up of our affairs, conversions
rights and voting powers. We have authorized the issuance of the Convertible
Exchangeable Preferred Stock, Series A, consisting of up to 1,380,000 shares of
preferred stock.
Series A Preferred Stock
In November 1995, we issued and sold 1,315,500 shares of series A preferred
stock.
Dividend Rights. Holders of the series A preferred stock are entitled to an
annual cash dividend of $2.125 per share, payable quarterly. If dividends are
not paid in full on all outstanding shares of the series A preferred stock and
any other security ranking on parity with the series A preferred stock,
dividends declared on the series A preferred stock and such other parity stock
are paid pro rata. Unless full cumulative dividends on all outstanding shares of
series A preferred stock have been paid, no dividends (other than in common
stock or other stock ranking junior to the series A preferred stock) may be
paid, or any other distributions made, on the common stock or on any other stock
of ours ranking junior to the series A preferred stock, nor may any common stock
or any other stock of ours ranking junior to or on a parity with the series A
preferred stock be redeemed, purchased or otherwise acquired for any
consideration by us (except by conversion into or exchange for stock of Callon
ranking junior to the series A preferred stock).
Conversion. The series A preferred stock is convertible at any time prior
to being called for redemption into common stock at a rate of approximately
2.273 shares of common stock for each share of series A preferred stock, subject
to adjustment for certain antidilutive events. From time to time, we may
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reduce the conversion price by any amount for a period of at least 20 days if
the board of directors determines that such reduction is in our best interests.
In the event of certain changes in control or fundamental changes, holders of
series A preferred stock have the right to convert all of their series A
preferred stock into common stock at a rate equal to the average of the last
reported sales prices of the common stock for the five business days ending on
the last business day preceding the date of the change in control or fundamental
change. We or our successor may elect to distribute cash to such holders in lieu
of common stock at an equal value.
Exchange. The series A preferred stock may be exchanged at our option for
convertible debentures beginning on January 15, 1998 at the rate of $25
principal amount of convertible debentures for each share of preferred stock,
provided that all accrued and unpaid dividends have been paid and certain other
conditions are met. See "Convertible Debentures" below.
Redemption. On or after December 31, 1998 we may from time to time redeem
the series A preferred stock at an initial redemption price of $26.488. On
December 31 of each year thereafter and until December 31, 2005, the redemption
price decreases. On December 31, 2005 and thereafter, the redemption price shall
remain at $25.
Voting Rights. The holders of series A preferred stock have no voting
rights, except as otherwise provided by law. However, if dividend payments are
in arrears in an amount equal to or exceeding six quarterly dividends, the
number of our directors will be increased by two and the holders of the series A
preferred stock (voting separately as a class) will be entitled to elect the
additional two directors until all dividends have been paid. In addition, we may
not create, issue or increase the authorized number of shares of any class or
series of stock ranking senior to the series A preferred stock or alter, change
or repeal any of the powers, rights or preferences of the holders of the series
A preferred stock as to adversely affect such powers, rights or preferences.
In a December 1998 private transaction, a preferred stockholder elected to
convert 59,689 shares of preferred stock into 136,867 shares of our common
stock. Subsequent to December 31, 1998, several other preferred stockholders,
through private transactions, converted 210,350 shares of preferred stock into
502,632 shares of our common stock under similar terms.
CONVERTIBLE DEBENTURES
At our option, the series A preferred stock may be converted into
convertible debentures. The convertible debentures, if issued, will be issued
under an indenture between Callon and Bank One, Columbus, NA, as trustee, a copy
of which is filed as an exhibit to our Form 10-K for fiscal year 1996.
General. The convertible debentures will be our unsecured, subordinated
obligations, limited in aggregate principal amount to the aggregate liquidation
preference of the series A preferred stock and will mature on December 31, 2010.
We must pay interest on the convertible debentures semiannually following the
issue thereof at the rate of 8.5% per annum. The convertible debentures are to
be issued in fully registered form, without coupons, in denominations of $25 or
any integral multiple thereof.
Conversion. The convertible debentures will be convertible at any time
after issue and prior to being called for redemption into common stock at the
conversion rate in effect on the series A preferred stock at the date of
exchange, subject to adjustment for certain antidilutive events. From time to
time we may reduce the conversion price in order that certain stock-related
distributions which may be made by us to our shareholders will not be taxable.
Each holder of a convertible debenture will be entitled to conversion rights
identical in substance to the rights applicable to holders of series A preferred
stock in the event of a change in control or fundamental change.
Subordination. Payment of principal of (and premium, if any) and interest
on the convertible debentures will be subordinated and junior in right of
payment to the prior payment in full of all senior indebtedness of Callon,
including the notes. During the continuation of any default in the payment of
principal, interest or premium on any senior indebtedness, no payment with
respect to the principal,
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interest or premium (if any) on the convertible debentures may be made until
such default on the senior indebtedness shall have been cured or waived or shall
have ceased to exist.
Redemption. On or after December 31, 1998, the convertible debentures may
be redeemed at our option at a redemption price (expressed as percentages of
principal amount) of 105.95%. On December 31 of each year thereafter and until
December 31, 2005, the redemption price decreases. On December 31, 2005 and
thereafter, the redemption price shall remain at 100.00%.
Events of Default. Upon an "event of default," the trustee or the holders
of at least 25% in aggregate principal amount of the outstanding convertible
debentures may accelerate the maturity of all convertible debentures, subject to
certain conditions. An event of default is defined in the indenture generally
as:
- failure to pay principal or premium, if any, on any convertible debenture
when due at maturity, upon redemption or otherwise;
- failure to pay an interest on any convertible debenture when due and
continuing for 30 days;
- breach of such indenture or convertible debentures by us;
- certain events in bankruptcy, insolvency or reorganization;
- default on indebtedness (other than non-recourse indebtedness) resulting
in more than $7,500,000 becoming due and payable prior to its maturity;
or
- a judgment or decree entered against us involving a liability of
$7,500,000 or more.
UNDERWRITING
We have entered into an underwriting agreement for the offering with the
underwriters named below. Subject to certain conditions, each underwriter has
severally agreed to purchase the principal amount of notes indicated in the
following table.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ------------ ----------------
<S> <C>
A.G. Edwards & Sons, Inc.................................... $
Morgan Keegan & Company, Inc................................
-----------
Total............................................. $40,000,000
===========
</TABLE>
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
notes sold by the underwriters to securities dealers may be sold at a discount
from the initial public offering price of up to % of the principal amount of
the notes. Any such securities dealers may resell any notes purchased from the
underwriters to other brokers or dealers at a discount from the initial public
offering price up to % per note from the initial public offering price. If all
the notes are not sold at the initial offering price, the underwriters may
change the offering price and the other selling terms.
The notes are a new issue of securities with no established trading market.
The notes have been approved for listing on the New York Stock Exchange. We have
been advised by the underwriters that the underwriters intend to make a market
in the notes but are not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the notes.
In connection with the offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater amount of
notes than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the notes while the
offering is in progress.
64
<PAGE> 66
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased notes sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
We have agreed to indemnify the several underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
We estimate that the expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $250,000.
VALIDITY OF THE NOTES
Our lawyers, Butler & Binion, L.L.P., Houston, Texas, will issue opinions
about the validity of the notes for us. Certain legal matters will be passed
upon for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The audited consolidated financial statements as of December 31, 1998, and
for the three years in the period ended December 31, 1998, included elsewhere in
this registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The information appearing in this prospectus regarding our quantities of
oil and gas and future net cash flows and the present values thereof from such
reserves is based on estimates of such reserves and present values prepared by
Huddleston & Co., Inc., an independent petroleum and geological engineering
firm.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information
on the operation of the SEC's public reference room in Washington, D.C. by
calling the SEC at 1-800-SEC-0330. We also file such information with the New
York Stock Exchange. Such reports, proxy statements and other information may be
read and copied at 30 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any further filings made with the
SEC under Sections 13(a), 13(c), 14, or
65
<PAGE> 67
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") until we sell
all of the securities or we terminate this offering:
- Our Annual Report on Form 10-K for the year ended December 31, 1998;
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
and
- Our Current Reports on Form 8-K, filed on February 3, 1999 and March 3,
1999.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
H. Michael Tatum
200 North Canal Street
Natchez, MS 39120
1 (800) 451-1294
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front of those documents.
66
<PAGE> 68
GLOSSARY OF OIL AND GAS TERMS
TERMS USED TO DESCRIBE QUANTITIES OF OIL AND NATURAL GAS
- BBL -- One stock tank barrel, or 42 US gallons liquid volume, of crude
oil or other liquid hydrocarbons.
- BCF -- One billion cubic feet of natural gas.
- BCFE -- One billion cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
- MBBL -- One thousand Bbl.
- MCF -- One thousand cubic feet of natural gas.
- MCFE -- One thousand cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
- MMCF -- One million cubic feet of natural gas.
- MMCFE -- One million cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.
TERMS USED TO DESCRIBE OUR INTERESTS IN WELLS AND ACREAGE
- GROSS OIL AND GAS WELLS OR ACRES -- Our gross wells or gross acres
represents the total number of wells or acres in which we own a working
interest.
- NET OIL AND GAS WELLS OR ACRES -- Determined by multiplying "gross" oil
and natural gas wells or acres by the working interest that we own in
such wells or acres represented by the underlying properties.
TERMS USED TO ASSIGN A PRESENT VALUE TO OUR RESERVES
- STANDARDIZED MEASURE OF PROVED RESERVES -- The present value, discounted
at 10%, of the pre-tax future net cash flows attributable to estimated
net proved reserves. We calculate this amount by assuming that we will
sell the oil and gas production attributable to the proved reserves
estimated in our independent engineer's reserve report for the prices we
received for the production on the date of the report, unless we had a
contract to sell the production for a different price. We also assume
that the cost to produce the reserves will remain constant at the costs
prevailing on the date of the report. The assumed costs are subtracted
from the assumed revenues resulting in a stream of future net cash flows.
Estimated future income taxes using rates in effect on the date of the
report are deducted from the net cash flow stream. The after-tax cash
flows are discounted at 10% to result in the standardized measure of our
proved reserves. The standardized measure of our proved reserves is
disclosed in our financial statements at note 12.
- DISCOUNTED PRESENT VALUE -- The discounted present value of proved
reserves is identical to the standardized measure, except that estimated
future income taxes are not deducted in calculating future net cash
flows. We disclose the discounted present value without deducting
estimated income taxes to provide what we believe is a better basis for
comparison of our reserves to other producers who may have different tax
rates.
TERMS USED TO CLASSIFY OUR RESERVE QUANTITIES
- PROVED RESERVES -- The estimated quantities of crude oil, natural gas and
natural gas liquids which, upon analysis of geological and engineering
data, appear with reasonable certainty to be recoverable in the future
from known oil and natural gas reservoirs under existing economic and
operating conditions.
67
<PAGE> 69
The Securities and Exchange Commission definition of proved oil and gas
reserves, per Article 4-10(a)(2) of Regulation S-X, is as follows:
PROVED OIL AND GAS RESERVES. Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of the date
the estimate is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on escalations
based upon future conditions.
(a) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(b) Reserves which can be produced economically through application of
improved recovery, techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
(c) Estimates of proved reserves do not include the following: (1) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (2) crude oil, natural gas,
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (3) crude oil, natural gas, and natural gas liquids, that
may occur in undrilled prospects; and (4) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil shales, coal, gilsonite
and other such sources.
- PROVED DEVELOPED RESERVES -- Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
- PROVED UNDEVELOPED RESERVES -- Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required.
TERMS WHICH DESCRIBE THE COST TO ACQUIRE OUR RESERVES
- RESERVE REPLACEMENT COSTS -- Our reserve replacement costs compare the
amount we spent to explore for oil and gas and to drill and complete
wells during a period, with the increases in reserves during the period.
This amount is calculated by dividing the net change in our evaluated oil
and property costs during a period by the change in proved reserves plus
production over the same period.
TERMS WHICH DESCRIBE THE PRODUCTIVE LIFE OF A PROPERTY OR GROUP OF PROPERTIES
- RESERVE LIFE -- A measure of the productive life of an oil and gas
property or a group of oil and gas properties, expressed in years.
Reserve life equals the estimated net proved reserves attributable to a
property or group of properties divided by production from the property
or group of properties for the four fiscal quarters preceding the date as
of which the proved reserves were estimated.
TERMS USED TO DESCRIBE THE LEGAL OWNERSHIP OF OUR OIL AND GAS PROPERTIES
- ROYALTY INTEREST -- A real property interest entitling the owner to
receive a specified portion of the gross proceeds of the sale of oil and
natural gas production or, if the conveyance creating the interest
provides, a specific portion of oil and natural gas produced, without any
deduction for the costs to explore for, develop or produce the oil and
natural gas. A royalty interest owner has no
68
<PAGE> 70
right to consent to or approve the operation and development of the
property, while the owners of the working interest have the exclusive
right to exploit the mineral on the land.
Working interest -- A real property interest entitling the owner to receive
a specified percentage of the proceeds of the sale of oil and natural gas
production or a percentage of the production, but requiring the owner of the
working interest to bear the cost to explore for, develop and produce such oil
and natural gas. A working interest owner who owns a portion of the working
interest may participate either as operator or by voting his percentage interest
to approve or disapprove the appointment of an operator and drilling and other
major activities in connection with the development and operation of a property.
TERMS USED TO DESCRIBE SEISMIC OPERATIONS
- Seismic data - Oil and gas companies use seismic data as their principal
source of information to locate oil and gas deposits, both to aid in
exploration for new deposits and to manage or enhance production from
known reservoirs. To gather seismic data, an energy source is used to
send sound waves into the subsurface strata. These waves are reflected
back to the surface by underground formations, where they are detected by
geophones which digitize and record the reflected waves. Computers are
then used to process the raw data to develop an image of underground
formations.
- 2-D seismic data - 2-D seismic survey data has been the standard
acquisition technique used to image geologic formations over a broad
area. 2-D seismic data is collected by a single line of energy sources
which reflect seismic waves to a single line of geophones. When
processed, 2-D seismic data produces an image of a single vertical plane
of sub-surface data.
- 3-D seismic - 3-D seismic data is collected using a grid of energy
sources, which are generally spread over several miles. A 3-D survey
produces a three dimensional image of the subsurface geology by
collecting seismic data along parallel lines and creating a cube of
information that can be divided into various planes, thus improving
visualization. Consequently, 3-D seismic data is a more reliable
indicator of potential oil and natural gas reservoirs in the area
evaluated.
69
<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998,
December 31, 1997 and March 31, 1999...................... F-3
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998 and the Three
Months Ended March 31, 1999 and 1998...................... F-4
Consolidated Statements of Stockholders' Equity for Each of
the Three Years in the Period Ended December 31, 1998 and
the Three Months Ended March 31, 1999..................... F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998 and the Three
Months Ended March 31, 1999 and 1998...................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Callon Petroleum Company:
We have audited the accompanying consolidated balance sheets of Callon
Petroleum Company (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 Callon Petroleum Company and
subsidiaries, as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN
New Orleans, Louisiana,
February 19, 1999
F-2
<PAGE> 73
CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 4,150 $ 6,300 $ 15,597
Accounts receivable..................................... 5,688 6,024 12,168
Other current assets.................................... 1,648 1,924 723
--------- --------- ---------
Total current assets............................ 11,486 14,248 28,488
--------- --------- ---------
Oil and gas properties, full-cost accounting method:
Evaluated properties.................................... 462,871 444,579 398,046
Less accumulated depreciation, depletion and
amortization......................................... (349,236) (345,353) (282,891)
--------- --------- ---------
113,635 99,226 115,155
Unevaluated properties excluded from amortization....... 38,328 42,679 35,339
--------- --------- ---------
Total oil and gas properties.................... 151,963 141,905 150,494
--------- --------- ---------
Pipeline and other facilities, net........................ 6,102 6,182 6,504
Other property and equipment, net......................... 1,676 1,753 1,938
Deferred tax asset........................................ 16,105 16,348 1,248
Long-term gas balancing receivable........................ 191 199 242
Other assets, net......................................... 934 1,017 1,507
--------- --------- ---------
Total assets.................................... $ 188,457 $ 181,652 $ 190,421
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................ $ 8,673 $ 11,257 $ 12,389
Undistributed oil and gas revenues...................... 1,874 1,720 2,259
Accrued net profits interest payable.................... 363 129 1,121
--------- --------- ---------
Total current liabilities....................... 10,910 13,106 15,769
--------- --------- ---------
Accounts payable and accrued liabilities to be
refinanced.............................................. 5,981 3,000 --
Long-term debt............................................ 86,250 78,250 60,250
Accrued retirement benefits............................... 2,269 2,323 297
Long-term gas balancing payable........................... 317 489 404
--------- --------- ---------
Total liabilities............................... 105,727 97,168 76,720
--------- --------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value; 2,500,000 shares
authorized; 1,045,461 shares of Convertible
Exchangeable Preferred Stock, Series A issued and
outstanding at March 31, 1999 and 1,255,811 and
1,315,500 outstanding at December 31, 1998 and 1997,
respectively, with a liquidation preference of
$26,136,525 at March 31, 1999........................ 10 13 13
Common Stock, $.01 par value; 20,000,000 shares
authorized; 8,545,517, 8,178,406 and 7,855,216 shares
outstanding at March 31, 1999, December 1998 and
1997, respectively................................... 85 82 79
Treasury stock (98,577 shares at cost).................. (1,177) (915) --
Unearned compensation -- restricted stock............... -- -- (2,232)
Capital in excess of par value.......................... 108,296 109,429 106,433
Retained earnings (deficit)............................. (24,484) (24,125) 9,408
--------- --------- ---------
Total stockholders' equity...................... 82,730 84,484 113,701
--------- --------- ---------
Total liabilities and stockholders' equity...... $ 188,457 $ 181,652 $ 190,421
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 74
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------- ----------------------------
1999 1998 1998 1997 1996
------ ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales.......................... $7,969 $11,045 $ 35,624 $42,130 $25,764
Interest and other......................... 405 447 2,094 1,508 946
------ ------- -------- ------- -------
Total revenues..................... 8,374 11,492 37,718 43,638 26,710
------ ------- -------- ------- -------
Cost and expenses:
Lease operating expenses................... 1,608 1,941 7,817 8,123 7,562
Depreciation, depletion and amortization... 3,963 5,570 19,284 16,488 9,832
General and administrative................. 1,061 1,502 5,285 4,433 3,495
Interest................................... 1,027 651 1,925 1,957 313
Accelerated vesting and retirement
benefits................................ -- -- 5,761 -- --
Impairment of oil and gas properties....... -- -- 43,500 -- --
------ ------- -------- ------- -------
Total costs and expenses........... 7,659 9,664 83,572 31,001 21,202
------ ------- -------- ------- -------
Income (loss) from operations................ 715 1,828 (45,854) 12,637 5,508
Income tax expense (benefit)............... 243 621 (15,100) 4,200 50
------ ------- -------- ------- -------
Net income (loss)............................ 472 1,207 (30,754) 8,437 5,458
Preferred stock dividends.................... 831 699 2,779 2,795 2,795
------ ------- -------- ------- -------
Net income (loss) available to common
shares..................................... $ (359) $ 508 $(33,533) $ 5,642 $ 2,663
====== ======= ======== ======= =======
Net income (loss) per common share:
Basic...................................... $ (.04) $ .06 $ (4.17) $ .91 $ .46
====== ======= ======== ======= =======
Diluted.................................... $ (.04) $ .06 $ (4.17) $ .88 $ .45
====== ======= ======== ======= =======
Shares used in computing net income (loss)
per common share:
Basic...................................... 8,477 8,015 8,034 6,194 5,835
====== ======= ======== ======= =======
Diluted.................................... 8,477 8,221 8,034 6,422 5,952
====== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 75
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION CAPITAL IN RETAINED
PREFERRED COMMON TREASURY RESTRICTED EXCESS OF EARNINGS
STOCK STOCK STOCK STOCK PAR VALUE (DEFICIT)
--------- ------ -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995.......... $13 $58 -- -- $ 73,955 $ 1,103
Net income......................... -- -- -- -- -- 5,458
Preferred stock dividends.......... -- -- -- -- -- (2,795)
Shares issued pursuant to employee
benefit plan.................... -- -- -- -- 72 --
--- --- ------- ------- -------- --------
Balances, December 31, 1996.......... 13 58 -- -- 74,027 3,766
Net income......................... -- -- -- -- -- 8,437
Sale of common stock............... -- 19 -- -- 29,249 --
Preferred stock dividends.......... -- -- -- -- -- (2,795)
Tax benefits related to stock
compensation plans.............. -- -- -- -- 36 --
Shares issued pursuant to employee
benefit and option plan......... -- -- -- -- 392 --
Restricted stock plan.............. -- 2 -- (3,153) 2,729 --
Earned portion of restricted
stock........................... -- -- -- 921 -- --
--- --- ------- ------- -------- --------
Balances, December 31, 1997.......... 13 79 -- (2,232) 106,433 9,408
Net income (loss).................. -- -- -- -- -- (30,754)
Preferred stock dividends.......... -- -- -- -- 15 (2,779)
Shares issued pursuant to employee
benefit and option plan......... -- -- -- -- 235 --
Employee stock purchase plan....... -- -- -- -- 163 --
Restricted stock plan.............. -- 2 -- (2,731) 2,584 --
Earned portion of restricted
stock........................... -- -- -- 4,963 -- --
Conversion of preferred shares to
common.......................... -- 1 -- -- (1) --
Stock buyback plan................. -- -- (915) -- -- --
--- --- ------- ------- -------- --------
Balances, December 31, 1998.......... 13 82 (915) -- 109,429 (24,125)
Net income (loss).................. -- -- -- -- -- 472
Preferred stock dividends.......... -- -- -- -- 276 (831)
Shares issued pursuant to employee
benefit and option plan......... -- -- -- -- 141 --
Employee stock purchase plan....... -- -- -- -- 66 --
Restricted stock plan.............. -- (2) -- -- (1,613) --
Earned portion of restricted
stock........................... -- -- -- -- -- --
Conversion of preferred shares to
common.......................... (3) 5 -- -- (3) --
Stock buyback plan................. -- -- (262) -- -- --
--- --- ------- ------- -------- --------
Balances, March 31, 1999
(Unaudited)........................ $10 $85 $(1,177) $ -- $108,296 $(24,484)
=== === ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 76
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 472 $ 1,207 $(30,754) $ 8,437 $ 5,458
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization..... 4,093 5,697 19,791 16,924 10,131
Impairment of oil and gas properties......... -- -- 43,500 -- --
Amortization of deferred costs............... 141 164 619 467 114
Deferred income tax expense (benefit)........ 243 621 (15,100) 4,200 50
Noncash compensation related to stock
compensation plans......................... 140 634 7,583 1,224 72
Changes in current assets and liabilities:
Accounts receivable........................ 336 1,946 6,144 493 (4,332)
Other current assets....................... 276 (1,004) (1,201) (207) (278)
Current liabilities........................ (2,462) (65) (860) (3,809) 4,049
Change in gas balancing receivable........... 8 (23) 43 418 (41)
Change in gas balancing payable.............. (172) 52 85 14 (42)
Change in other long-term liabilities........ (52) -- -- 249 (28)
Change in other assets, net.................. (58) (82) (129) (1,073) (830)
-------- -------- -------- -------- --------
Cash provided (used) by operating
activities................................. 2,965 9,147 29,721 27,337 14,323
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (13,884) (12,736) (64,105) (89,609) (37,637)
Cash proceeds from sale of mineral interests.... 154 339 9,909 4,450 1,574
-------- -------- -------- -------- --------
Cash provided (used) by investing
activities................................. (13,730) (12,397) (54,196) (85,159) (36,063)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Change in accrued liabilities for capital
expenditures................................. -- -- (2,396) 3,610 3,346
Increase in accounts payable and accrued
liabilities to be refinanced................. 2,981 -- 3,000 -- --
Equity issued related to employee stock plans... 66 171 414 90 --
Purchase of treasury shares..................... (262) -- (915) -- --
Payments on debt................................ -- -- -- (49,200) (25,850)
Proceeds from debt issuance..................... 8,000 -- 18,000 85,200 50,000
Common stock canceled........................... (1,615) (145) (130) (422) --
Sale of common stock............................ -- -- -- 29,267 --
Increase (decrease) in accrued preferred stock
dividends payable............................ -- -- (16) -- 443
Dividends on preferred stock.................... (555) (699) (2,779) (2,795) (2,795)
-------- -------- -------- -------- --------
Cash provided (used) by financing
activities................................. 8,615 (673) 15,178 65,750 25,144
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (2,150) (3,923) (9,297) 7,928 3,404
Cash and cash equivalents:
Balance, beginning of period.................... 6,300 15,597 15,597 7,669 4,265
-------- -------- -------- -------- --------
Balance, end of period.......................... $ 4,150 $ 11,674 $ 6,300 $ 15,597 $ 7,669
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 77
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE PERIODS ENDING MARCH 31, 1999 AND 1998 IS
UNAUDITED.)
1. ORGANIZATION
Callon Petroleum Company (the "Company") was organized under the laws of
the state of Delaware in March 1994 to serve as the surviving entity in the
consolidation and combination of several related entities (referred to herein
collectively as the "Constituent Entities"). The combination of the businesses
and properties of the Constituent Entities with the Company was completed on
September 16, 1994 (the "Consolidation").
As a result of the Consolidation, all of the businesses and properties of
the Constituent Entities are owned (directly or indirectly) by the Company.
Certain registration rights were granted to the stockholders of certain of the
Constituent Entities. See Note 7.
The Company and its predecessors have been engaged in the acquisition,
development and exploration of crude oil and natural gas since 1950. The
Company's properties are geographically concentrated in Louisiana, Alabama,
Texas and offshore Gulf of Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Reporting
The Consolidated Financial Statements include the accounts of the Company,
and its subsidiary, Callon Petroleum Operating Company ("CPOC"). CPOC also has
subsidiaries, namely Callon Offshore Production, Inc. and Mississippi Marketing,
Inc. All intercompany accounts and transactions have been eliminated. Certain
prior year amounts have been reclassified to conform to presentation in the
current year.
Use of Estimates
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 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.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. FAS
133 is effective for fiscal years beginning after June 15, 1999, with earlier
application permitted. The Company has not yet determined the timing or method
of the adoption of FAS 133 and thus cannot quantify the impact of adoption.
However, the Statement will create volatility in equity through other
comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("FAS 130"), Reporting Comprehensive Income. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. FAS 130 was effective for the
Company in 1998. The Company does not have any items of other comprehensive
income.
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131 ("FAS 131"), Disclosures about Segments of an Enterprise and Related
Information. FAS 131 establishes standards for
F-7
<PAGE> 78
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company has only one operating segment and
thus separate segment disclosure is not required.
Property and Equipment
The Company follows the full-cost method of accounting for oil and gas
properties whereby all costs incurred in connection with the acquisition,
exploration and development of oil and gas reserves, including certain overhead
costs, are capitalized. Such amounts include the cost of drilling and equipping
productive wells, dry hole costs, lease acquisition costs, delay rentals,
interest capitalized on unevaluated leases and other costs related to
exploration and development activities. Payroll and general and administrative
costs capitalized include salaries and related fringe benefits paid to employees
directly engaged in the acquisition, exploration and/or development of oil and
gas properties as well as other directly identifiable general and administrative
costs associated with such activities. Costs associated with unevaluated
properties are excluded from amortization. Unevaluated property costs are
transferred to evaluated property costs at such time as wells are completed on
the properties, the properties are sold or management determines these costs
have been impaired.
Costs of properties, including future development and net future site
restoration, dismantlement and abandonment costs, which have proved reserves and
those which have been determined to be worthless, are depleted using the
unit-of-production method based on proved reserves. If the total capitalized
costs of oil and gas properties, net of amortization, exceed the sum of (1) the
estimated future net revenues from proved reserves at current prices and
discounted at 10% and (2) the lower of cost or market of unevaluated properties
(the full-cost ceiling amount), net of tax effects, then such excess is charged
to expense during the period in which the excess occurs. See Note 8.
Upon the acquisition or discovery of oil and gas properties, management
estimates the future net costs to be incurred to dismantle, abandon and restore
the property using geological, engineering and regulatory data available. Such
cost estimates are periodically updated for changes in conditions and
requirements. Such estimated amounts are considered as part of the full-cost
pool subject to amortization upon acquisition or discovery. Such costs are
capitalized as oil and gas properties as the actual restoration, dismantlement
and abandonment activities take place. As of December 31, 1998 and 1997 and
March 31, 1999, estimated future site restoration, dismantlement and abandonment
costs, net of related salvage value and amounts funded by abandonment trusts
(see Notes 7 and 9) were not material.
Depreciation of other property and equipment is provided using the
straight-line method over estimated lives of three to twenty years. Depreciation
of the pipeline and other facilities is provided using the straight-line method
over estimated lives of 15 to 27 years.
Natural Gas Imbalances
The Company follows an entitlement method of accounting for its
proportionate share of gas production on a well by well basis, recording a
receivable to the extent that a well is in an "undertake" position and
conversely recording a liability to the extent that a well is in an "overtake"
position.
Derivatives
The Company uses derivative financial instruments (see Note 6) for price
protection purposes on a limited amount of its future production and does not
use them for trading purposes. Such derivatives are accounted for on an accrual
basis and amounts paid or received under the agreements are recognized as oil
and gas sales in the period in which they accrue.
F-8
<PAGE> 79
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable
Accounts receivable consists primarily of accrued oil and gas production
receivable. The balance in the reserve for doubtful accounts included in
accounts receivable is $38,000, $38,000 and $36,000 at March 31, 1999, December
31, 1998 and 1997, respectively. Net recoveries were $2,000 in 1998 and net
charge offs were $357,000 and $88,000 in 1997 and 1996. There were no provisions
to expense in the three year period ended December 31, 1998 and the three month
period ending March 31, 1999.
For the year ended December 31, 1998, three companies purchased 23%, 26%
and 22%, respectively of the Company's natural gas and oil production. All three
customers purchased production primarily from Callon owned interests in Federal
OCS leases, CB40, MP163, MP 164/165, MB 864 and MB 952/955 fields. Because of
the nature of oil and gas operations and the marketing of production, the
Company believes that the loss of these customers would not have a significant
adverse impact on the Company's ability to sell its production.
Statements of Cash Flows
For purposes of the Consolidated Financial Statements, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
The Company paid no federal income taxes for the three years ended December
31, 1998. During the years ended December 31, 1998, 1997 and 1996, the Company
made cash payments of $6,229,000, $4,167,000, and $251,000, respectively, for
interest charged on its indebtedness and $1,663,000 for the three months ended
March 31, 1999.
Per Share Amounts
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("FAS 128"), Earnings per Share, which generally simplified the manner
in which earnings per share are determined. The Company adopted FAS 128
effective December 15, 1997. In accordance with FAS 128, the Company's
previously reported earnings per share for 1996 were restated. The effect of
this accounting change on previously reported earnings per share (EPS) data was
as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Primary EPS as reported..................................... $.45
Effect of FAS 128........................................... .01
----
Basic EPS as restated....................................... $.46
====
Fully diluted EPS as reported............................... $.43
Effect of FAS 128........................................... .02
----
Diluted EPS as restated..................................... $.45
====
</TABLE>
Basic earnings or loss per common share were computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share for the years
1997 and 1996 were determined on a weighted average basis using common shares
issued and outstanding adjusted for the effect of stock options considered
common stock equivalents computed using the treasury stock method. In 1998, all
options were excluded from the computation of diluted loss per share because
they were antidilutive. The conversion of the preferred stock was not included
in any annual calculation due to their antidilutive effect on diluted income or
loss per share.
F-9
<PAGE> 80
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the basic and diluted per share computation is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ ----------------------------
1999 1998 1998 1997 1996
------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
(a) Net income (loss) available for common
stock.................................. $ (359) $ 508 $(33,533) $5,642 $2,663
(b) Weighted average shares outstanding.... 8,477 8,015 8,034 6,194 5,835
(c) Dilutive impact of stock options....... -- 206 -- 228 117
(d) Total diluted shares................... 8,477 8,221 8,034 6,422 5,952
Stock options excluded due to
antidilutive impact.................... 44 -- 163 -- --
Basic earnings (loss) per share(a/b)... $ (.04) $ .06 $ (4.17) $ .91 $ .46
Diluted earnings (loss) per
share(a/d)............................... $ (.04) $ .06 $ (4.17) $ .88 $ .45
</TABLE>
Fair Value of Financial Instruments
Fair value of cash, cash equivalents, accounts receivable, accounts payable
and long-term debt approximates book value at December 31, 1998 and 1997 and
March 31, 1999. Fair value of long-term debt (specifically the 10% and the
10.125% senior subordinated notes) was based on quoted market value.
The calculation of the fair market value of the outstanding hedging
contracts (see Note 6) as of December 31, 1998 indicated a $1.4 million market
value benefit to the Company based on market prices at that date.
Accounts Payable and Accrued Liabilities -- Long-Term
Approximately $3,000,000 and $6,000,000 of current accounts payable and
accrued liabilities at December 31, 1998 and March 31, 1999, respectively,
related to long-term assets, primarily oil and gas properties that were financed
subsequent to year-end with long-term debt and therefore have been reclassified
as long-term.
3. INCOME TAXES
The Company follows the asset and liability method of accounting for
deferred income taxes prescribed by Financial Accounting Standards Board
Statement No. 109 ("FAS 109") "Accounting for Income Taxes". The statement
provides for the recognition of a deferred tax asset for deductible temporary
timing differences, capital and operating loss carryforwards, statutory
depletion carryforward and tax credit carryforwards, net of a "valuation
allowance". The valuation allowance is provided for that portion of the asset,
for which it is deemed more likely than not, that it will not be realized. The
F-10
<PAGE> 81
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's management determined that no valuation allowance was necessary in
1998 and 1997. Accordingly, the Company has recorded a deferred tax asset at
December 31, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Federal net operating loss carryforward..................... $ 7,916 $ 3,531
Statutory depletion carryforward............................ 4,083 4,062
Temporary differences:
Oil and gas properties.................................... 3,979 (4,943)
Pipeline and other facilities............................. (2,164) (2,277)
Non-oil and gas property.................................. (101) (86)
Other..................................................... 2,635 961
------- -------
Total tax asset............................................. 16,348 1,248
Valuation allowance......................................... -- --
------- -------
Net tax asset............................................... $16,348 $ 1,248
======= =======
</TABLE>
At December 31, 1998, the Company had, for federal tax reporting purposes,
net operating loss carryforwards ("NOL") of $22.6 million which expire in 2000
through 2012. Approximately $5.0 million of such carryovers are subject to
limitations on utilization as a result of ownership changes which occurred in
CPOC's common stock prior to the Consolidation and ownership changes as a result
of the Consolidation. Additionally, the Company had available for tax reporting
purposes $11.7 million in statutory depletion deductions which can be carried
forward for an indefinite period.
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the statutory rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
-------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed expense (benefit) at the expected statutory
rate.................................................. $(15,590) $4,296 $ 1,910
Change in valuation allowance........................... -- -- (1,760)
Other................................................... 490 (96) (100)
-------- ------ -------
Deferred income tax expense (benefit)................... $(15,100) $4,200 $ 50
======== ====== =======
</TABLE>
4. ACQUISITIONS
On June 26, 1997 the Company purchased an 18.8% working interest in the
Mobile Block 864 Area from Elf Exploration, Inc. The Company's net purchase
price was approximately $11.8 million. The Company further increased its
ownership in this area by purchasing Chevron U.S.A. Inc.'s interest in the
Mobile Block 864 Area for $18.8 million in November 1997.
The Company, together with an industry partner, was the high bidder on 18
offshore tracts at the Outer Continental Shelf ("OCS") Lease Sale #157 and #161,
held during 1996 in New Orleans, Louisiana, and conducted by the U.S. Department
of the Interior through its Minerals Management Service ("MMS"). The Company
holds a 25% working interest in the leases and its share of the total lease
costs was approximately $15.2 million.
F-11
<PAGE> 82
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1999 1998 1997
--------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit Facility......................................... $26,100 $18,100 $ 100
10% Senior Subordinated Notes........................... 24,150 24,150 24,150
10.125% Senior Subordinated Notes....................... 36,000 36,000 36,000
------- ------- -------
86,250 78,250 60,250
Less: current portion................................... -- -- --
------- ------- -------
$86,250 $78,250 $60,250
======= ======= =======
</TABLE>
Borrowings under the Credit Facility, with Chase Manhattan Bank, are
secured by mortgages covering substantially all of the Company's producing oil
and gas properties. Currently, the Credit Facility provides for a $50 million
borrowing base ("Borrowing Base") which is adjusted periodically on the basis of
a discounted present value of future net cash flows attributable to the
Company's proved producing oil and gas reserves. Pursuant to the Credit
Facility, depending upon the percentage of the unused portion of the borrowing
base, the interest rate is equal to the lender's prime rate plus 0.125% (prime
plus 0.50% if utilized percentage of borrowing base is greater than 50%). The
Company, at its option, may fix the interest rate on all or a portion of the
outstanding principal balance at 1.125% above a defined "Eurodollar" rate for
periods up to six months (1.5% above if utilized percentage of borrowing base is
greater than 50%). The weighted average interest rate for the total debt
outstanding at March 31, 1999, December 31, 1998 and 1997 was 6.50%, 6.68% and
8.50%, respectively. Under the Credit Facility, a commitment fee of .25% or
.375% per annum on the unused portion of the Borrowing Base (depending upon the
percentage of the unused portion of the Borrowing Base) is payable quarterly.
The Company may borrow, pay, reborrow and repay under the Credit Facility until
October 31, 2000, on which date, the Company must repay in full all amounts then
outstanding.
On November 27, 1996, the Company issued $24,150,000 of 10% Senior
Subordinated Notes that will mature December 15, 2001. The Company used the
proceeds to reduce borrowings under the Credit Facility and for other corporate
purposes. Interest is payable quarterly beginning March 15, 1997. The notes are
redeemable at the option of the Company, in whole or in part, on or after
December 15, 1997, at 100% of the principal amount thereof, plus accrued
interest to the redemption date. The notes are general unsecured obligations of
the Company, subordinated in right of payment to all existing and future
indebtedness of the Company.
On July 31, 1997, the Company issued $36 million of its 10.125% Series A
Senior Subordinated Notes due 2002. Interest is payable quarterly beginning
September 15, 1997. The Senior Subordinated Notes were offered through a private
placement transaction. The net proceeds of the transaction were used to repay
the outstanding balance under the Credit Facility and fund a portion of the
Company's capital expenditure budget. On September 10, 1997, the Company
commenced an offer to exchange the Series A Notes for a like principal amount of
10.125% Series B Senior Subordinated Notes due 2002 (the "Series B Notes" and,
together with the Series A Notes, the "10.125% Notes"). The form and terms of
the Series B Notes are identical in all material respects to the terms of the
Series A Notes, except for certain transfer restrictions and provisions relating
to registration rights. The exchange offer was completed on November 10, 1997.
Interest on the 10.125% Notes is payable quarterly, on March 15, June 15,
September 15, and December 15 of each year. The 10.125% Notes are redeemable at
the option of the Company in whole or in part, at any time on or after September
15, 2000. The 10.125% Notes are general
F-12
<PAGE> 83
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unsecured obligations of the Company, subordinated in right of payment to all
existing and future indebtedness of the Company and rank pari passu with the 10%
Notes.
The Credit Facility and the subordinated debt contain various covenants
including restrictions on additional indebtedness and payment of cash dividends
as well as maintenance of certain financial ratios. The Company is in compliance
with these covenants at December 31, 1998 and March 31, 1999.
6. HEDGING CONTRACTS
The Company periodically uses derivative financial instruments to manage
oil and gas price risk. Settlements of gains and losses on commodity price swap
contracts are generally based upon the difference between the contract price or
prices specified in the derivative instrument and a NYMEX price or other cash or
futures index price, and are reported as a component of oil and gas revenues.
Gains or losses attributable to the termination of a swap contract are deferred
and recognized in revenue when the oil and gas production is sold. Approximately
$1,886,000 and $2,466,000 was recognized as additional oil and gas revenue in
1998 and 1997 and recognized a reduction in revenue of $2,757,000 in 1996 as a
result of such agreements. For the three months ended March 31, 1999 and 1998,
approximately $1,004,000 and $583,000 was recognized as additional oil and gas
revenue, respectively.
At March 31, 1999, the Company had open collar contracts with third parties
whereby minimum floor prices and maximum ceiling prices are contracted and
applied to related contract volumes. These agreements in effect for 1999 are for
average gas volumes of 483,333 Mcf per month through September 1999 at (on
average) a ceiling price of $2.12 and floor price of $1.85. In addition, the
Company had open oil collar contracts averaging 24,167 barrels per month at (on
average) a ceiling of $16.15 and a floor of $13.78 from April 1999 through
December 1999.
Also at March 31, 1999 the Company had open forward natural gas swap
contracts of 200,000 Mcf per month from April 1999 through September 1999 with a
fixed contract price of $2.35. In addition, the Company had open forward crude
oil swap contracts of 10,000 barrels per month with a fixed contract price of
$14.10 per month from April 1999 through June 1999.
7. COMMITMENTS AND CONTINGENCIES
As described in Note 9, abandonment trusts (the "Trusts") have been
established for future abandonment obligations of those oil and gas properties
of the Company burdened by a net profits interest. The management of the Company
believes the Trusts will be sufficient to offset those future abandonment
liabilities; however, the Company is responsible for any abandonment expenses in
excess of the Trusts' balances. As of March 31, 1999, total estimated site
restoration, dismantlement and abandonment costs were approximately $6,000,000,
net of expected salvage value. Substantially all such costs are expected to be
funded through the Trusts' funds, all of which will be accessible to the Company
when abandonment work begins. In addition as a working interest owner and/or
operator of oil and gas properties, the Company is responsible for the cost of
abandonment of such properties. See Note 2.
The Company, as part of the Consolidation, entered into Registration Rights
Agreements whereby the former stockholders of certain of the Constituent
Entities are entitled to require the Company to register Common Stock of the
Company owned by them with the Securities and Exchange Commission for sale to
the public in a firm commitment public offering and generally to include shares
owned by them, at no cost, in registration statements filed by the Company.
Costs of the offering will not include discounts and commissions, which will be
paid by the respective sellers of the Common Stock.
F-13
<PAGE> 84
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. OIL AND GAS PROPERTIES
The following table discloses certain financial data relating to the
Company's oil and gas activities, all of which are located in the United States.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED DECEMBER 31,
MARCH 31, ------------------------------
1999 1998 1997 1996
------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capitalized costs incurred:
Evaluated Properties --
Beginning of period balance................ $444,579 $398,046 $322,970 $304,737
Property acquisition costs................. 348 9,464 51,751 2,999
Exploration costs.......................... 15,905 42,617 13,620 8,732
Development costs.......................... 1,885 4,361 14,155 8,076
Sale of mineral interest................... 154 (9,909) (4,450) (1,574)
-------- -------- -------- --------
End of period balance...................... $462,871 $444,579 $398,046 $322,970
======== ======== ======== ========
Unevaluated Properties (excluded from the
full-cost pool) --
Beginning of period balance................ $ 42,679 $ 35,339 $ 26,235 $ 10,171
Additions.................................. 1,891 11,156 16,924 20,640
Capitalized interest and general
administrative costs..................... 1,613 8,955 5,163 1,883
Transfer to evaluated...................... (7,855) (12,771) (12,983) (6,459)
-------- -------- -------- --------
End of period balance...................... 38,328 $ 42,679 $ 35,339 $ 26,235
======== ======== ======== ========
Accumulated depreciation, depletion and
amortization --
Beginning of period balance................ $345,353 $282,891 $266,716 $257,143
Provision charged to expense............... 3,883 18,962 16,175 9,573
Impairment of oil and gas properties....... -- 43,500 -- --
-------- -------- -------- --------
End of period balance...................... $349,236 $345,353 $282,891 $266,716
======== ======== ======== ========
</TABLE>
Unevaluated property costs, primarily lease acquisition costs incurred at
federal and state lease sales and unevaluated drilling costs being excluded from
the amortizable evaluated property base as of December 31, 1998 consisted of
$17.9 million incurred in 1998, $8.2 million incurred in 1997 and $16.6 million
incurred in 1996 and prior. These costs are directly related to the acquisition
and evaluation of unproved properties and major development projects. The
excluded costs and related reserves are included in the amortization base as the
properties are evaluated and proved reserves are established or impairment is
determined. The majority of these costs will be evaluated over the next five
year period.
Depreciation, depletion and amortization per unit-of-production (equivalent
barrel of oil) amounted to $7.16, $6.11, and $5.87 for the years ended December
31, 1998, 1997 and 1996, respectively, and $5.96 and $6.99 for the three months
ended March 31, 1999 and 1998, respectively.
Impairment of Oil and Gas Properties
Under full-cost accounting rules, the capitalized costs of proved oil and
gas properties are subject to a "ceiling test", which limits such costs to the
estimated present value net of related tax effects, discounted at a 10 percent
interest rate, of future net cash flows from proved reserves, based on current
economic and
F-14
<PAGE> 85
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating conditions (PV-10). If capitalized costs exceed this limit, the excess
is charged to expense. During the fourth quarter of 1998, the Company recorded a
noncash impairment provision related to oil and gas properties in the amount of
$43.5 million ($28.7 million after-tax) primarily due to the significant decline
in oil and gas prices.
9. NET PROFITS INTEREST
Since 1989, the Constituent Entities have entered into separate agreements
to purchase certain oil and gas properties with gross contract acquisition
prices of $170,000,000 ($150,000,000 net as of closing dates) and in
simultaneous transactions, entered into agreements to sell overriding royalty
interests ("ORRI") in the acquired properties. These ORRI are in the form of net
profits interests ("NPI") equal to a significant percentage of the excess of
gross proceeds over production costs, as defined, from the acquired oil and gas
properties. A net deficit incurred in any month can be carried forward to
subsequent months until such deficit is fully recovered. The Company has the
right to abandon the purchased oil and gas properties if it deems the properties
to be uneconomical.
The Company has, pursuant to the purchase agreements, created abandonment
trusts whereby funds are provided out of gross production proceeds from the
properties for the estimated amount of future abandonment obligations related to
the working interests owned by the Company. The Trusts are administered by
unrelated third party trustees for the benefit of the Company's working interest
in each property. The Trust agreements limit their funds to be disbursed for the
satisfaction of abandonment obligations. Any funds remaining in the Trusts after
all restoration, dismantlement and abandonment obligations have been met will be
distributed to the owners of the properties in the same ratio as contributions
to the Trusts. The Trusts' assets are excluded from the Consolidated Balance
Sheets of the Company because the Company does not control the Trusts. Estimated
future revenues and costs associated with the NPI and the Trusts are also
excluded from the oil and gas reserve disclosures at Note 12. As of December 31,
1998 and 1997 the Trusts' assets (all cash and investments) totaled $6,360,000
and $19,300,000, respectively and $6,000,000 at March 31, 1999, all of which
will be available to the Company to pay its portion, as working interest owner,
of the restoration, dismantlement and abandonment costs discussed at Note 7. The
trust asset decrease in 1998 was the result of a sale of an oil and gas property
and the related trust.
At the time of acquisition of properties by the Company, the property
owners estimated the future costs to be incurred for site restoration,
dismantlement and abandonment, net of salvage value. A portion of the amounts
necessary to pay such estimated costs was deposited in the Trusts upon
acquisition of the properties, and the remainder is deposited from time to time
out of the proceeds from production. The determination of the amount deposited
upon the acquisition of the properties and the amount to be deposited as
proceeds from production was based on numerous factors, including the estimated
reserves of the properties. The amounts deposited in the Trusts upon acquisition
of the properties were capitalized by the Company as oil and gas properties.
As operator, the Company receives all of the revenues and incurs all of the
production costs for the purchased oil and gas properties but retains only that
portion applicable to its net ownership share. As a result, the payables and
receivables associated with operating the properties included in the Company's
Consolidated Balance Sheets include both the Company's and all other outside
owner's shares. However, revenues and production costs associated with the
acquired properties reflected in the accompanying Consolidated Statements of
Operations represent only the Company's share, after reduction for the NPI.
F-15
<PAGE> 86
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
The Company has adopted a series of incentive compensation plans designed
to align the interest of the executives and employees with those of its
stockholders. The following is a brief description of each plan:
The Savings and Protection Plan provides employees with the option to defer
receipt of a portion of their compensation and the Company may, at its
discretion, match a portion of the employee's deferral with cash and Company
Common Stock. The Company may also elect, at its discretion, to contribute a
non-matching amount in cash and Company Common Stock to employees. The amounts
held under the Savings and Protection Plan are invested in various funds
maintained by a third party in accordance with the directions of each employee.
An employee is fully vested immediately upon participation in the Savings and
Protection Plan. The total amounts contributed by the Company, including the
value of the common stock contributed, were $468,000, $438,000, and $241,000 in
the years 1998, 1997 and 1996, respectively.
The 1994 Stock Incentive Plan (the "1994 Plan") provides for 600,000 shares
of Common Stock to be reserved for issuance pursuant to such plan. Under the
1994 Plan the Company may grant both stock options qualifying under Section 422
of the Internal Revenue Code and options that are not qualified as incentive
stock options, as well as performance shares. No options will be granted at an
exercise price of less than fair market value of the Common Stock on the date of
grant. A total of 500,000 options were granted in 1994 and 1995 and all such
options could be exercised as of December 31, 1996. During 1997, there were no
other options granted and 9,000 shares were exercised at an average price of
$17.94. These options have an expiration date 10 years from date of grant. In
1998, 20,000 non-employee director options were granted under the plan, vesting
100% in November 1998.
On August 23, 1996, the Board of Directors of the Company approved and
adopted the Callon Petroleum Company 1996 Stock Incentive Plan (the "1996
Plan"). The 1996 Plan provides for the same types of awards as the 1994 Plan and
is limited to a maximum of 1,200,000 shares (as amended from the original
900,000 shares) of common stock that may be subject to outstanding awards.
During 1998, 1997 and 1996, the Company granted stock options to purchase
205,000, 20,000 and 530,000 shares, respectively, of Common Stock under the
plan. All of such options were granted at an exercise price equal to the fair
market value of the Common Stock on the date of grant. Terms of the options
granted in 1998 provide that 25% of the options become exercisable each year
beginning August of 1998 and each succeeding January. Terms of the plan for
450,000 options granted in 1996 provide that 20% of the options become
exercisable on January 1 of each succeeding year, beginning January 1, 1997.
Non-employee director options aggregating 80,000 shares vest 25% at each
succeeding annual meeting of directors following each annual stockholders'
meeting, beginning in 1997. Unvested options are subject to forfeiture upon
certain termination of employment events and expire 10 years from date of grant.
The Company accounts for the options issued pursuant to the stock incentive
plans under APB Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost for these
F-16
<PAGE> 87
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plans been determined consistent with FAS 123, the Company's net income and
earnings per common share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net income (loss):
As reported............................................ $(33,533) $5,642 $2,663
Pro Forma.............................................. (34,421) 4,977 2,411
Basic earnings (loss) per share:
As reported............................................ (4.17) .91 .46
Pro Forma.............................................. (4.28) .80 .41
Diluted earnings (loss) per share:
As reported............................................ (4.17) .88 .45
Pro Forma.............................................. (4.28) .77 .41
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost above may not be representative of that to be expected in future years.
A summary of the status of the Company's two stock option plans at December
31, 1998, 1997 and 1996 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WTD WTD WTD
AVG AVG AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year........................ 1,041,000 $11.19 1,030,000 $11.10 490,000 $10.01
Granted..................... 225,000 10.08 20,000 15.31 550,000 12.06
Exercised................... -- -- (9,000) 10.00 -- --
Forfeited................... -- -- -- -- (10,000) 10.00
Expired..................... -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Outstanding, end of year...... 1,266,000 $11.00 1,041,000 $11.19 1,030,000 $11.10
========== ====== ========== ====== ========== ======
Exercisable, end of year...... 802,250 $10.90 621,000 $10.65 500,000 $10.16
========== ====== ========== ====== ========== ======
Weighted average fair value of
options granted............. $ 4.31 $ 6.30 $ 4.96
========== ========== ==========
</TABLE>
The options outstanding at December 31, 1998 have exercise prices ranging
from $9.47 to $16.38 with a remaining weighted average contractual life of 7.06
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for options granted during 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate..................................... 5.1% 6.8% 6.5%
Expected life (years)....................................... 7.0 4.0 4.9
Expected volatility......................................... 28.8% 41.1% 34.7%
Expected dividends.......................................... -- -- --
</TABLE>
F-17
<PAGE> 88
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company awarded 225,000 performance shares under the 1996 Plan to the
Company's Executive officers on August 23, 1996. During June 1997, the Company's
stockholders approved the performance share awards and the related common stock
was issued. The issuance was recorded at the fair market value of the shares on
their date of grant, with a corresponding charge to stockholders' equity
representing the unearned portion of the award. All of the performance shares
granted will vest in whole on January 1, 2001, and will be subject to forfeiture
upon certain termination of employment events. The unearned portion was being
amortized as compensation expense on a straight-line basis over the vesting
period. An additional 25,000 shares were issued under the 1994 Plan in 1997 and
165,500 shares were issued to certain key employees other than the Company's
Executive officers in 1998. Approximately $4,963,000 in 1998, $714,000 in 1997
and $208,000 in 1996 of compensation cost were charged to expense related to the
restricted shares granted.
In December 1998, the Company approved the accelerated vesting of all
performance shares. As a result, an additional charge of $3,469,000 which
represents the future unamortized expense related to unvested shares at the date
the acceleration of vesting occurred, was expensed in 1998.
In addition, the Company recorded a provision of approximately $2.3 million
for retirement benefits approved in December of 1998.
11. EQUITY TRANSACTIONS
In November 1995, the Company sold 1,315,500 shares of $2.125 Convertible
Exchangeable Preferred Stock, Series A (the "Preferred Stock"). Annual dividends
are $2.125 per share and are cumulative. The net proceeds of the $.01 par value
stock after underwriters discount and expense was $30,899,000. Each share has a
liquidation preference of $25.00, plus accrued and unpaid dividends. Dividends
on the Preferred Stock are cumulative from the date of issuance and are payable
quarterly, commencing January 15, 1996. The Preferred Stock is convertible at
any time, at the option of the holders thereof, unless previously redeemed, into
shares of Common Stock of the Company at an initial conversion price of $11 per
share of Common Stock, subject to adjustments under certain conditions.
The Preferred Stock is redeemable at any time on or after December 31,
1998, in whole or in part at the option of the Company at a redemption price of
$26.488 per share beginning at December 31, 1998 and at premiums declining to
the $25.00 liquidation preference by the year 2005 and thereafter, plus accrued
and unpaid dividends. The Preferred Stock is also exchangeable, in whole, but
not in part, at the option of the Company on or after January 15, 1998 for the
Company's 8.5% Convertible Subordinated Debentures due 2010 (the "Debentures")
at a rate of $25.00 principal amount of Debentures for each share of Preferred
Stock. The Debentures will be convertible into Common Stock of the Company on
the same terms as the Preferred Stock and will pay interest semi-annually.
On November 25, 1997, the Company completed a public offering of 1,840,000
shares of Common Stock at a price to the public of $17.00. This offering
resulted in the Company receiving cash proceeds of $29,267,000, net of offering
costs and underwriting discount. The Company used a portion of the proceeds to
repay indebtedness incurred to finance the purchase of Chevron U.S.A. Inc.'s
interest in Mobile Block 864 Area (see Note 4) and the remaining proceeds were
used to fund a portion of the 1998 capital expenditures budget.
In a December 1998 private transaction, a preferred stockholder elected to
convert 59,689 shares of Preferred Stock into 136,867 shares of the Company's
Common Stock. During the first quarter of 1999 certain preferred stockholder's
through private transactions, agreed to convert 210,350 shares of Preferred
Stock into 502,632 shares of the Company's Common Stock. Any premium negotiated
in excess of the conversion rate was recorded as additional preferred stock
dividends.
F-18
<PAGE> 89
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)
The Company's proved oil and gas reserves at December 31, 1998, 1997 and
1996 have been estimated by independent petroleum consultants in accordance with
guidelines established by the Securities and Exchange Commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions.
There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and should
not be construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties or
the cost that would be incurred to obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located onshore and offshore in the continental
United States, are as follows:
RESERVE QUANTITIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Crude Oil (MBbls):
Beginning of period.................................... 3,402 3,819 4,766
Revisions to previous estimates........................ (99) (151) (50)
Purchase of reserves in place.......................... 162 -- --
Sales of reserves in place............................. (1,531) (78) (312)
Extensions and discoveries............................. 5,274 274 --
Production............................................. (310) (462) (585)
------- ------- ------
End of period.......................................... 6,898 3,402 3,819
======= ======= ======
Natural Gas (MMcf):
Beginning of period.................................... 88,738 50,424 29,667
Revisions to previous estimates........................ (8,631) (11,174) (1,688)
Purchase of reserves in place.......................... 4,414 52,485 7,391
Sales of reserves in place............................. (684) (164) (228)
Extensions and discoveries............................. 18,229 10,281 21,551
Production............................................. (14,036) (13,114) (6,269)
------- ------- ------
End of period.......................................... 88,030 88,738 50,424
======= ======= ======
Proved developed reserves:
Crude Oil (MBbls):
Beginning of period.................................... 2,976 3,385 3,890
======= ======= ======
End of period.......................................... 1,774 2,976 3,385
======= ======= ======
Natural Gas (MMcf):
Beginning of period.................................... 88,010 49,491 20,408
======= ======= ======
End of period.......................................... 76,895 88,010 49,491
======= ======= ======
</TABLE>
F-19
<PAGE> 90
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE
The following tables present the Company's standardized measure of
discounted future net cash flows and changes therein relating to proved oil and
gas reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract and law. Future production,
development and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor.
STANDARDIZED MEASURE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows......................................... $256,325 $285,953 $285,727
Future costs --
Production................................................ (67,192) (63,709) (59,584)
Development............................................... (36,581) (12,984) (9,989)
-------- -------- --------
Future net inflows before income taxes...................... 152,552 209,260 216,154
Future income taxes......................................... -- (32,781) (49,438)
-------- -------- --------
Future net cash flows....................................... 152,552 176,479 166,716
10% discount factor......................................... (52,801) (48,400) (36,547)
-------- -------- --------
Standardized measure of discounted future net cash flows.... $ 99,751 $128,079 $130,169
======== ======== ========
</TABLE>
CHANGES IN STANDARDIZED MEASURE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure -- beginning of period................. $128,079 $130,169 $ 63,764
Sales and transfers, net of production costs................ (27,807) (34,006) (18,202)
Net change in sales and transfer prices, net of production
costs..................................................... (33,029) (66,880) 32,268
Exchange and sale of in place reserves...................... (4,445) (2,428) (877)
Purchases, extensions, discoveries, and improved recovery,
net of future production and development costs............ 24,294 90,550 79,983
Revisions of quantity estimates............................. (9,409) (13,751) (3,907)
Accretions of discount...................................... 13,645 16,017 6,376
Net change in income taxes.................................. 7,926 21,633 (30,000)
Changes in production rates, timing and other............... 497 (13,225) 764
-------- -------- --------
Standardized measure -- end of period....................... $ 99,751 $128,079 $130,169
======== ======== ========
</TABLE>
F-20
<PAGE> 91
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Total revenues.......................................... $11,492 $9,733 $9,339 $ 7,154
Total costs and expenses................................ 9,664 8,606 7,919 57,383
Income taxes expense (benefit).......................... 621 380 487 (16,588)
Net income (loss)....................................... 1,207 747 933 (33,641)
Net income (loss) per share -- basic.................... .06 .01 .03 (4.27)
Net income (loss) per share -- diluted.................. .06 .01 .03 (4.27)
1997
Total revenues.......................................... $12,781 $8,758 $9,201 $ 12,898
Total costs and expenses................................ 7,366 6,971 7,394 9,270
Income taxes expense.................................... 1,733 578 615 1,274
Net income.............................................. 3,682 1,209 1,192 2,354
Net income (loss) per share -- basic.................... .50 .08 .08 .25
Net income (loss) per share -- diluted.................. .39 .08 .08 .24
</TABLE>
F-21
<PAGE> 92
[Photograph of the Ocean Concord,
the drilling rig that drilled the Habanero prospect.]
During the first quarter of 1999, the Ocean Concord (pictured above)
successfully drilled the largest discovery in our history. Located in 2,000 feet
of water at Garden Banks Block 341, the Habanero prospect was drilled to a
measured depth of 21,158 feet and encountered over 200 net feet of pay in two
zones.
<PAGE> 93
- ---------------------------------------------------------
- ---------------------------------------------------------
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION
OR REPRESENTATIONS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF THE
NOTES MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THESE NOTES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
Forward-Looking Statements.............. 14
Use of Proceeds......................... 15
Capitalization.......................... 15
Selected Financial Data................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 18
Business and Properties................. 25
Management.............................. 38
Beneficial Ownership of Our Common and
Preferred Stock....................... 40
Description of the Notes................ 44
Description of Bank Credit Facility and
Other Indebtedness.................... 61
Description of Capital Stock............ 62
Underwriting............................ 64
Validity of the Notes................... 65
Experts................................. 65
Where You Can Find More Information..... 65
Glossary of Oil and Gas Terms........... 67
Index to Financial Statements........... F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
$40,000,000
CALLON PETROLEUM LOGO
CALLON PETROLEUM COMPANY
% SENIOR SUBORDINATED NOTES
DUE 2004
------------------------
PROSPECTUS
------------------------
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, other than
underwriting commissions, payable by the Registrant in connection with the
issuance and distribution of the securities being registered hereby.
<TABLE>
<S> <C>
Securities Act registration fee............................. $ 11,120
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,500
Printing costs.............................................. 40,000
Legal fees & expenses....................................... 100,000
Accounting fees & expenses.................................. 30,000
Engineering fees and expenses............................... 7,000
Trustee & Registrar fees.................................... 5,000
Miscellaneous............................................... 52,380
--------
TOTAL............................................. $250,000
========
</TABLE>
All of the foregoing estimated costs, expenses and fees will be borne by
the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Delaware Law")
permits, subject to certain conditions, a corporation to indemnify its
directors, officers, employees and agents against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such director, officer, employee or agent in connection with
threatened, pending or completed actions, suits and proceeding (other than
actions by or in the right of the corporation) in or to which any of such
persons is a party or is threatened to be made a party.
Article 8 of the Company's Certificate of Incorporation, as amended, and
Article VII, Section 7.9, of the Company's Bylaws provide that the Company may
indemnify its directors, officers, employees and agents to the fullest extent
permitted by Delaware Law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1. -- Underwriting Agreement
1.1 -- Form of Underwriting Agreement***
2. -- Plan of acquisition, reorganization, arrangement,
liquidation or succession*
4. -- Instruments defining the rights of security holders,
including indentures
4.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 of the
Company's Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
4.2 -- Certificate of Merger of Callon Consolidated Partners,
L.P. with and into the Company dated September 16, 1994
(incorporated by reference from Exhibit 3.2 of the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1994.
</TABLE>
II-1
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.3 -- Bylaws of the Company (incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement on
Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.4 -- Specimen Stock Certificate (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement
on Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.5 -- Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.6 -- Designation for Series A Preferred Stock (incorporated by
reference from Exhibit 4.3 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.7 -- Indenture for Convertible Debentures (incorporated by
reference form Exhibit 4.4 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.8 -- Certificate of Correction on Designation of Series A
Preferred Stock (incorporated by reference from Exhibit
4.4 of the Company's Registration Statement on Form
S-1/A, filed November 22, 1996, Reg. No. 333-15501)
4.9 -- Form of Note Indenture (incorporated by reference from
Exhibit 4.6 of the Company's Registration Statement on
Form S-1/A filed November 22, 1996, Reg. No. 333-15501)
4.10 -- Form of Notes Indenture
4.11 -- Form of Global Certificate (included in Exhibit 4.10)
5. -- Opinion re legality
5.1 -- Form of Opinion of Butler & Binion, L.L.P.**
8. -- Opinion re tax matters*
9. -- Voting Trust Agreement
9.1 -- Stockholders' Agreement dated September 16, 1994 among
the Company, the Callon Stockholders and NOCO
Enterprises, L.P. (incorporated by reference from Exhibit
9.1 of the Company's Registration Statement on Form 8-B
filed October 3, 1994)
10. -- Material Contracts
10.1 -- Registration Rights Agreement dated September 16, 1994
between the Company and NOCO Enterprises, L.P.
(incorporated by reference from Exhibit 10.2 of the
Company's Registration Statement on Form 8-B filed
October 3, 1994)
10.2 -- Registration Rights Agreement dated September 16, 1994
between the Company and Callon Stockholders (incorporated
by reference from Exhibit 10.3 of the Company's
Registration Statement on Form 8-B filed October 3, 1994)
10.3 -- Callon Petroleum Company 1994 Stock Incentive Plan
(incorporated by reference from Exhibit 10.5 of the
Company's Registration Statement on Form 8-B filed
October 3, 1994)
10.4 -- Credit Agreement dated October 14, 1994 by and between
the Company, Callon Petroleum Operating Company and
Internationale Nederlanden (U.S.) Capital Corporation
(incorporated by reference from Exhibit 99.1 of the
Company's Report on form 10-Q for the quarter ended
September 30, 1994)
10.5 -- Third Amendment dated February 22, 1996, to Credit
Agreement by and among Callon Petroleum Operating
Company, Callon Petroleum Company and Internationale
Nederlanden (U.S.) Capital Corporation (incorporated by
reference from Exhibit 10.9 of the Company's Form 10-K
for the fiscal year ended December 31, 1995)
</TABLE>
II-2
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.6 -- Consulting Agreement between the Company and John S.
Callon dated June 19, 1996 (incorporated by reference
from Exhibit 10.10 of the Company's Registration
Statement on Form S-1, filed November 5, 1996, Reg. No.
333-15501)
10.7 -- Employment Agreement effective September 1, 1996, between
the Company and Fred L. Callon (incorporated by reference
from Exhibit 10.4 of the Company's Registration Statement
on Form S-1/A, filed November 14, 1996, Reg. No.
333-15501)
10.8 -- Employment Agreement effective September 1, 1996, between
the Company and Dennis W. Christian (incorporated by
reference from Exhibit 10.7 of the Company's Registration
Statement on Form S-1/A, filed November 14, 1996, Reg.
No. 333-15501)
10.9 -- Employment Agreement effective September 1, 1996, between
the Company and John S. Weatherly (incorporated by
reference from Exhibit 10.8 of the Company's Registration
Statement on Form S-1/A, filed November 14, 1996, Reg.
No. 333-15501)
10.10 -- Callon Petroleum Company's Amended 1996 Stock Incentive
Plan (incorporated by reference from Exhibit 4.4 of the
Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-8, filed February 5,
1996, Reg. No. 333-29537)
10.11 -- Purchase and Sale Agreement between Callon Petroleum
Operating Company and Murphy Exploration & Production
Company, dated May 26, 1999**
11. -- Statement re computation of per share earnings*
12. -- Statement re computation of ratios*
13. -- Annual report to security holders, Form 10-Q or quarterly
report to security holders*
15. -- Letter re unaudited interim financial information*
16. -- Letter re change in certifying accountant*
21. -- Subsidiaries of the registrant
21.1 -- Subsidiaries of the Company (incorporated by reference
from Exhibit 21.1 of the Company's Registration Statement
on Form 8-B filed October 3, 1994)
23. -- Consents of experts and counsel
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Huddleston & Co., Inc.**
23.3 -- Consent of Butler & Binion, L.L.P.**
24. -- Power of attorney**
25. -- Statement of Eligibility of Trustee
25.1 -- Form of Statement of Eligibility of Trustee**
26. -- Invitation for Competitive Bids*
27. -- Financial Data Schedule*
99. -- Additional exhibits*
</TABLE>
- ---------------
* Inapplicable to this filing.
** Previously filed.
*** To be filed by amendment.
II-3
<PAGE> 97
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Natchez, State of Mississippi, on June 25, 1999.
CALLON PETROLEUM COMPANY
By: /s/ FRED L. CALLON
----------------------------------
Fred L. Callon
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOHN S. CALLON* Chairman of the Board, June 25, 1999
- ----------------------------------------------------- Director
John S. Callon
/s/ FRED L. CALLON President, Chief Executive June 25, 1999
- ----------------------------------------------------- Officer, Director
Fred L. Callon (Principal Executive
Officer)
/s/ DENNIS W. CHRISTIAN* Chief Operating Officer, June 25, 1999
- ----------------------------------------------------- Senior Vice President,
Dennis W. Christian Director
/s/ JOHN S. WEATHERLY* Senior Vice President and June 25, 1999
- ----------------------------------------------------- Chief Financial Officer
John S. Weatherly (Principal Financial
Officer)
/s/ JAMES O. BASSI* Vice President, Controller June 25, 1999
- ----------------------------------------------------- and Principal Accounting
James O. Bassi Officer (Principal
Accounting Officer)
/s/ ROBERT A. STANGER* Director June 25, 1999
- -----------------------------------------------------
Robert A. Stanger
/s/ JOHN C. WALLACE* Director June 25, 1999
- -----------------------------------------------------
John C. Wallace
/s/ B. F. WEATHERLY* Director June 25, 1999
- -----------------------------------------------------
B. F. Weatherly
/s/ RICHARD O. WILSON* Director June 25, 1999
- -----------------------------------------------------
Richard O. Wilson
/s/ LEIF DONS* Director June 25, 1999
- -----------------------------------------------------
Leif Dons
*By: /s/ FRED L. CALLON
------------------------------------------------
Fred L. Callon
Pursuant to a power of attorney
previously filed
</TABLE>
II-5
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1. -- Underwriting Agreement
1.1 -- Form of Underwriting Agreement***
2. -- Plan of acquisition, reorganization, arrangement,
liquidation or succession*
4. -- Instruments defining the rights of security holders,
including indentures
4.1 -- Certificate of Incorporation of the Company, as amended
(incorporated by reference from Exhibit 3.1 of the
Company's Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
4.2 -- Certificate of Merger of Callon Consolidated Partners,
L.P. with and into the Company dated September 16, 1994
(incorporated by reference from Exhibit 3.2 of the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1994.
4.3 -- Bylaws of the Company (incorporated by reference from
Exhibit 3.2 of the Company's Registration Statement on
Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.4 -- Specimen Stock Certificate (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement
on Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.5 -- Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.6 -- Designation for Series A Preferred Stock (incorporated by
reference from Exhibit 4.3 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.7 -- Indenture for Convertible Debentures (incorporated by
reference form Exhibit 4.4 of the Company's Registration
Statement on Form S-1/A, filed November 13, 1995, Reg.
No. 33-96700)
4.8 -- Certificate of Correction on Designation of Series A
Preferred Stock (incorporated by reference from Exhibit
4.4 of the Company's Registration Statement on Form
S-1/A, filed November 22, 1996, Reg. No. 333-15501)
4.9 -- Form of Note Indenture (incorporated by reference from
Exhibit 4.6 of the Company's Registration Statement on
Form S-1/A filed November 22, 1996, Reg. No. 333-15501)
4.10 -- Form of Notes Indenture
4.11 -- Form of Global Certificate (included in Exhibit 4.10)
5. -- Opinion re legality
5.1 -- Form of Opinion of Butler & Binion, L.L.P.**
8. -- Opinion re tax matters*
9. -- Voting Trust Agreement
9.1 -- Stockholders' Agreement dated September 16, 1994 among
the Company, the Callon Stockholders and NOCO
Enterprises, L.P. (incorporated by reference from Exhibit
9.1 of the Company's Registration Statement on Form 8-B
filed October 3, 1994)
10. -- Material Contracts
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Registration Rights Agreement dated September 16, 1994
between the Company and NOCO Enterprises, L.P.
(incorporated by reference from Exhibit 10.2 of the
Company's Registration Statement on Form 8-B filed
October 3, 1994)
10.2 -- Registration Rights Agreement dated September 16, 1994
between the Company and Callon Stockholders (incorporated
by reference from Exhibit 10.3 of the Company's
Registration Statement on Form 8-B filed October 3, 1994)
10.3 -- Callon Petroleum Company 1994 Stock Incentive Plan
(incorporated by reference from Exhibit 10.5 of the
Company's Registration Statement on Form 8-B filed
October 3, 1994)
10.4 -- Credit Agreement dated October 14, 1994 by and between
the Company, Callon Petroleum Operating Company and
Internationale Nederlanden (U.S.) Capital Corporation
(incorporated by reference from Exhibit 99.1 of the
Company's Report on form 10-Q for the quarter ended
September 30, 1994)
10.5 -- Third Amendment dated February 22, 1996, to Credit
Agreement by and among Callon Petroleum Operating
Company, Callon Petroleum Company and Internationale
Nederlanden (U.S.) Capital Corporation (incorporated by
reference from Exhibit 10.9 of the Company's Form 10-K
for the fiscal year ended December 31, 1995)
10.6 -- Consulting Agreement between the Company and John S.
Callon dated June 19, 1996 (incorporated by reference
from Exhibit 10.10 of the Company's Registration
Statement on Form S-1, filed November 5, 1996, Reg. No.
333-15501)
10.7 -- Employment Agreement effective September 1, 1996, between
the Company and Fred L. Callon (incorporated by reference
from Exhibit 10.4 of the Company's Registration Statement
on Form S-1/A, filed November 14, 1996, Reg. No.
333-15501)
10.8 -- Employment Agreement effective September 1, 1996, between
the Company and Dennis W. Christian (incorporated by
reference from Exhibit 10.7 of the Company's Registration
Statement on Form S-1/A, filed November 14, 1996, Reg.
No. 333-15501)
10.9 -- Employment Agreement effective September 1, 1996, between
the Company and John S. Weatherly (incorporated by
reference from Exhibit 10.8 of the Company's Registration
Statement on Form S-1/A, filed November 14, 1996, Reg.
No. 333-15501)
10.10 -- Callon Petroleum Company's Amended 1996 Stock Incentive
Plan (incorporated by reference from Exhibit 4.4 of the
Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-8, filed February 5,
1996, Reg. No. 333-29537)
10.11 -- Purchase and Sale Agreement between Callon Petroleum
Operating Company and Murphy Exploration & Production
Company, dated May 26, 1999**
11. -- Statement re computation of per share earnings*
12. -- Statement re computation of ratios*
13. -- Annual report to security holders, Form 10-Q or quarterly
report to security holders*
15. -- Letter re unaudited interim financial information*
16. -- Letter re change in certifying accountant*
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21. -- Subsidiaries of the registrant
21.1 -- Subsidiaries of the Company (incorporated by reference
from Exhibit 21.1 of the Company's Registration Statement
on Form 8-B filed October 3, 1994)
23. -- Consents of experts and counsel
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Huddleston & Co., Inc. **
23.3 -- Consent of Butler & Binion, L.L.P.**
24. -- Power of attorney**
25. -- Statement of Eligibility of Trustee
25.1 -- Form of Statement of Eligibility of Trustee**
26. -- Invitation for Competitive Bids*
27. -- Financial Data Schedule*
99. -- Additional exhibits*
</TABLE>
- ---------------
* Inapplicable to this filing.
** Previously filed.
*** To be filed by amendment.
<PAGE> 1
Exhibit 4.10
================================================================================
CALLON PETROLEUM COMPANY
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
Trustee
----------------
INDENTURE
Dated as of , 1999
--------------
----------------
$40,000,000
% Senior Subordinated Notes due 2004
----
================================================================================
<PAGE> 2
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939, AS
AMENDED AND INDENTURE DATED AS OF ________________, 1999
<TABLE>
<CAPTION>
Trust Indenture Act Indenture
Section Section
<S> <C>
Section 310 (a)(1).....................................................608
(a)(2).....................................................608
(a)(3).....................................................Inapplicable
(a)(4).....................................................Inapplicable
(b)........................................................605, 608, 609, 613
Section 311............................................................605, 614
Section 312 (a)........................................................701, 702
(b)........................................................702
(c)........................................................702
Section 313 (a)........................................................703
(b)(1).....................................................703
(b)(2).....................................................703
(c)........................................................703
(d)........................................................703
Section 314 (a)........................................................704, 1011
(b)........................................................Inapplicable
(c)(1).....................................................102
(c)(2).....................................................102
(c)(3).....................................................Inapplicable
(d)........................................................Inapplicable
(e)........................................................102
Section 315 (a)........................................................601, 603
(b)........................................................602
(c)........................................................601
(d)........................................................601, 603
(e)........................................................603, 607
Section 316 (a)(1)(A)..................................................512
(a)(1)(B)..................................................513
(a)(2).....................................................Inapplicable
(b)........................................................508
(c)........................................................104
Section 317 (a)(1).....................................................503
(a)(2).....................................................504
(b)........................................................1003
Section 318 (a)........................................................108
</TABLE>
- --------
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL
APPLICATION.......................................................................................................1
SECTION 101. DEFINITIONS.......................................................................................1
SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS.............................................................13
SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE...........................................................14
SECTION 104. ACTS OF HOLDERS..................................................................................14
SECTION 105. NOTICES, ETC, TO TRUSTEE AND COMPANY.............................................................16
SECTION 106. NOTICE TO HOLDERS OF NOTES; WAIVER...............................................................16
SECTION 107. LANGUAGE OF NOTICES..............................................................................17
SECTION 108. CONFLICT WITH TRUST INDENTURE ACT................................................................17
SECTION 109. EFFECT OF HEADINGS AND TABLE OF CONTENTS.........................................................17
SECTION 110. SUCCESSORS AND ASSIGNS...........................................................................17
SECTION 111. SEVERABILITY CLAUSE..............................................................................17
SECTION 112. BENEFITS OF INDENTURE............................................................................17
SECTION 113. GOVERNING LAW....................................................................................17
SECTION 114. LEGAL HOLIDAYS...................................................................................18
SECTION 115. COUNTERPARTS.....................................................................................18
SECTION 116. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS.................................................18
SECTION 117. NO ADVERSE INTERPRETATIONS OF OTHER AGREEMENTS...................................................18
ARTICLE TWO FORM OF NOTES.......................................................................................19
SECTION 201. FORMS GENERALLY..................................................................................19
SECTION 202. FORM OF FACE OF NOTE.............................................................................19
SECTION 203. FORM OF REVERSE OF NOTE.........................................................................21
SECTION 204. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION..................................................24
ARTICLE THREE THE NOTES.........................................................................................24
SECTION 301. TITLE AND TERMS..................................................................................24
SECTION 302. CURRENCY; DENOMINATIONS..........................................................................25
SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING...................................................25
SECTION 304. TEMPORARY NOTES..................................................................................26
SECTION 305. REGISTRATION, TRANSFER AND EXCHANGE..............................................................26
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN NOTES......................................................27
SECTION 307. PAYMENT OF INTEREST, RIGHTS TO INTEREST PRESERVED................................................28
SECTION 308. PERSONS DEEMED OWNERS............................................................................29
SECTION 309. CANCELLATION.....................................................................................30
SECTION 310. AUTHENTICATION AND DELIVERY OF ORIGINAL ISSUE....................................................30
SECTION 311. COMPUTATION OF INTEREST..........................................................................30
SECTION 312. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTE............................................................30
ARTICLE FOUR SATISFACTION AND DISCHARGE.........................................................................31
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE..........................................................31
SECTION 402. APPLICATION OF TRUST MONEY.......................................................................32
ARTICLE FIVE REMEDIES...........................................................................................32
SECTION 501. EVENTS OF DEFAULT................................................................................32
SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT...............................................34
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE..................................35
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.................................................................36
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES...........................................37
SECTION 506. APPLICATION OF MONEY COLLECTED...................................................................37
SECTION 507. LIMITATION ON SUITS..............................................................................37
SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE
PRINCIPAL PREMIUM AND INTEREST...................................................................38
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES...............................................................38
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE...................................................................38
SECTION 511. DELAY OR OMISSION NOT WAIVER.....................................................................39
SECTION 512. CONTROL BY HOLDERS...............................................................................39
SECTION 513. WAIVER OF PAST DEFAULTS..........................................................................39
SECTION 514. UNDERTAKING FOR COSTS............................................................................39
SECTION 515. WAIVER OF STAY, EXTENSION OR USURY LAWS..........................................................40
ARTICLE SIX THE TRUSTEE.........................................................................................40
SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES..............................................................40
SECTION 602. NOTICE OF DEFAULTS...............................................................................41
SECTION 603. CERTAIN RIGHTS OF TRUSTEE........................................................................41
SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES................................................42
SECTION 605. MAY HOLD NOTES...................................................................................43
SECTION 606. MONEY HELD IN TRUST..............................................................................43
SECTION 607. COMPENSATION AND REIMBURSEMENT...................................................................43
SECTION 608. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY..........................................................44
SECTION 609. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR................................................44
SECTION 610. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR...........................................................45
SECTION 611. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS......................................46
SECTION 612. APPOINTMENT OF AUTHENTICATION AGENT..............................................................46
SECTION 613. CONFLICTING INTERESTS............................................................................47
SECTION 614. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY................................................47
ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY.................................................48
SECTION 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS........................................48
SECTION 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS...........................................48
SECTION 703. REPORTS BY TRUSTEE...............................................................................48
SECTION 704. REPORTS BY COMPANY...............................................................................49
ARTICLE EIGHT CONSOLIDATION, MERGER AND SALES...................................................................50
SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.............................................50
SECTION 802. SUCCESSOR PERSON SUBSTITUTED FOR COMPANY.........................................................51
ARTICLE NINE SUPPLEMENTAL INDENTURES............................................................................51
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS...............................................51
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS..................................................52
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.............................................................52
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES................................................................53
SECTION 905. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES....................................................53
SECTION 906. EFFECT ON SENIOR INDEBTEDNESS....................................................................53
SECTION 907. RECORD DATE......................................................................................53
ARTICLE TEN COVENANTS...........................................................................................54
SECTION 1001. PAYMENT OF PRINCIPAL AND INTEREST...............................................................54
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C>
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.................................................................54
SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.....................................................54
SECTION 1004. CORPORATE EXISTENCE.............................................................................56
SECTION 1005. MAINTENANCE OF PROPERTIES.......................................................................56
SECTION 1006. RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS........................................56
SECTION 1007. LIMITATIONS ON INDEBTEDNESS FOR MONEY BORROWED..................................................57
SECTION 1008. LIMITATION LIENS................................................................................58
SECTION 1009. INSURANCE.......................................................................................58
SECTION 1010. PAYMENT OF TAXES AND OTHER CLAIMS...............................................................58
SECTION 1011. STATEMENT BY OFFICERS AS TO DEFAULT.............................................................59
SECTION 1012. WAIVER OF CERTAIN COVENANTS.....................................................................59
SECTION 1013. LIMITATION ON RANKING OF FUTURE INDEBTEDNESS....................................................59
SECTION 1014. LIMITATIONS ON RESTRICTING SUBSIDIARY DIVIDENDS.................................................59
SECTION 1015. LIMITATION ON TRANSACTIONS WITH AFFILIATES......................................................60
SECTION 1016. CHANGE OF CONTROL...............................................................................61
ARTICLE ELEVEN REDEMPTION OF NOTES..............................................................................63
SECTION 1101. RIGHT OF REDEMPTION.............................................................................63
SECTION 1102. ELECTION TO REDEEM; NOTICE TO TRUSTEE...........................................................63
SECTION 1103. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED....................................................63
SECTION 1104. NOTICE OF REDEMPTION............................................................................64
SECTION 1105. DEPOSIT OF REDEMPTION PRICE.....................................................................64
SECTION 1106. NOTES PAYABLE ON REDEMPTION DATE................................................................65
SECTION 1107. NOTES REDEEMED IN PART..........................................................................65
SECTION 1108. PURCHASE OF NOTES...............................................................................65
ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE...............................................................65
SECTION 1201. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE....................................65
SECTION 1202. DEFEASANCE AND DISCHARGE........................................................................66
SECTION 1203. COVENANT DEFEASANCE.............................................................................66
SECTION 1204. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.................................................67
SECTION 1205. DEPOSITED MONEY AND GOVERNMENT OBLIGATIONS TO
BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS................................................68
SECTION 1206. REINSTATEMENT...................................................................................68
ARTICLE THIRTEEN SUBORDINATION OF NOTES.........................................................................69
SECTION 1301. NOTES SUBORDINATE TO SENIOR INDEBTEDNESS........................................................69
SECTION 1302. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC..................................................69
SECTION 1303. SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.......................................70
SECTION 1304 . PAYMENT PERMITTED IF NO DEFAULT................................................................71
SECTION 1305. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.........................................71
SECTION 1306 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS......................................................71
SECTION 1307. TRUSTEE TO EFFECTUATE SUBORDINATION.............................................................72
SECTION 1308. NO WAIVER OF SUBORDINATION PROVISION............................................................72
SECTION 1309. NOTICE TO TRUSTEE...............................................................................72
SECTION 1310. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT BANK.............................73
SECTION 1311. RIGHTS OF TRUSTEE AS A HOLDER OF SENIOR INDEBTEDNESS:
PRESERVATION OF TRUSTEE'S RIGHTS................................................................73
SECTION 1312. ARTICLE APPLICABLE TO PAYING AGENTS.............................................................74
SECTION 1313. NO SUSPENSION OF REMEDIES.......................................................................74
SECTION 1314. TRUST MONEY NOT SUBORDINATED....................................................................74
</TABLE>
iii
<PAGE> 6
THIS INDENTURE, dated as of ______________, 1999 (the "Indenture"), is
between CALLON PETROLEUM COMPANY, a corporation duly organized and existing
under the laws of the State of Delaware (hereinafter called the "Company"),
having executive offices located at 200 North Canal Street, Natchez,
Mississippi 39120 and AMERICAN STOCK TRANSFER & TRUST COMPANY, a corporation
duly organized and existing under the laws of the State of New York
(hereinafter called the "Trustee"), having its principal corporate trust office
at 40 Wall Street, 46th Floor, New York, New York 10005.
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance of its ____% Senior Subordinated Notes
due 2004 (hereinafter called the "Notes"), to be issued in such amount and to
have such provisions as are hereinafter set forth. All things necessary to make
this Indenture a valid agreement of the Company, in accordance with its terms,
have been done.
This Indenture is subject to the provisions of the Trust Indenture Act
of 1939, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder that are required to be part of this
Indenture and, to the extent applicable, shall be governed by such provisions.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders (as hereinafter defined) thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders from time to
time of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. DEFINITIONS.
Except as otherwise expressly provided in this Indenture or unless the
context otherwise requires, for all purposes of this Indenture:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act (as hereinafter defined), either directly or by reference
therein, have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(4) the words "herein", "hereof", "hereto" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
<PAGE> 7
(5) the word "or" is always used inclusively (for example, the phrase
"A or B" means "A or B or both", not "either A or B but not both");
(6) the masculine gender includes the feminine and the neuter; and
(7) references to agreements and other instruments include subsequent
amendments and waivers but only to the extent not prohibited by this Indenture.
Certain terms used principally in certain Articles hereof are defined
in those Articles.
"Acquired Indebtedness" means Indebtedness for Money Borrowed of a
Person existing at the time such Person becomes a Restricted Subsidiary or
assumed in connection with the acquisition by the Company or a Restricted
Subsidiary of assets from such Person, and not incurred in connection with, or
in anticipation of, such Person becoming a Restricted Subsidiary or such
acquisition. Acquired Indebtedness shall be deemed to be incurred on the date
of the related acquisition of assets from any Person or the date the acquired
Person becomes a Restricted Subsidiary.
"Act", when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agent Members" has the meaning specified in Section 312.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 612 to act on behalf of the Trustee to authenticate Notes.
"Authorized Newspaper" means a newspaper, in an official language of
the place of publication or in the English language, customarily published on
each day that is a Business Day in the place of publication, whether or not
published on days that are Legal Holidays in the place of publication, and of
general circulation in each place in connection with which the term is used or
in the financial community of each such place. Where successive publications
are required to be made in Authorized Newspapers, the successive publications
may be made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any day that is a Business Day in
the place of publication.
"Average Life" means, with respect to any Indebtedness for Money
Borrowed, as at any date of determination, the quotient obtained by dividing
(a) the sum of the products of (i) the number of years (and any portion
thereof) from the date of determination to the date or dates of each successive
scheduled principal payment (including, without limitation, any sinking fund or
mandatory redemption payment requirements) of such
2
<PAGE> 8
Indebtedness for Money Borrowed multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Board of Directors" means the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a copy of one or more resolutions, certified
by the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"Business Day", with respect to any Place of Payment or other
location, means each Monday, Tuesday, Wednesday, Thursday and Friday that is
not a Legal Holiday in such Place of Payment or other location.
"Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real or personal property which
obligations are required to be classified and accounted for as capital lease
obligations on a balance sheet of such Person under GAAP and, for purposes of
this Indenture, the amount of such obligations at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Change of Control" means the occurrence of any of the following: (1)
the sale, lease, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" or group of related "persons" (as
such terms are used in Section 13(d)(3) of the Exchange Act), (2) the adoption
of a plan relating to the liquidation or dissolution of the Company, (3) the
consummation of any transaction (including, without limitation, any purchase,
sale, acquisition, disposition, merger or consolidation) the result of which is
that any "person" or group of related "persons"(as defined above) becomes the
"beneficial owner" (as such term is described in Rule 13d-3 and Rule 13d-5
under the Exchange Act), directly or indirectly, of more than 50% of the
aggregate voting power of all classes of Voting Stock of the Company; provided,
however, that the sale of Equity Interests in the Company to a Person or
Persons acting as underwriter(s) in connection with a firm commitment
underwriting shall not constitute a Change of Control, or (4) the first day on
which a majority of the members of the Board of Directors of the Company are
not Continuing Directors.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties at such time.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" and "Company Order" mean, respectively, a written
request or order, as the case may be, signed in the name of the Company by the
Chairman of the Board, a Vice Chairman of the Board, the Chief Executive
Officer, the President, a Vice
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<PAGE> 9
President, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary, of the Company, or by another officer of the Company duly authorized
to sign by a Board Resolution, and delivered to the Trustee.
"Consolidated" when used in conjunction with any other defined term
means the aggregate amount of the items included within the defined term of the
Company and its Restricted Subsidiaries on a Consolidated basis, eliminating
inter-company items.
"Consolidated EBITDA" means, for any period, determined in accordance
with GAAP on a Consolidated basis for the Company and its Restricted
Subsidiaries, the sum of Consolidated Net Income, plus depreciation, depletion,
amortization and other non-cash charges, income tax expense, and Consolidated
Interest Expense for such period, each as deducted in determining such
Consolidated Net Income.
"Consolidated Interest Expense" means, for any period, the interest
expense for such period which is required to be shown as such on the financial
statements of the Company and its Restricted Subsidiaries, on a Consolidated
basis, prepared in accordance with GAAP.
"Consolidated Net Income" means, for any period, the amount of
Consolidated net income (loss) of the Company and its Restricted Subsidiaries
for such period, determined in accordance with GAAP; provided, however, that
there shall be included in Consolidated Net Income any net extraordinary gains
or losses for such period (less all fees and expenses related thereto); and,
provided, further, that there shall not be included in Consolidated Net Income
(1) any net income (loss) of a Restricted Subsidiary for any portion of such
period during which it was not a Consolidated Subsidiary, (2) any net income
(loss) of businesses, properties or assets acquired or disposed of (by way of
merger, consolidation, purchase, sale or otherwise) by the Company or any
Restricted Subsidiary for any portion of such period prior to the acquisition
thereof or subsequent to the disposition thereof, or (3) any net income for
such period resulting from transfers of assets received by the Company or any
Restricted Subsidiary from an Unrestricted Subsidiary.
"Consolidated Subsidiary" means a Restricted Subsidiary the financial
statements of which are Consolidated with the financial statements of the
Company.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (1) was a member of such
Board of Directors on the date of the Indenture or (2) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Convertible Debentures" means the Company's 8.5% Convertible
Subordinated Debentures due 2010 issuable in exchange for the Company's Series
A Preferred Stock.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at 40 Wall Street, 46th Floor, New York, New York 10005.
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<PAGE> 10
"Corporation" includes corporations, associations, companies, joint
stock companies, limited liability companies or business trusts.
"Credit Facility" means that certain Amended and Restated Credit
Agreement, dated as of October 31, 1996, among the Company, Callon Petroleum
Operating Company, a Delaware corporation and wholly owned Subsidiary of the
Company ("Operating"), Callon Offshore Production, Inc., a Mississippi
corporation and wholly owned Subsidiary of Operating, the several banks and
other financial institutions from time to time parties thereto (the "Banks"),
and The Chase Manhattan Bank, as agent for the Banks, as amended, and as the
same may be further amended, modified, supplemented, extended, restated,
replaced, renewed or refinanced from time to time.
"Default" means any event that is or with the passage of time or
giving notice or both would be an Event of Default.
"Defaulted Interest" has the meaning specified in Section 307.
"Depository" means The Depository Trust Company, its nominees and
their respective successors.
"Equity Interest" means Voting Stock and all warrants, options or
other rights to acquire Voting Stock (but excluding any debt security that is
convertible into, or exchangeable for, Voting Stock).
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor act thereto.
"GAAP" means United States generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting Principles board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board in effect on the
date of this Indenture.
"Global Note" has the meaning specified in Section 201.
"Government Obligations" means direct obligations of the United States
of America, or any Person controlled or supervised by and acting as an agency
or instrumentality of such government, in each case where the payment or
payments thereunder are unconditionally guaranteed as a full faith and credit
obligation by such government and which are not callable or redeemable at the
option of the issuer or issuers thereof, and shall also include a depository
receipt issued by a bank or trust company as custodian with respect to any such
Government Obligation or a specific payment of interest on or principal of or
other amount with respect to any such Government Obligation held by such
custodian for the account of the holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of or other amount with
respect to the Government Obligation evidenced by such depository receipt.
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"Holder", when used with respect to the Notes, means the Person in
whose name such Note is registered in the Note Register.
"Indebtedness for Money Borrowed" means any of the following
obligations of the Company or any Restricted Subsidiary: (1) any obligations,
contingent or otherwise, for borrowed money or for the deferred purchase price
of property, assets, securities or services (including, without limitation, any
interest accruing subsequent to an event of default), (2) all obligations
(including the Notes) evidenced by bonds, notes, debentures or other similar
instruments, (3) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property),
except any such obligation that constitutes a trade payable and an accrued
liability arising in the ordinary course of business, if and to the extent any
of the foregoing indebtedness would appear as a liability upon a balance sheet
prepared in accordance with GAAP, (4) all Capitalized Lease Obligations, (5)
liabilities of the Company actually due and payable under bankers acceptances
and letters of credit, (6) all indebtedness of the type referred to in clause
(1), (2), (3), (4) or (5) above secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or security interest in property of the Company or any Restricted
Subsidiary (including, without limitation, accounts and contract rights), even
though the Company or any Restricted Subsidiary has not assumed or become
liable for the payment of such indebtedness, and (7) any guarantee or
endorsement (other than for collection or deposit in the ordinary course of
business) or discount with recourse of, or other agreement, contingent or
otherwise, to purchase, repurchase, or otherwise acquire, to supply, or advance
funds or become liable with respect to, any indebtedness or any obligation of
the type referred to in any of the foregoing clauses (1) through (6),
regardless of whether such obligation would appear on a balance sheet;
provided, however, that Indebtedness for Money Borrowed shall not include (i)
Production Payments and Reserve Sales, (ii) any liability for gas balancing
incurred in the ordinary course of business, (iii) accounts payable or other
obligations of the Company or a Restricted Subsidiary in the ordinary course of
business in connection with the obtaining of goods or services, and (iv) any
liability under any and all (A) employment or consulting agreements or employee
benefit plans or arrangements and (B) futures contracts, forward contracts,
swap, cap or collar contracts, option contracts, or other similar derivative
agreements.
"Indenture" means this instrument as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Independent Public Accountants" means a nationally recognized firm of
accountants that, with respect to the Company, are Independent Public
Accountants within the meaning of the Securities Act of 1933, as amended, and
the rules and regulations promulgated by the Commission thereunder, who may be
the Independent Public Accountants regularly retained by the Company or who may
be other Independent Public Accountants. Such accountants or firm shall be
entitled to rely upon any Opinion of Counsel as to the interpretation of any
legal matters relating to the Indenture or certificates required to be provided
hereunder.
"Insolvency or Liquidation Proceeding" means, with respect to any
Person, (a) an insolvency or bankruptcy case or proceeding, or any
receivership, liquidation,
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<PAGE> 12
reorganization or similar case or proceeding in connection therewith, relative
to such Person or its creditors, as such, or its assets or (b) any liquidation,
dissolution or other winding-up of such Person, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy or (c) any
assignment for the benefit of creditors or any other marshaling of assets or
liabilities of such Person.
"Interest Coverage Ratio" means, for any date of determination, the
ratio of (1) Consolidated EBITDA for the immediately preceding four fiscal
quarters of the Company to (2) Consolidated Interest Expense for such
immediately preceding four fiscal quarters.
"Interest Payment Date" when used with respect to any Note, means the
Stated Maturity of an installment of interest on such Note.
"Issue Date" when used with respect to any Note, means the earliest
date on which any Note is originally issued in accordance with the terms of
this Indenture.
"Legal Holiday" with respect to any Place of Payment or other
location, means a Saturday, a Sunday or a day on which banking institutions or
trust companies in such Place of Payment or other location are not authorized
or obligated to be open.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation,
any agreement to give or grant a Lien or any lease, conditional sale or other
title retention agreement having substantially the same economic effect as any
of the foregoing) upon or with respect to any property of any kind. A Person
shall be deemed to own subject to a Lien any property which such Person has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Subsidiary" means any Restricted Subsidiary whose assets or
revenues comprise at least five percent (5%) of the assets or revenues of the
Company and the Restricted Subsidiaries on a Consolidated basis as of the end
of, or for the, Company's most recently completed fiscal quarter, as determined
from time to time.
"Maturity" when used with respect to any Note, means the date on which
the principal of such Note becomes due and payable as provided in this
Indenture, whether at the Stated Maturity or by declaration of acceleration,
notice of redemption, and includes any Redemption Date.
"Money", with respect to any payment, deposit or other transfer
pursuant to or contemplated by the terms hereof, means United States dollars or
other equivalent unit of legal tender for payment of public or private debts in
the United States of America.
"Non-payment Event of Default" means any event (other than a Payment
Event of Default), the occurrence of which (with or without notice or the
passage of time) entitles one or more Persons to accelerate the maturity of any
Specified Senior Indebtedness.
"Note" or "Notes" means any note or notes, as the case may be,
authenticated and delivered under this Indenture.
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"Note Register" and "Note Registrar" have the respective meanings
specified in Section 305.
"Office or Agency" means an office or agency of the Company maintained
or designated in a Place of Payment for the Notes pursuant to Section 1002 or
any other office or agency of the Company maintained or designated for, the
payment or surrender of the Notes pursuant to Section 1002 or, to the extent
designated or required by Section 1002 in lieu of such office or agency, the
Corporate Trust Office of the Trustee.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman of the Board, the Chief Executive Officer, the
President or a Vice President, and by the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and is delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or counsel for the Company or other counsel who shall be reasonably
acceptable to the Trustee.
"Outstanding", when used with respect to any Notes, means, as of the
date of determination, all Notes theretofore authenticated and delivered under
this Indenture, except:
(1) any Note theretofore canceled by the Trustee or the Note
Registrar or delivered to the Trustee or the Note Registrar
for cancellation;
(2) any Note or portion thereof for whose payment at the Maturity
thereof Money in the necessary amount has been theretofore
deposited pursuant hereto with the Trustee or any Paying
Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act
as its own Paying Agent) for the Holders of such Notes,
provided that, if such Notes are to be redeemed, notice of
such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee
has been made;
(3) any Note, except to the extent provided in Sections 1202 and
1203, with respect to which the Company has effected legal
defeasance or covenant defeasance as provided in Article
Twelve; and
(4) any Note which has been paid pursuant to Section 306 or in
exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture,
unless there shall have been presented to the Trustee proof
satisfactory to it that such Note is held by a bona fide
purchaser in whose hands such Note is a valid obligation of
the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in making
any such determination or relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Notes which the Trustee knows to
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<PAGE> 14
be so owned shall be so disregarded. Notes so owned which shall have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Trustee (a) the pledgee's right so to act with
respect to such Notes and (b) that the pledgee is not the Company or any other
obligor upon the Notes or any Affiliate of the Company or such other obligor.
"Pari Passu Indebtedness" means any Indebtedness for Money Borrowed of
the Company that is pari passu in right of payment to the Notes and shall
include, without limitation, the 2001 Notes and the 2002 Notes.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (or premium, if any) or interest on any Note on behalf of the
Company.
"Payment Blockage Notice" has the meaning specified in Section 1303.
"Payment Blockage Period" has the meaning specified in Section 1303.
"Payment Event of Default" means any default in the payment or
required prepayment of principal of (or premium, if any) or interest on any
Specified Senior Indebtedness when due (whether at final maturity, upon
scheduled installment, upon acceleration or otherwise).
"Permitted Indebtedness" means any of the following:
(i) Indebtedness for Money Borrowed outstanding on the date of
this Indenture (and not repaid or defeased with the proceeds
of the offering of the Notes);
(ii) Indebtedness for Money Borrowed of the Company to a
Restricted Subsidiary and Indebtedness for Money Borrowed of
a Restricted Subsidiary to the Company or a Restricted
Subsidiary; provided, however, that upon any event which
results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of any such
Indebtedness for Money Borrowed (except to the Company or a
Restricted Subsidiary), such Indebtedness for Money Borrowed
shall be deemed, in each case, to be incurred and shall be
treated as an incurrence for purposes of Section 1007 at the
time the Restricted Subsidiary in question ceased to be a
Restricted Subsidiary;
(iii) any guarantee of Senior Indebtedness incurred in compliance
with Section 1007 by a Restricted Subsidiary or the Company;
and
(iv) any renewals, substitutions, refinancings or replacements
(each, for purposes of this clause, a "refinancing") by the
Company or a Restricted Subsidiary of any Indebtedness for
Money Borrowed incurred pursuant to clause (i) of this
definition, including any successive refinancings by the
Company or such Restricted Subsidiary, so long as (A) any
such new Indebtedness for Money Borrowed shall be in a
principal amount that does not exceed the principal amount
(or, if such Indebtedness for Money Borrowed being refinanced
provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration
thereof, such lesser amount as of the date of determination)
so refinanced plus the amount of any premium
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<PAGE> 15
required to be paid in connection with such refinancing
pursuant to the terms of the Indebtedness for Money Borrowed
refinanced or the amount of any premium reasonably determined
by the Company or such Restricted Subsidiary as necessary to
accomplish such refinancing, plus the amount of expenses of
the Company or such Restricted Subsidiary incurred in
connection with such refinancing, and (B) in the case of any
refinancing of Indebtedness for Money Borrowed of the Company
that is not Senior Indebtedness, such new Indebtedness for
Money Borrowed is either pari passu with the Notes or
subordinated to the Notes at least to the same extent as the
Indebtedness being refinanced and (C) such new Indebtedness
for Money Borrowed has an Average Life equal to or longer
than the Average Life of the Indebtedness for Money Borrowed
being refinanced and a final Stated Maturity equal to or
later than the final Stated Maturity of the Indebtedness for
Money Borrowed being refinanced.
"Permitted Junior Securities" means any equity securities or
subordinated debt securities of the Company or any successor obligor with
respect to the Senior Indebtedness provided for by a plan of reorganization or
readjustment that, in the case of any such subordinated debt securities, are
subordinated in right of payment to all Senior Indebtedness that may at the
time be outstanding to substantially the same degree as, or to a greater extent
than, the Notes are so subordinated as provided in this Indenture.
"Permitted Liens" means any of the following types of Liens:
(a) Liens existing as of the date the Notes are first issued
(except to the extent such Liens secure any Pari Passu Indebtedness or
Subordinated Indebtedness that is repaid or defeased with proceeds of
the offering of the Notes), and any renewal, extension or refinancing
of any such Lien provided that thereafter such Lien extends only to
the properties that were subject to such Lien prior to the renewal,
extension or refinancing thereof;
(b) Liens securing the Notes; and
(c) Liens in favor of the Company.
"Person" means any individual, Corporation, partnership, joint
venture, association, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Physical Notes" has the meaning specified in Section 201.
"Place of Payment" has the meaning set forth in Section 301.
"Predecessor Note" of a Note means every previous Note evidencing all
or a portion of the same debt as that evidenced by such particular Note; and,
for the purposes of this definition, any Note authenticated and delivered under
Section 306 in exchange for or in lieu of a lost, destroyed, mutilated or
stolen Note shall be deemed to evidence the same debt as the lost, destroyed,
mutilated or stolen Note.
"Production Payments and Reserve Sales" means the grant or transfer to
any Person of a royalty, overriding royalty, net profits interest, production
payment (whether
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<PAGE> 16
volumetric or dollar denominated), master limited partnership interest or other
interest in oil and gas properties, reserves 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.
"Redemption Date", with respect to any Note or portion thereof to be
redeemed, means the date fixed for such redemption pursuant to Article Eleven
of this Indenture.
"Redemption Price", with respect to any Note or portion thereof to be
redeemed, means the price at which it is to be redeemed pursuant to Article
Eleven of this Indenture.
"Regular Record Date" for the interest payable on any Note on any
Interest Payment Date therefor means the date, if any, specified in or pursuant
to this Indenture as the "Regular Record Date".
"Responsible Officer" means any officer of the Trustee in its
Corporate Trust Department and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
"Restricted Payment" has the meaning specified in Section 1006.
"Restricted Subsidiary" means any Subsidiary, whether existing on or
after the date of this Indenture, unless such Subsidiary is an Unrestricted
Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms
of this Indenture.
"Senior Event of Default" has the meaning specified in Section 1301.
"Senior Indebtedness" means the principal amount of, premium, if any,
and interest on and all other amounts due on or in connection with, (1) any
Indebtedness for Money Borrowed of the Company, whether now outstanding or
hereafter created, incurred, assumed or guaranteed, unless in the instrument
creating or evidencing such Indebtedness for Money Borrowed or pursuant to
which such Indebtedness for Money Borrowed is outstanding it is provided that
such indebtedness is subordinate in right of payment or in rights upon
liquidation to any other Indebtedness for Money Borrowed of the Company and (2)
all renewals, extensions and refundings of any such indebtedness.
"Series A Preferred Stock" means the Company's $2.125 Convertible
Exchangeable Preferred Stock, Series A.
"Special Record Date" for the payment of any Defaulted Interest on any
Note means a date fixed by the Trustee pursuant to Section 307.
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<PAGE> 17
"Specified Senior Indebtedness" means (a) all Senior Indebtedness of
the Company in respect of the Credit Facility and any renewals, amendments,
extensions, supplements, modifications, deferrals, refinancings, or
replacements (each, for purposes of this definition, a "refinancing") thereof
by the Company, including any successive refinancings thereof by the Company
and (b) any other Senior Indebtedness and any refinancings thereof by the
Company having a principal amount of at least $5 million as of the date of
determination and provided that the agreements, indentures or other instruments
evidencing such Senior Indebtedness or pursuant to which such Senior
Indebtedness was issued specifically designates such Senior Indebtedness as
"Specified Senior Indebtedness" for purposes of this Indenture. For purposes of
this definition, a refinancing of any Specified Senior Indebtedness shall be
treated as a Specified Senior Indebtedness only if the Senior Indebtedness
issued in such refinancing ranks or would rank pari passu with the Specified
Senior Indebtedness refinanced and only if the Senior Indebtedness issued in
such refinancing is permitted by Section 1007.
"Stated Maturity" with respect to any Note or any installment of
principal thereof or interest thereon means the date established by this
Indenture as the fixed date on which the principal of such Note or such
installment of principal or interest is due and payable, and, when used with
respect to any other Indebtedness for Money Borrowed or any installment of
interest thereon, means the date specified in the instrument evidencing or
governing such Indebtedness for Money Borrowed as the fixed date on which the
principal of such Indebtedness for Money Borrowed or such installment of
interest is due and payable.
"Subordinated Indebtedness" means Indebtedness for Money Borrowed of
the Company which is expressly subordinated in right of payment to the Notes,
including, without limitation, the Convertible Debentures.
"Subsidiary" means any Corporation of which at the time of
determination the Company or one or more Subsidiaries owns or controls directly
or indirectly more than 50% of the shares of Voting Stock;
"Surviving Entity" has the meaning specified in Section 801.
"Transaction" has the meaning specified in Section 1015.
"Trust Indenture Act" means the United States Trust Indenture Act of
1939, as in force at the date as of which this instrument was executed, except
as provided in Sections 901 and 902; provided, however, that in the event the
United States Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the United
States Trust Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean each Person who is then a Trustee hereunder.
"2001 Indenture" means that certain Indenture dated as of November 27,
1996 between the Company and American Stock Transfer & Trust Company, as
Trustee, as the same may have been amended or supplemented from time to time
prior to the date hereof.
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"2001 Notes" means the Company's 10% Senior Subordinated Notes due
2001, issued pursuant to the 2001 Indenture.
"2002 Indenture" means that certain Indenture dated as of July 31,
1997 between the Company and American Stock Transfer & Trust Company, as
Trustee, as the same may have been amended or supplemented from time to time
prior to the date hereof.
"2002 Notes" means the Company's 10.125% Senior Subordinated Notes due
2002, issued pursuant to the 2002 Indenture.
"United States", except as otherwise provided herein, means the United
States of America (including the states thereof and the District of Columbia),
its territories and possessions and other areas subject to its jurisdiction.
"Unrestricted Subsidiary" means (i) any Subsidiary that at the time of
determination will be designated an Unrestricted Subsidiary by the Board of
Directors as provided below and (ii) any Subsidiary of an Unrestricted
Subsidiary. The Board of Directors may designate any Subsidiary as an
Unrestricted Subsidiary so long as neither the Company nor any Restricted
Subsidiary is directly or indirectly liable pursuant to the terms of any
Indebtedness for Money Borrowed of such Subsidiary or has any assets or
properties which are subject to any Lien securing any Indebtedness for Money
Borrowed of such Subsidiary. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing a Board Resolution with the Trustee
giving effect to such designation. The Board of Directors may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation, (i) no Event of Default shall have occurred and be
continuing and (ii) the Company could occur $1.00 of additional Indebtedness
for Money Borrowed (other than Permitted Indebtedness) under Section 1007.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "Vice President".
"Voting Stock" means stock, interests, participations, rights in or
other equivalents in the equity interests (however designated) with respect to
a Corporation having general voting power under ordinary circumstances to elect
at least a majority of the board of directors, managers or trustees of such
Corporation; provided that, for the purposes hereof, stock which carries only
the right to vote conditionally on the happening of an event shall not be
considered Voting Stock whether or not such event shall have happened.
SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents or any of them is specifically required by any provision of
this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished.
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Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such condition or covenant and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, such
individual has made such examination or investigation as is necessary to enable
such individual to express an informed opinion as to whether or not such
condition or covenant has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which such officer's certificate or opinion is
based are erroneous. Any such certificate of counsel or Opinion of Counsel or
representation of counsel may be based, insofar as it relates to factual
matters, upon a certificate or opinion of, or representations by, an officer or
officers of the Company stating that the information with respect to such
factual matters is in the possession of the Company unless such counsel knows,
or in the exercise of reasonable care should know, that the certificate or
opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture or any Note, they may, but need not, be
consolidated and form one instrument.
SECTION 104. ACTS OF HOLDERS
(1) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent
duly appointed in writing. Except as herein otherwise expressly provided, such
action shall become effective when such instrument or
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<PAGE> 20
instruments are delivered to the Trustee and, where it is hereby expressly
required, to the Company. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent, or of the
holding by any Person of a Note, shall be sufficient for any purpose of this
Indenture and (subject to Section 315 of the Trust Indenture Act) conclusive in
favor of the Trustee and the Company and any agent of the Trustee or the
Company, if made in the manner provided in this Section.
Without limiting the generality of this Section, unless otherwise
provided in or pursuant to this Indenture, a Holder, including a Depository
that is a Holder of a Global Note, may make, give or take, by a proxy, or
proxies, duly appointed in writing, any request, demand, authorization,
direction, notice, consent, waiver or other action provided in or pursuant to
this Indenture to be made, given or taken by Holders, and a Depository that is
a Holder of a Global Note may provide its proxy or proxies to the beneficial
owners of interests in any such Global Note through such Depository's standing
instructions and customary practices.
The Trustee shall fix a record date for the purpose of determining the
Persons who are beneficial owners of interests in any permanent Global Note
held by a Depository entitled under the procedures of such Depository to make,
give or take, by a proxy or proxies duly appointed in writing, any request,
demand, authorization, direction, notice, consent, waiver or other action
provided in or pursuant to this Indenture to be made, given or taken by
Holders. If such a record date is fixed, the Holders on such record date or
their duly appointed proxy or proxies, and only such Persons, shall be entitled
to make, give or take such request, demand, authorization, direction, notice,
consent, waiver or other action, whether or not such Holders remain Holders
after such record date. No such request, demand, authorization, direction,
notice, consent, waiver or other action shall be valid or effective if made,
given or taken more than 90 days after such record date.
(2) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(3) The ownership, principal amount and serial numbers of Notes held
by any Person, and the date of the commencement and the date of the termination
of holding the same, shall be proved by the Note Register.
(4) If the Company shall solicit from the Holders of any Notes any
request, demand, authorization, direction, notice, consent, waiver or other
action, the Company may at its option (but is not obligated to), by Board
Resolution, fix in advance a record date for the determination of Holders of
Notes entitled to give such request, demand, authorization, direction, notice,
consent, waiver or other action. If such a record date is fixed, such request,
demand, authorization, direction, notice, consent, waiver or other action may
be given before or after such record date, but only the Holders of Notes of
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<PAGE> 21
record at the close of business on such record date shall be deemed to be
Holders for the purpose of determining whether Holders of the requisite
proportion of Outstanding Notes have authorized or agreed or consented to such
request, demand, authorization, direction, notice, consent, waiver or other
action, and for that purpose the Outstanding Notes shall be computed as of such
record date; provided that no such authorization, agreement or consent by the
Holders of Notes on such record date shall be deemed effective unless it shall
become effective pursuant to the provisions of this Indenture not later than
six months after the record date.
(5) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done or suffered to be done by the Trustee, any Note Registrar, any
Paying Agent or the Company in reliance thereon, whether or not notation of
such action is made upon such Note.
SECTION 105. NOTICES, ETC, TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:
(1) the Trustee by any Holder or the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing and
delivered in person or mailed by certified or registered mail (return receipt
requested) to or with the Trustee at its Corporate Trust Office, or
(2) the Company by the Trustee or any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided) if in
writing and delivered in person or mailed by certified or registered mail
(return receipt requested), to the Company addressed to the attention of its
Chief Financial Officer at the address of its principal office specified in the
first paragraph of this instrument or at any other address previously furnished
in writing to the Trustee by the Company.
SECTION 106. NOTICE TO HOLDERS OF NOTES; WAIVER.
Except as otherwise expressly provided in this Indenture, where this
Indenture provides for notice to Holders of Notes of any event, such notice
shall be sufficiently given to Holders of Notes if in writing and mailed,
first-class postage prepaid, to each Holder of a Note affected by such event,
at such Holder's address as it appears in the Note Register, not later than the
latest date, and not earlier than the earliest date, prescribed for the giving
of such notice.
In any case where notice to Holders of Notes is given by mail, neither
the failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder of a Note shall affect the sufficiency of such notice with
respect to other Holders of Notes. Any notice which is mailed in the manner
herein provided shall be conclusively presumed to have been duly given or
provided. In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
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Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders of Notes shall be filed with the Trustee,
but such filing shall not be a condition precedent to the validity of any
action taken in reliance upon such waiver.
SECTION 107. LANGUAGE OF NOTICES.
Any request, demand, authorization, direction, notice, consent or
waiver required or permitted under this Indenture shall be in the English
language.
SECTION 108. CONFLICT WITH TRUST INDENTURE ACT.
If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with any duties under any required provision of the
Trust Indenture Act imposed hereon by Section 318(c) thereof, such required
provision shall control.
SECTION 109. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein, the Reconciliation and Tie
Chart and the Table of Contents are for convenience only and shall not affect
the construction hereof.
SECTION 110. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not. All agreements of
the Trustee in this Indenture shall bind its successors.
SECTION 111. SEVERABILITY CLAUSE.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, either wholly or partially, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and such provisions shall be given effect to the
fullest extent permitted by law.
SECTION 112. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto, any Note Registrar, any
Paying Agent, any Authenticating Agent and their respective successors
hereunder, the Holders of Notes and the holders of Senior Indebtedness, any
benefit or any legal or equitable right, remedy or claim under this Indenture.
SECTION 113. GOVERNING LAW.
This Indenture and the Notes shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
or instruments entered into and, in each case, performed in said state.
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<PAGE> 23
SECTION 114. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date, or
Stated Maturity of any Note shall be a Legal Holiday at any Place of Payment,
then (notwithstanding any other provision of this Indenture) payment need not
be made at such Place of Payment on such date, but may be made on the next
succeeding day that is a Business Day at such Place of Payment with the same
force and effect as if made on the Interest Payment Date, Redemption Date, or
at the Stated Maturity, and no interest shall accrue on the amount payable on
such date or at such time for the period from and after such Interest Payment
Date, Redemption Date, or Stated Maturity, as the case may be.
SECTION 115. COUNTERPARTS.
This Indenture may be executed in any number of counterparts, each of
which shall be an original; but such counterparts shall together constitute but
one and the same instrument.
SECTION 116. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS.
No recourse under or upon any obligation, covenant or agreement of
this Indenture, any supplemental indenture, or of any Note, or for any claim
based thereon or otherwise in respect thereof, shall be had against any
incorporator, shareholder, officer, employee, director or Affiliate, as such,
past, present or future, of the Company or of any successor corporation or
Person, either directly or through the Company, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment
or penalty or otherwise; it being expressly understood that this Indenture and
the obligations issued hereunder are solely corporate obligations, and that no
such personal liability whatever shall attach to, or is or shall be incurred
by, the incorporators, shareholders, officers, employees, directors or
Affiliates, as such, of the Company or of any successor corporation or Person,
or any of them, because of the creation of the indebtedness hereby authorized,
or under or by reason of the obligations, covenants or agreements contained in
this Indenture or any of the Notes or implied therefrom; and that any and all
such personal liability, either at common law or in equity or by constitution
or statute, of, and any and all such rights and claims against, every such
incorporator, shareholder, officer, employee, director or Affiliate, as such,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Indenture
or in any of the Notes or implied therefrom, are hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of such Notes.
SECTION 117. NO ADVERSE INTERPRETATIONS OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
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ARTICLE TWO
FORM OF NOTES
SECTION 201. FORMS GENERALLY.
The definitive Notes shall be printed, lithographed or engraved on
steel-engraved borders or may be produced in any other manner, all as
determined by the officers executing such Notes as evidenced by their execution
of such Notes.
Notes (including the Trustee's certificate of authentication) offered
and sold shall be issued initially in the form of one or more permanent global
Notes substantially in the form set forth in Sections 202 through 204 (the
"Global Note") deposited with the Trustee, as custodian for the Depository,
duly executed by the Company and authenticated by the Trustee as hereinafter
provided. Subject to the limitation set forth in Section 301, the principal
amounts of the Global Notes may be increased or decreased from time to time by
adjustments made on the records of the Trustee as custodian for the Depository,
as hereinafter provided.
Notes (including the Trustee's certificate of authentication)
exchanged for beneficial interests in a Global Note as described in Section 312
shall be issued in the form of permanent certificated securities in registered
form in substantially the form set forth in Sections 202 through 204 hereto
("Physical Notes").
The Notes and the Trustee's certificate of authentication shall be in
substantially the respective forms set forth in this Article, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture, and may have such letters, CUSIP or
other numbers or other marks of identification and such legends or endorsements
placed thereon as may be required to comply with the rules of the Depository or
any securities exchange or as may, consistently herewith, be determined by the
officers executing such Notes, as evidenced by their execution of the Notes.
Any portion of the text of any Note may be set forth on the reverse thereof,
with an appropriate reference thereto on the face of the Note.
SECTION 202. FORM OF FACE OF NOTE.
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A NOTE
REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR IN PART MAY BE REGISTERED,
IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITORY OR A NOMINEE THEREOF,
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
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CALLON PETROLEUM COMPANY
___% SENIOR SUBORDINATED NOTE DUE 2004
$________________________ CUSIP No. 13123X AF 9
CALLON PETROLEUM COMPANY, a Delaware corporation (herein called the
"Company" which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to CEDE &
CO., or registered assigns, the principal sum of ________________________
Dollars on September 15, 2004 and to pay interest thereon at the rate of ___%
per annum from _______________, 1999 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, quarterly on the
fifteenth (15th) day of each March, June, September and December commencing
September 15, 1999 (each an "Interest Payment Date"), until the principal
hereof is paid or made available for payment.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, except as provided in the Indenture hereinafter
referred to, be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the Regular Record
Date for such interest, which shall be the first (1st) day of March, June,
September, and December (whether or not a Business Day), as the case may be,
next preceding such Interest Payment Date. Any such interest not so punctually
paid or duly provided for shall forthwith cease to be payable to the Holder on
such Regular Record Date and either may be paid to the Person in whose name
this Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such defaulted interest to
be fixed by the Trustee, notice whereof shall be given to the Holders not less
than ten days prior to such Special Record Date, or may be paid at any time in
any other lawful manner, all as more fully provided in the Indenture.
Payment of the principal of and interest on this Note will be made at
the Office or Agency of the Company maintained for that purpose in New York,
New York, or in such other Office or Agency as may be established by the
Company pursuant to the Indenture (initially the principal corporate trust
office of the Trustee in New York, New York (the "Corporate Trust Office")), in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however,
that payment of interest on Physical Notes on any Interest Payment Date other
than at Maturity may be made at the option of the Company by check mailed to
the address of the Person entitled thereto as such address shall appear in the
Note Register. Payments of principal and interest at Maturity will be made
against presentation of this Note at the Corporate Trust Office (or such other
office as may be established pursuant to the Indenture).
Reference is hereby made to the further provisions of this Note set
forth on the reverse side hereof, which further provisions shall for all
purposes have the same effect as though fully set forth at this place.
Unless the Certificate of Authentication hereon has been executed by
the Trustee or an Authenticating Agent under the Indenture referred to on the
reverse hereof by the manual signature of one of its authorized officers, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name by the manual or facsimile signature of its Chief Executive Officer,
its President, its Treasurer or one of its Vice Presidents and its corporate
seal, or a facsimile thereof, to be impressed, imprinted or reproduced hereon,
attested by the manual or facsimile signature of its Secretary or one of its
Assistant Secretaries.
Date:
CALLON PETROLEUM COMPANY
By
--------------------------------------
President
[Corporate Seal]
ATTEST:
---------------------------
Secretary
SECTION 203. FORM OF REVERSE OF NOTE.
CALLON PETROLEUM COMPANY
___% SENIOR SUBORDINATED NOTE DUE 2004
This Note is one of a duly authorized issue of Notes of the Company
designated as its ___% Senior Subordinated Notes due 2004 (herein called the
"Notes') limited in aggregate principal amount to $40,000,000 issued and to be
issued under an Indenture dated as of ________________, 1999 (herein called the
"Indenture"), between the Company and American Stock Transfer & Trust Company,
as Trustee (herein called the "Trustee," which term includes any successor
Trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights thereunder of the Company, the Trustee and the Holders of the Notes, and
the terms upon which the Notes are, and are to be, authenticated and delivered.
The indebtedness of the Company evidenced by the Notes, including the
principal thereof and interest thereon (including post-default interest), is
expressly subordinated, to the extent and to the manner set forth in the
Indenture, in right of payment to the prior payment in full of all of the
Company's obligations to holders of Senior Indebtedness. Each Holder of Notes,
by acceptance thereof, (a) agrees to and shall be bound by such provisions of
the Indenture and all other provisions of the Indenture; (b) authorizes and
directs the Trustee to take such action on such Holder's behalf as may be
necessary or appropriate to effectuate the subordination of the Notes as
provided in the Indenture; and (c) appoints the Trustee as such Holder's
attorney-in-fact for any and all such purposes.
The Notes may not be redeemed by the Company prior to March 15, 2001.
On or after March 15, 2001, the Notes may be redeemed, at the option of the
Company, in whole at any time or from time to time in part in increments of
$1,000, at 100% of the principal amount thereof, without premium, together with
interest thereon accrued to such
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Redemption Date. If fewer than all Notes are redeemed, the Trustee will select
the Notes to be redeemed by lot or such other method as the Trustee may deem
fair and appropriate.
Notice of redemption shall be given to the Holders of Notes to be
redeemed by mailing a notice of such redemption not less than 30 or more than
60 days prior to the Redemption Date at their addresses as they shall appear on
the Note Register, all as provided in the Indenture.
If this Note (or a portion hereof) is duly called for redemption and
funds for payment are duly provided, this Note (or such portion hereof) shall
cease to bear interest from and after such Redemption Date.
Interest installments whose Stated Maturity is on the Redemption Date
will be payable to the Holders of such Notes, or one or more Predecessor Notes,
of record at the close of business on the relevant Regular Record Date referred
to on the face hereof, all as provided in the Indenture. In the event of
redemption or repayment of this Note in part only, a new Note or Notes for the
unredeemed or unrepaid portion hereof shall be issued in the name of the Holder
hereof upon the surrender hereof.
Except as may be provided in the Indenture, if an Event of Default
with respect to the Notes shall occur and be continuing, the Trustee or the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Notes may declare the principal of all the Notes due and payable in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration and its consequences may, in certain events, be annulled by the
Holders of a majority in aggregate principal amount of the Outstanding Notes.
The Indenture contains provisions for (i) defeasance at any time of
the entire indebtedness of the Company on this Note and (ii) discharge from
certain restrictive covenants and the related Defaults and Events of Default,
upon compliance by the Company with certain conditions set forth therein, which
provisions apply to this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time Outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time Outstanding,
on behalf of the Holders of all Notes, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of
such consent or waiver is made upon this Note. Without the consent of any
Holder, the Company and the Trustee may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes and to
make certain other specified changes and other changes that do not adversely
affect the interests of any Holder.
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<PAGE> 28
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note
at the times, places and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note may be registered on the Note
Register of the Company, upon surrender of this Note for registration of
transfer at the Office or Agency of the Company maintained for such purpose
pursuant to the Indenture, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Note
Registrar, and duly executed by the Holder hereof or such Holder's attorney
duly authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to
the designated transferee or transferees.
The Notes are issuable only in registered form, without coupons, in
denominations of $1,000 or any amount in excess thereof which is an integral
multiple of $1,000. As provided in the Indenture, and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes in authorized denominations, as requested by the
Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
A director, officer, employee, incorporator, shareholder or Affiliate
of the Company, as such, past, present or future shall not have any personal
liability under this Note or the Indenture by reason of his or its status as
such director, officer, employee, incorporator, shareholder or Affiliate, or
any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder, by accepting this Note, waives and
releases all such liability. Such waiver and release are part of the
consideration for the issuance of this Note.
Prior to the due presentment of this Note for registration of transfer
or exchange, the Company, the Trustee and any agent of the Company or the
Trustee may treat the Person in whose name this Note is registered as the owner
hereof for all purposes, whether or not this Note be overdue, and neither the
Company, the Trustee, nor any such agent shall be affected by notice to the
contrary.
Each Holder of a Note covenants and agrees by such Holder's acceptance
thereof to comply with and be bound by the foregoing provisions.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to the Company at
200 North Canal Street, Natchez, Mississippi 39120.
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<PAGE> 29
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Notes as a convenience to the Holders thereof. No representation
is made as to the accuracy of such numbers as printed on the Notes and reliance
may be placed only on the other identifying information printed hereon.
Interest on this Note shall be computed on the basis of a 360-day year
comprised of twelve 30-day months.
This Note shall be governed by and construed in accordance with the
laws of the State of New York.
SECTION 204. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
Subject to Section 612, the Trustee's certificate of authentication
shall be in substantially the following form:
This is one of the Notes referred to in the within mentioned
Indenture.
Authentication Date: AMERICAN STOCK TRANSFER &
--------------- TRUST COMPANY, as Trustee
By
--------------------------------------
Authorized Signatory
ARTICLE THREE
THE NOTES
SECTION 301. TITLE AND TERMS.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $40,000,000, except for Notes
authenticated and delivered upon transfer of, or in exchange for, or in lieu of
other Notes pursuant to Sections 304, 305, 306, 905 and 1107.
The Notes shall be known and designated as the "____% Senior
Subordinated Notes due 2004" of the Company. The Stated Maturity of all
principal shall be September 15, 2004, and they shall bear interest from the
date and at the rate per annum specified in, and such interest shall be payable
on the dates specified in, the form of Note set forth in Sections 202 and 203,
until the principal thereof is paid or made available for payment.
The principal of and interest on the Notes shall be payable at the
Office or Agency of the Company in New York, New York ("Place of Payment")
maintained for such purposes pursuant to Section 1002; provided, however, that,
at the option of the Company,
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<PAGE> 30
payment of interest on Physical Notes on any Interest Payment Date other than
at Maturity may be made (subject to collection) by check mailed to the address
of the Person entitled thereto as such address shall appear on the Note
Register. Payments of principal and interest at Maturity shall be made against
presentation of Notes at such Office or Agency.
The Notes shall be redeemable prior to their Stated Maturity as
provided in Article Eleven.
The Notes shall be subject to defeasance at the option of the Company
as provided in Article Twelve.
The Notes shall be subordinated in right of payment to Senior
Indebtedness, whether outstanding at the date of this Indenture or thereafter
created, as provided in Article Thirteen.
SECTION 302. CURRENCY; DENOMINATIONS.
The principal of and interest on the Notes shall be payable in Money.
Notes shall be issuable in registered form only without coupons in
denominations of $1,000 and any integral multiple thereof.
SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
Notes shall be executed on behalf of the Company by its Chairman of
the Board, one of its Vice Chairmen of the Board, its Chief Executive Officer,
its President, its Treasurer or one of its Vice Presidents under its corporate
seal impressed, imprinted or reproduced thereon and attested by its Secretary
or one of its Assistant Secretaries. The signature of any of these officers on
the Notes may be manual or facsimile.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Notes, executed by the Company, to the
Trustee for authentication and, provided that a Company Order for the
authentication and delivery of such Notes has been delivered to the Trustee,
the Trustee, in accordance with the Company Order and subject to the provisions
hereof, shall authenticate and deliver such Notes.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form provided for in Section
204 or 612 executed by or on behalf of the Trustee by the manual signature of
one of its authorized signatories or by an Authenticating Agent. Such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder.
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SECTION 304. TEMPORARY NOTES.
Pending the preparation of definitive Notes, the Company may execute
and deliver to the Trustee and, upon Company Order, the Trustee shall
authenticate and deliver temporary Notes which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Notes in lieu of
which they are issued, in registered form and with such appropriate insertions,
omissions, substitutions and other variations as the officers of the Company
executing such Notes may determine, as conclusively evidenced by their
execution of such Notes. Such temporary Notes may be in global form.
Except in the case of temporary Notes in global form, which shall be
exchanged in accordance with the provisions thereof, if temporary Notes are
issued, the Company shall cause definitive Notes to be prepared without
unreasonable delay. After the preparation of definitive Notes, such temporary
Notes shall be exchangeable for such definitive Notes upon surrender of such
temporary Notes at an Office or Agency for such Notes, without charge to any
Holder thereof. Upon surrender for cancellation of any one or more temporary
Notes, the Company shall execute and the Trustee shall authenticate and deliver
in exchange therefor a like principal amount of definitive Notes of authorized
denominations. Unless otherwise provided in or pursuant to this Indenture with
respect to a temporary Global Note, until so exchanged the temporary Notes
shall in all respects be entitled to the same benefits under this Indenture as
definitive Notes.
SECTION 305. REGISTRATION, TRANSFER AND EXCHANGE.
The Company shall cause to be kept a register (herein sometimes
referred to as the "Note Register") at an Office or Agency maintained pursuant
to Section 1002 in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of the Notes and of
transfers of the Notes. The Trustee is hereby initially appointed as Note
Registrar for the Notes. In the event that the Trustee shall cease to be Note
Registrar it shall have the right to examine the Note Register at all
reasonable times.
Upon surrender for registration of transfer of any Note at the Office
or Agency of the Company, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Notes, denominated as authorized in this
Indenture, of a like aggregate principal amount bearing a number not
contemporaneously outstanding and containing identical terms and provisions.
Furthermore, any Holder of a Global Note shall, by acceptance of such
Global Note, be deemed to have agreed that transfers of beneficial interests in
such Global Note may be effected only through a book-entry system maintained by
the Depository (or its agent), and that ownership of a beneficial interest in a
Global Note shall be required to be reflected in a book entry.
At the option of the Holder, Notes may be exchanged for other Notes,
in any authorized denominations, and of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such Office or Agency. Whenever any
Notes are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Notes which the Holder making the
exchange is entitled to receive.
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All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company evidencing the same debt
and entitling the Holders thereof to the same benefits under this Indenture as
the Notes surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
for exchange or redemption shall (if so required by the Company or the Note
Registrar for such Note) be duly endorsed by, or be accompanied by a written
instrument of transfer in form satisfactory to the Company and the Note
Registrar duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Notes, other than exchanges
pursuant to Section 304, 905 or 1107 not involving any transfer.
Neither the Trustee nor the Company shall not be required (1) to
issue, register the transfer of or exchange any Physical Notes during a period
beginning at the opening of business 15 calendar days before the day of the
selection for redemption of Notes under Section 1103 and ending at the close of
business on the day of the mailing of the relevant notice of redemption, or (2)
to register the transfer of or exchange any Physical Note so selected for
redemption in whole or in part, except in the case of any Physical Note to be
redeemed in part, the portion thereof not to be redeemed.
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If any mutilated Note is surrendered to the Trustee, subject to the
provisions of this Section, the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a new Note containing identical
terms and of like principal amount and bearing a number not contemporaneously
outstanding.
If there be delivered to the Company and to the Trustee (1) evidence
to their satisfaction of the destruction, loss or theft of any Note, and (2)
such indemnity as may be required by them to save each of them and any agent of
either of them harmless, then, in the absence of notice to the Company or the
Trustee that such Note has been acquired by a bona fide purchaser (or any
equivalent person under any applicable statute, rule or regulation or
interpretation then in effect), the Company shall execute and, upon the
Company's request the Trustee shall authenticate and deliver, in exchange for
or in lieu of any such destroyed, lost or stolen Note, a new Note containing
identical terms and of like principal amount and bearing a number not
contemporaneously outstanding.
Notwithstanding the foregoing provisions of this Section, in case any
mutilated, destroyed, lost or stolen Note has become or is about to become due
and payable or redeemed by the Company pursuant to Article Eleven hereof, the
Company in its discretion may, instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be
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imposed in relation thereto and any other expenses (including the fees and
expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an additional original
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any and
all other Notes duly issued hereunder.
The provisions of this Section, as amended or supplemented pursuant to
this Indenture, shall be exclusive and shall preclude (to the extent lawful)
all other rights and remedies with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Notes.
SECTION 307. PAYMENT OF INTEREST, RIGHTS TO INTEREST PRESERVED.
Any interest on any Note which shall be payable and is punctually paid
or duly provided for on any Interest Payment Date shall be paid to the Person
in whose name such Note (or one or more Predecessor Notes) is registered as of
the close of business on the Regular Record Date for such interest.
Any interest on any Note which shall be payable, but shall not be
punctually paid or duly provided for, on any Interest Payment Date for such
Note (herein called "Defaulted Interest") shall forthwith cease to be payable
to the Holder thereof on the relevant Regular Record Date by virtue of having
been a Holder on such date; and such Defaulted Interest may be paid by the
Company, at its election in each case, as provided in Clause (1) or (2) below.
(1) The Company may elect to make payment of any Defaulted
Interest to the Person in whose name such Note (or a Predecessor Note thereof)
shall be registered at the close of business on a Special Record Date for the
payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on such Note and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of Money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit on or prior to the date of the proposed payment,
such Money when so deposited to be held in trust for the benefit of the Person
entitled to such Defaulted Interest as in this Clause provided. Thereupon, the
Trustee shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 10 days prior
to the date of the proposed payment and not less than 10 days after the receipt
by the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the name and at
the expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to the Holder of such Note (or a Predecessor Note
thereof) at such Holder's address as it appears in the Note Register not less
than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company cause a similar
notice to be published at least once in an Authorized Newspaper of general
circulation in each Place of Payment, but such publication shall not be a
condition precedent to the establishment of such Special Record Date and the
failure of a
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Holder to observe such published notice shall not entitle such Holder to
additional benefits or interest with respect to such Holder's Notes. Notice of
the proposed payment of such Defaulted Interest and the Special Record Date
therefor having been mailed as aforesaid, such Defaulted Interest shall be paid
to the Person in whose name such Note (or a Predecessor Note thereof) shall be
registered at the close of business on such Special Record Date and shall no
longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice as
may be required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this Clause, such payment shall be
deemed practicable by the Trustee.
At the option of the Company, Defaulted Interest may be paid (i) by
mailing a check to the address of the Person entitled thereto as such address
shall appear in the Note Register, in the case of any Physical Note, or (ii) by
wire transfer to an account maintained by the Person entitled thereto as
specified in the Note Register.
Subject to the foregoing provisions of this Section and Section 305,
each Note delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Note shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Note.
SECTION 308. PERSONS DEEMED OWNERS.
Prior to due presentment of a Note for registration of transfer or
exchange, the Company, the Trustee, the Note Registrar, and any agent of the
Company or the Trustee may treat the Person in whose name such Note is
registered in the Note Register as the owner of such Note for the purpose of
receiving payment of principal of, premium, if any, and (subject to Sections
305 and 307) interest on such Note and for all other purposes whatsoever,
whether or not any payment with respect to such Note shall be overdue, and
neither the Company, nor the Trustee, the Note Registrar, or any agent of the
Company or the Trustee shall be affected by notice to the contrary.
No holder of any beneficial interest in any Global Note held on its
behalf by a Depository shall have any rights under this Indenture with respect
to such Global Note, and such Depository may be treated by the Company, the
Trustee, and any agent of the Company or the Trustee as the owner of such
Global Note for all purposes whatsoever. None of the Company, the Trustee, any
Paying Agent or the Note Registrar will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of a Global Note or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
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SECTION 309. CANCELLATION.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the
Trustee, be delivered to the Trustee, and any such Notes, as well as Notes
surrendered directly to the Trustee for any such purpose, shall be canceled
promptly by the Trustee. The Company may at any time deliver to the Trustee for
cancellation any Notes previously authenticated and delivered hereunder which
the Company may have acquired in any manner whatsoever, and all Notes so
delivered shall be canceled promptly by the Trustee. No Notes shall be
authenticated in lieu of or in exchange for any Notes canceled as provided in
this Section, except as expressly permitted by this Indenture. All canceled
Notes held by the Trustee shall be disposed of as directed by a Company Order
or in accordance with the Trustee's usual practice; provided, however, that the
Trustee shall not be required to destroy canceled Securities.
SECTION 310. AUTHENTICATION AND DELIVERY OF ORIGINAL ISSUE.
Forthwith upon the execution and delivery of this Indenture, or from
time to time thereafter, Notes up to the aggregate principal amount of
$40,000,000 may be executed by the Company and delivered to the Trustee for
authentication, and shall thereupon be authenticated and delivered by the
Trustee upon Company Order, without any further action by the Company.
SECTION 311. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
SECTION 312. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTE
Each Global Note shall be registered in the name of the Depository for
such Global Note or the nominee of such Depository and be delivered to the
Trustee as custodian for such Depository.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under such
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company, or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by the Depository or
shall impair, as between the Depository and its Agent Members, the operation of
customary practices governing the exercise of the rights of a holder of any
Note.
Transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to the Depository, its successors or
their respective nominees. Interests of beneficial owners in a Global Note may
be transferred or exchanged for Physical Notes in accordance with the rules and
procedures of the Depository. Physical Notes shall be transferred to all
beneficial owners in exchange for their beneficial interests in a Global Note
if, and only if, either (1) the Depository notifies the Company that it is
unwilling or unable to continue as depository for the Global Note and a
successor
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depository is not appointed by the Company within 90 days of such notice, or
(2) an Event of Default has occurred and is continuing and the Note Registrar
has received a request from the Depository to issue Physical Notes in lieu of
all or a portion of the Global Note (in which case the Company shall deliver
Physical Notes within 30 days of such request).
In connection with the transfer of an entire Global Note to beneficial
owners pursuant to this Section, the Global Note shall be deemed to be
surrendered to the Trustee for cancellation, and the Company shall execute, and
the Trustee shall authenticate and deliver, to each beneficial owner identified
by the Depository, in exchange for its beneficial interest in the Global Note,
an equal aggregate principal amount of Physical Notes of authorized
denominations.
The Holder of the Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of registration of transfer or exchange
of Notes, as expressly provided for in this Indenture) as to all Outstanding
Notes, and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture when
(a) either
(1) all Notes theretofore authenticated and
delivered (other than (i) Notes which have been mutilated,
destroyed, lost or stolen and which have been replaced or
paid as provided in Section 306 and (ii) Notes for whose
payment Money or Government Obligations have theretofore been
deposited in trust with the Trustee or any Paying Agent or
segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, as
provided in Section 1003) have been delivered to the Trustee
for cancellation; or
(2) all such Notes not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their
Stated Maturity within one year, or
(iii) are to be called for redemption within
one year under arrangements satisfactory to the
Trustee for the giving of notice of
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redemption by the Trustee in the name, and at the
expense, of the Company,
and the Company, in the case of clause (2)(i), (2)(ii) or
(2)(iii) above, has irrevocably deposited or caused to be
deposited with the Trustee Money in an amount sufficient to
pay and discharge the entire indebtedness on such Notes not
theretofore delivered to the Trustee for cancellation, for
principal, premium, if any, and interest to the date of such
deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the
case may be, together with instructions from the Company
irrevocably directing the Trustee to apply such Money to the
payment thereof at maturity or redemption, as the case may
be;
(b) the Company has paid or caused to be paid all other sums
then due and payable hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, which, taken together,
state that all conditions precedent herein relating to the
satisfaction and discharge of this Indenture have been
complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607, the obligations of
the Trustee to any Authenticating Agent under Section 612 and, if Money and/or
Government Obligations shall have been deposited with the Trustee pursuant to
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 1003, all
Money and Government Obligations deposited with the Trustee pursuant to Section
401 and all Money received by the Trustee in respect of Government Obligations
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal, premium, if any,
and interest for whose payment such Money has or Government Obligations have
been deposited with or received by the Trustee.
ARTICLE FIVE
REMEDIES
SECTION 501. EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or be effected by operation of law pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
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(1) default in the payment of any interest on any Note when such
interest becomes due and payable, and continuance of such default for a period
of 30 days, whether or not such payment is prohibited by the provisions of
Article Thirteen; or
(2) default in the payment of the principal of (or premium, if any,
on) any Note when it becomes due and payable at its Maturity, whether or not
such payment is prohibited by the provisions of Article Thirteen; or
(3) default in the performance, or breach, of any covenant or
agreement of the Company in this Indenture or the Notes (other than a covenant
or warranty a default in the performance or the breach of which is elsewhere in
this Section specifically dealt with), and continuance of such default or
breach for a period of 30 days after there has been given, by registered or
certified mail, to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the Outstanding
Notes a written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder; or
(4) default in the payment at Stated Maturity of any Indebtedness for
Money Borrowed of the Company or any Restricted Subsidiary in principal amount
due at Stated Maturity in excess of $2,500,000, and such default shall
continue, without being cured or waived to and without such Indebtedness for
Money Borrowed being discharged, for a period of 30 days beyond any applicable
period of grace; or
(5) the occurrence of an event of default as defined in any mortgage,
indenture or instrument under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness for Money Borrowed of the Company or
any Restricted Subsidiary (or the payment of which is guaranteed by the
Company), whether such Indebtedness for Money Borrowed now exists or shall
hereafter be created, provided, however, that no such event of default shall
constitute an Event of Default hereunder unless the effect of such event of
default is to cause the acceleration of such Indebtedness for Money Borrowed
prior to its Stated Maturity, which together with the principal amount of any
such other Indebtedness for Money Borrowed so caused to be accelerated,
aggregates $2,500,000 or more at any one point in time and such default shall
not have been cured or waived and such acceleration shall not have been
rescinded or annulled within a period of 30 days from the occurrence of such
acceleration; or
(6) the entry by a court or agency or supervisory authority having
competent jurisdiction of:
(a) a decree or order for relief in respect of the Company or
any Material Subsidiary in an involuntary proceeding under any applicable
bankruptcy, insolvency, reorganization or other similar law and such decree or
order shall remain unstayed and in effect for a period of 60 consecutive days;
or
(b) a decree or order adjudging the Company or any Material
Subsidiary to be insolvent, or approving a petition seeking reorganization,
arrangement, adjustment or composition of the Company or any Material
Subsidiary and such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or
(c) a decree or order appointing any Person to act as a
custodian, receiver, liquidator, assignee, trustee or other similar official of
the Company or any
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Material Subsidiary or of any substantial part of the Property of the Company
or any Material Subsidiary, as the case may be, or ordering the winding up or
liquidation of the affairs of the Company or any Material Subsidiary and such
decree or order shall remain unstayed and in effect for a period of 60
consecutive days; or
(7) the commencement by the Company or any Material Subsidiary of a
voluntary proceeding under any applicable bankruptcy, insolvency,
reorganization or other similar law or of a voluntary proceeding seeking to be
adjudicated insolvent or the consent by the Company or any Material Subsidiary
to the entry of a decree or order for relief in an involuntary proceeding under
any applicable bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any insolvency proceedings against it, or the filing by
the Company or any Material Subsidiary of a petition or answer or consent
seeking reorganization or relief under any applicable law, or the consent by
the Company or any Material Subsidiary to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or similar official of the Company or any Material Subsidiary
or any substantial part of the Property of the Company or any Material
Subsidiary or the making by the Company or any Material Subsidiary of an
assignment for the benefit of creditors, or the taking of corporate action by
the Company or any Material Subsidiary in furtherance of any such action; or
(8) a final judgment, judicial decree or order for the payment of
money in excess of $2,500,000 shall be rendered against the Company or any
Material Subsidiary and such judgment, decree or order shall continue
unsatisfied for a period of 30 days without a stay of execution.
SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If any Event of Default (other than an Event of Default specified in
Section 501(6) or 501(7)) occurs and is continuing, the Trustee or the Holders
of not less than 25% in aggregate principal amount of the Notes then
Outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the Holders), may, and the Trustee upon the request of the
Holders of not less than 25% in aggregate principal amount of the Outstanding
Notes shall, by a notice in writing to the Company, declare all unpaid
principal of, premium, if any, and accrued and unpaid interest on all the Notes
to be due and payable immediately, upon which declaration all amounts payable
in respect of the Notes shall be immediately due and payable. If an Event of
Default specified in Section 501(6) or 501(7) occurs and is continuing, the
amounts described above shall become and be immediately due and payable without
any declaration, notice or other act on the part of the Trustee or any Holder.
At any time after a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in aggregate principal amount of the Notes Outstanding, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay,
(1) all overdue interest on all Outstanding Notes,
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(2) all unpaid principal of (and premium, if any, on) any
Outstanding Notes which have become due otherwise than by
such declaration of acceleration and interest on such unpaid
principal at the rate borne by the Notes,
(3) to the extent that payment of such interest is lawful,
interest on overdue interest and overdue principal at the
rate borne by the Notes (without duplication of any amount
paid or deposited pursuant to clauses (1) and (2) above), and
(4) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel;
(b) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction as certified to the Trustee by the
Company; and
(c) all Events of Default, other than the non-payment of amounts
of principal of (or premium, if any) or interest on Notes which have become due
solely by such declaration of acceleration, have been cured or waived as
provided in Section 513.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Notwithstanding the foregoing, if an Event of Default specified in
Section 50l(4) or 501(5) shall have occurred and be continuing, such Event of
Default and any consequential acceleration shall be automatically rescinded if
the Indebtedness for Money Borrowed that is the subject of such Event of
Default has been repaid, or if the default relating to such Indebtedness is
waived or cured and if such Indebtedness has been accelerated, then the holders
thereof have rescinded their declaration of acceleration in respect of such
Indebtedness (provided, in each case, that such repayment, waiver, cure or
rescission is effected within a period of 30 days from the continuation of such
default beyond the applicable grace period or the occurrence of such
acceleration), and written notice of such repayment, or cure or waiver and
rescission, as the case may be, shall have been given to the Trustee by the
Company and countersigned by the holders of such Indebtedness for Money
Borrowed or a trustee, fiduciary or agent for such holders or other evidence
satisfactory to the Trustee of such events is provided to the Trustee, within
30 days after any such acceleration in respect of the Notes, and so long as
such rescission of any such acceleration of the Notes does not conflict with
any judgment or decree as certified to the Trustee by the Company.
SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
(a) default is made in the payment of any installment of interest
on any Note when such interest becomes due and payable and such default
continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or
premium, if any, on) any Note at the Maturity thereof, the Company will, upon
demand of the Trustee, pay to the Trustee for the benefit of the Holders of
such Notes, the whole amount then due and
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payable on such Notes for principal, premium, if any, and interest, and, to the
extent that payment of such interest shall be legally enforceable, upon any
overdue installment of interest and overdue principal (and premium, if any), at
the rate borne by the Notes (without duplication of any amount paid pursuant to
the preceding clauses of this Section 503(b)), and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Notes and collect the money
adjudged or decreed to be payable in the manner provided by law out of the
Property of the Company or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes,
their creditors or the Property of the Company or of such other obligor, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company or such other
obligor for the payment of overdue principal, premium, if any, or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such other papers or documents and take any other actions including
participation as a full member of any creditor or other committee as may be
necessary or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(b) subject to Article Thirteen, to collect and receive any money or
other Property payable or deliverable on any such claims and to distribute the
same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 607.
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Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name and as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes in respect of which such judgment has been recovered.
SECTION 506. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in the case of the distribution of such money on account of principal, premium,
if any, or interest, upon presentation of the Notes and the notation thereon of
the payment if only partially paid and upon surrender thereof if fully paid;
FIRST: to the payment of all amounts due the Trustee under
Section 607;
SECOND: subject to Article Thirteen, to the payment of the
amounts then due and unpaid for principal of (premium, if any, on) and
interest on the Notes in respect of which or for the benefit of which
such money has been collected, ratably, without preference or priority
of any kind, according to the amounts due and payable on such Notes
for principal, premium, if any, and interest, respectively; and
THIRD: subject to Article Thirteen, the balance, if any, to
the Company.
SECTION 507. LIMITATION ON SUITS.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount of
the Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
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(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority or more in
aggregate principal amount of the Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture (but subject to
Article Thirteen), the Holder of any Note shall have the right, which is
absolute and unconditional, to receive payment, as provided herein and in such
Note of the principal of (premium, if any, on) and (subject to Section 307)
interest on, such Note on the respective Stated Maturities expressed in such
Note (or, in the case of redemption, on the Redemption Date) and to institute
suit for the enforcement of any such payment, and such rights shall not be
impaired without the consent of such Holder.
SECTION 509. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereunder and all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
SECTION 510. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
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SECTION 511. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 512. CONTROL BY HOLDERS.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Notes shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, provided that
(a) such direction shall not be in conflict with any rule of law or
with this Indenture,
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(c) the Trustee need not take any action which might involve it in
personal liability or be unduly prejudicial to the Holders not joining therein.
SECTION 513. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Notes, by Act of such Holders, may on behalf of the Holders
of all the Notes waive any existing Default or Event of Default hereunder and
its consequences, except a Default or Event of Default on any Note,
(a) in respect of the payment of the principal of (premium, if any, on)
or interest on any Note, or
(b) in respect of a covenant or provision hereof which under Article
Nine hereof cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected thereby.
Upon any such waiver, such Default or Event of Default shall cease to
exist for every purpose under this Indenture, but no such waiver shall extend to
any subsequent or other Default or Event of Default or impair any right
consequent thereon. Any such waiver may (but need not) be given in connection
with a tender offer or exchange offer for the Notes.
SECTION 514. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Note by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any
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party litigant in such suit of an undertaking to pay the costs of such suit, and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having due
regard to the merits and good faith of the claims or defenses made by such party
litigant; but the provisions of this Section shall not apply to any suit
instituted by the Company, to any suit instituted by the Trustee, to any suit
instituted by any Holder, or group of Holders, holding in the aggregate more
than 25% in aggregate principal amount of the Outstanding Notes, or to any suit
instituted by any Holder for the enforcement of the payment of the principal of
(premium, if any, on) or interest on any Note on or after the respective Stated
Maturities expressed in such Note (or, in the case of redemption, on or after
the Redemption Date).
SECTION 515. WAIVER OF STAY, EXTENSION OR USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, plead or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension, or usury law or other law
wherever enacted, now or at any time hereafter in force, which would prohibit or
forgive the Company from paying all or any portion of the principal of (premium,
if any, on) or interest on the Notes as contemplated herein, or which may affect
the covenants or the performance of this Indenture; and (to the extent that it
may lawfully do so) the Company hereby expressly waives all benefit or advantage
of any such law, and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES.
(1) Except during the continuance of an Event of Default,
(a) the Trustee undertakes to perform such duties, and only
such duties, as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the Trustee;
and
(b) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture.
(2) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
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(3) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(a) this Subsection shall not be construed to limit the effect
of Subsection (1) of this Section;
(b) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(c) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the Outstanding
Notes, relating to the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture with respect to the Notes, provided such
direction shall not be in conflict with any rule of law or with this Indenture;
and
(d) no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(4) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
SECTION 602. NOTICE OF DEFAULTS.
Within 90 days after the occurrence of any Event of Default hereunder,
the Trustee shall transmit to the Holders of Notes, in the manner and to the
extent provided in Section 313(c) of the Trust Indenture Act, notice of such
Event of Default hereunder known to the Trustee, unless such Event of Default
shall have been cured or waived; provided, however, that, except in the case of
an Event of Default in the payment of the principal of (premium, if any, on) or
interest on any Note, the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determines that the withholding of such notice is in the interest of the Holders
of Notes.
SECTION 603. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of Section 601 hereof:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, coupon or other paper or document reasonably believed by it to be genuine
and to have been signed or presented by the proper party or parties;
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(2) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or a Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless other
evidence shall be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(4) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders of Notes pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, fees, expenses and liabilities which might be incurred by it,
including reasonable fees of counsel, in complying with such request or
direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, coupon or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts or
matters as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine, during
business hours and upon reasonable notice, the books, records and premises of
the Company, personally or by agent or attorney; and
(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.
SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES.
The recitals contained herein and in the Notes, except the Trustee's
certificate of authentication, shall be taken as the statements of the Company
and neither the Trustee nor any Authenticating Agent assumes any responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Notes, except that the Trustee
represents that it is duly authorized to execute and deliver this Indenture,
authenticate the Notes and perform its obligations hereunder and that the
statements made by it in a Statement of Eligibility and Qualification on Form
T-1 supplied to the Company are true and accurate, subject to the qualifications
set forth therein. Neither the Trustee nor any Authenticating Agent shall be
accountable for the use or application by the Company of the Notes or the
proceeds thereof.
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SECTION 605. MAY HOLD NOTES.
The Trustee, any Authenticating Agent, any Paying Agent, any Note
Registrar or any other Person that may be an agent of the Trustee or the
Company, in its individual or any other capacity, may become the owner or
pledgee of Notes and, subject to Sections 310(b) and 311 of the Trust Indenture
Act, may otherwise deal with the Company with the same rights it would have if
it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or such
other agent.
SECTION 606. MONEY HELD IN TRUST.
Except as provided in Section 402 and Section 1003, Money held by the
Trustee in trust hereunder need not be segregated from other funds except to the
extent required by law. The Trustee shall be under no liability for interest on
any Money received by it hereunder except as otherwise agreed with the Company.
So long as no Event of Default shall have occurred and be continuing, all
interest allowed on any such Money shall be paid to the Company from time to
time upon receipt by the Trustee of a Company Order except as otherwise provided
in this Indenture.
SECTION 607. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by the Trustee hereunder (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable costs, expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
expenses and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to the Trustee's willful
misconduct, negligence or bad faith; and
(3) to indemnify the Trustee and its agents for, and to hold
them harmless against, any loss, liability or expense incurred without
negligence or bad faith on their part, arising out of or in connection with the
acceptance or administration of the trust hereunder, including the costs and
expenses of defending themselves against any claim or liability in connection
with the exercise or performance of any of their powers or duties hereunder.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Notes upon all Money
and other property held or collected by the Trustee as such, except Money and
other property held in trust for the payment of principal of (premium, if any,
on) and interest on the Notes.
When the Trustee incurs expenses or renders services in connection with
an Event of Default specified in Section 501(6) or Section 501(7), the expenses
(including the reasonable compensation, expenses and disbursements of its
counsel) and the compensation for the services are intended to constitute
expenses of administration under any applicable federal or state bankruptcy,
insolvency or other similar law.
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The obligations of the Company under this Section to compensate and
indemnify the Trustee and each predecessor Trustee and to pay or reimburse the
Trustee and each predecessor Trustee for expenses, disbursements and advances
shall constitute an additional obligation hereunder and shall survive the
satisfaction and discharge of this Indenture and the resignation or removal of
the Trustee and each predecessor Trustee.
SECTION 608. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder that is a Corporation
organized and doing business under the laws of the United States, authorized
under such laws to exercise corporate trust powers, or any other Person
permitted by the Trust Indenture Act to act as trustee under an indenture
qualified under the Trust Indenture Act and that has a combined capital and
surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture
Act) of at least $10,000,000. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
SECTION 609. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(1) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee pursuant
to Section 610.
(2) The Trustee may resign at any time by giving written
notice thereof to the Company. If the instrument of acceptance by a successor
Trustee required by Section 610 shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment of
a successor Trustee.
(3) The Trustee may be removed at any time by Act of the
Holders of not less than a majority in aggregate principal amount of the
Outstanding Notes delivered to the Trustee and the Company.
(4) If at any time:
(a) the Trustee shall fail to comply with the
obligations imposed upon it under Section 310(b) of the Trust Indenture Act
after written request therefor by the Company or any Holder of a Note who has
been a bona fide Holder of a Note for at least six months, or
(b) the Trustee shall cease to be eligible under
Section 608 and shall fail to resign after written request therefor by the
Company or by any Holder of the Notes who has been a bona fide Holder of a Note
for at least six months, or
(c) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or control
of the Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
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then, in any such case, (i) the Company, by or pursuant to a Board Resolution,
may remove the Trustee, or (ii) subject to Section 315(e) of the Trust
Indenture Act, any Holder of a Note who has been a bona fide Holder of a Note
for at least six months may, on behalf of such Holder and all others similarly
situated, petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor Trustee.
(5) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by or pursuant to a Board Resolution, shall promptly
appoint a successor Trustee. If, within one year after such resignation, removal
or incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of not less than a majority in aggregate
principal amount of the Outstanding Notes delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment in accordance with the applicable requirements of
Section 610, become the successor Trustee and supersede the successor Trustee
appointed by the Company. If no successor Trustee shall have been so appointed
by the Company or the Holders of Notes and accepted appointment in the manner
required by Section 610, any Holder of a Note who has been a bona fide Holder of
a Note for at least six months may, on behalf of such Holder and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(6) The Company shall give notice of (i) each resignation and
each removal of the Trustee and each appointment of a successor Trustee pursuant
to this Section and (ii) each succession pursuant to Section 611 hereof, in each
case by mailing written notice of such event by first-class mail, postage
prepaid, to the Holders of Notes as their names and addresses appear in the Note
Register. Each notice shall include the name of the successor Trustee and the
address of its Corporate Trust Office.
SECTION 610. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Upon the appointment hereunder of any successor Trustee, such successor
Trustee so appointed shall execute, acknowledge and deliver to the Company and
the retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties hereunder of the retiring
Trustee; but, on the request of the Company or such successor Trustee, such
retiring Trustee, upon payment of all amounts due it under Section 607, shall
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all Money and other property held
by such retiring Trustee hereunder.
Upon request of any Person appointed hereunder as a successor Trustee,
the Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts referred to in this Section.
No Person shall accept its appointment hereunder as a successor Trustee
unless at the time of such acceptance such successor Person shall be qualified
and eligible under this Article.
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SECTION 611. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS.
Any Corporation into which the Trustee may be merged or converted or
with which it may be Consolidated, or any Corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
Corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such Corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto; provided, however, such Corporation shall
notify the Company of its succession as Trustee pursuant to this Section as soon
as practicable. In case any Notes shall have been authenticated but not
delivered by the Trustee then in office, any successor by merger, conversion or
consolidation to such authenticating Trustee may adopt such authentication and
deliver the Notes so authenticated with the same effect as if such successor
Trustee had itself authenticated such Notes.
SECTION 612. APPOINTMENT OF AUTHENTICATION AGENT.
The Trustee, with the prior written consent of the Company and after
giving notice of the appointment described in this Section 612 in the manner
provided in Section 106 to all Holders of Notes, may appoint one or more
Authenticating Agents with respect to the Notes which shall be authorized to act
on behalf of the Trustee to authenticate Notes issued upon original issue,
exchange, registration of transfer, partial redemption or pursuant to Section
306, and Notes so authenticated shall be entitled to the benefits of this
Indenture and shall be valid and obligatory for all purposes as if authenticated
by the Trustee hereunder. Wherever reference is made in this Indenture to the
authentication and delivery of Notes by the Trustee or the Trustee's certificate
of authentication, such reference shall be deemed to include authentication and
delivery on behalf of the Trustee by an Authenticating Agent and a certificate
of authentication executed on behalf of the Trustee by an Authenticating Agent.
Each Authenticating Agent shall be acceptable to the Company and shall
at all times be a Corporation (organized and doing business under the laws of
the United States, authorized under such laws to act as Authenticating Agent)
that would be permitted by the Trust Indenture Act to act as trustee under an
indenture qualified under the Trust Indenture Act, is authorized under
applicable law and by its charter to act as an Authenticating Agent and has a
combined capital and surplus (computed in accordance with Section 310(a)(2) of
the Trust Indenture Act) of at least $10,000,000. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect specified in this Section.
Any Corporation into which an Authenticating Agent may be merged or
converted or with which it may be Consolidated, or any Corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any Corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall be the successor of
such Authenticating Agent hereunder, provided such Corporation shall be
otherwise eligible under this Section, without the execution or filing of any
paper or any further act on the part of the Trustee or the Authenticating Agent.
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An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 106 to all Holders of Notes, if
any, as their names and addresses appear in the Note Register. Any successor
Authenticating Agent, upon acceptance of its appointment hereunder, shall become
vested with all the rights, powers and duties of its predecessor hereunder, with
like effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible under the provisions of
this Section.
The Company agrees to pay each Authenticating Agent from time to time
reasonable compensation for its services under this Section. If the Trustee
makes such payments, it shall be entitled to be reimbursed for such payments,
subject to the provisions of Section 607.
The provisions of Sections 308, 604 and 605 shall be applicable to each
Authenticating Agent.
If an Authenticating Agent is appointed pursuant to this Section, the
Notes may have endorsed thereon, in addition to or in lieu of the Trustee's
certificate of authentication, an alternate certificate of authentication in the
following form:
This is one of the Notes referred to in the within mentioned Indenture.
Authentication Date: , Authenticating Agent
---------------- -----------------
By:
-------------------------------------
Authorized Signatory
SECTION 613. CONFLICTING INTERESTS.
The Trustee shall comply with the provisions of Section 310(b) of the
Trust Indenture Act; provided, however, there shall be excluded from the
operation of Section 310(b)(1) of the Trust Indenture Act any indenture or
indentures under which other securities or certificates of interest or
participation in other securities of the Company are outstanding (including,
without limitation, the 2001 Indenture and the 2002 Indenture) if the
requirements for such exclusion set forth in Section 310(b)(1) of the Trust
Indenture Act are met.
SECTION 614. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor under the Notes), the Trustee shall be subject to the
provisions of the Trust
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Indenture Act regarding the collection of claims against the Company (or any
such other obligor).
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company shall furnish or cause to be furnished to the Trustee
(1) semi-annually no later than June 15 and December 15 of
each year, a list, in each case in such form as the Trustee may reasonably
require, of the names and addresses of Holders as of the preceding June 1 or
December 1, as the case may be, and
(2) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the time
such list is furnished,
provided, however, that so long as the Trustee is the Note Registrar no such
list shall be required to be furnished for Notes for which the Trustee acts as
Note Registrar.
SECTION 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS.
The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Notes contained in the most
recent list furnished to the Trustee as provided in Section 701 and the names
and address of Holders of Notes received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
The rights of Holders of Notes to communicate with other Holders of
Notes with respect to their rights under this Indenture or under the Notes and
the corresponding rights and privileges of the Trustee, shall be as provided by
the Trust Indenture Act.
Every Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that neither the Company, the Trustee, any Paying
Agent or any Note Registrar or any agent of any of them shall be held
accountable by reason of the disclosure of information as to the names and
addresses of the Holders of Notes made pursuant to the Trust Indenture Act,
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under Section 312(b) of the Trust Indenture Act.
SECTION 703. REPORTS BY TRUSTEE.
(1) Within 60 days after May 15 of each year, if required by
Section 313(a) of the Trust Indenture Act, the Trustee shall transmit, pursuant
to Section 313(c) of the Trust Indenture Act, a brief report dated as of such
May 15 with respect to any of the events specified in said Section 313(a) which
may have occurred since the later of the immediately preceding May 15 and the
date of this Indenture.
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(2) The Trustee shall transmit the reports required by Section
313(b) of the Trust Indenture Act at the times specified therein.
(3) Reports pursuant to this Section shall be transmitted in
the manner and to the Persons required by Sections 313(c) and 313(d) of the
Trust Indenture Act.
SECTION 704. REPORTS BY COMPANY.
The Company shall:
(1) file with the Trustee, within 30 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of said Sections, then the Company shall file with the Trustee and the
Commission, in accordance with rules and regulations prescribed from time to
time by the Commission, such of the supplementary and periodic information,
documents and reports which may be required pursuant to Section 13 of the
Exchange Act in respect of a Note listed and registered on a national securities
exchange as may be prescribed from time to time in such rules and regulations;
provided that notwithstanding the requirements of such rules and regulations, so
long as any Note is Outstanding the Company shall file with the Trustee at a
minimum (a) as soon as practicable, but in any event no more than one hundred
twenty (120) days, after the end of each fiscal year, copies of a balance sheet
and statements of income and retained earnings of the Company as of the end of
and for such fiscal year, audited by Independent Public Accountants, and (b) as
soon as practicable, but in any event no more than forty-five (45) days, after
the end of each quarterly fiscal period, except for the last quarterly fiscal
period in each fiscal year, a summary statement (which need not be audited) of
income and retained earnings of the Company for such period;
(2) file with the Trustee and the Commission, in accordance
with rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the
Company, as the case may be, with the conditions and covenants of this Indenture
as may be required from time to time by such rules and regulations;
(3) transmit to the Holders of Notes within 30 days after the
filing thereof with the Trustee, in the manner and to the extent provided in
Section 313(c) of the Trust Indenture Act, such summaries of any information,
documents and reports required to be filed by the Company pursuant to paragraphs
(1) and (2) of this Section as may be required by rules and regulations
prescribed from time to time by the Commission; provided that notwithstanding
the requirements of such rules and regulations, so long as any Note is
Outstanding the Company shall transmit to the Holders of Notes, within 30 days
after the filing thereof with the Trustee, in the manner and to the extent
provided in Section 313(c) of the Trust Indenture Act, the information,
documents and other reports required to be filed by the Company pursuant to
paragraph (1) of this Section; provided further that in lieu of any Annual
Report on Form 10-K or Quarterly Report on Form 10-Q, the Company may transmit
an annual or quarterly report, respectively, containing
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financial statements and an undertaking to transmit such Form 10-K or Form 10-Q,
as the case may be, to any Holder upon request; and
(4) furnish to the Trustee the Officers' Certificates required
by Section 1011 hereof.
ARTICLE EIGHT
CONSOLIDATION, MERGER AND SALES
SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
Nothing contained in this Indenture shall prevent any consolidation or
merger of the Company with or into any other Person or Persons (whether or not
affiliated with the Company), or successive consolidations or mergers in which
the Company or its successor or successors shall be a party or parties, or shall
prevent any conveyance, transfer or lease of the property of the Company as an
entirety or substantially as an entirety, to any other Person (whether or not
affiliated with the Company); provided, however, that:
(1) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease all or substantially all its
properties and assets to any Person, the entity formed by such consolidation or
into which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, all or substantially all the properties and assets of
the Company (the "Surviving Entity") shall be a Person organized and existing
under the laws of the United States and shall expressly assume, by an indenture
supplemental hereto, executed by the Surviving Entity and delivered to the
Trustee, in form satisfactory to the Trustee, the due and punctual payment of
the principal of (and premium, if any, on) and interest on all the Notes and the
performance of every other covenant of this Indenture on the part of the Company
to be performed or observed;
(2) except in the case of the consolidation or merger of the
Company with or into a Restricted Subsidiary or any Restricted Subsidiary with
or into the Company or any Restricted Subsidiary, immediately before and
immediately after giving effect to such transaction or transactions on a pro
forma basis (on the assumption that the transaction or transactions occurred on
the first day of the period of four full fiscal quarters ending immediately
prior to the consummation of such transaction or transactions, with the
appropriate adjustments with respect to the transaction or transactions being
included in such pro forma calculation), the Company (or the Surviving Entity if
the Company is not the continuing obligor under this Indenture) could incur
$1.00 of additional Indebtedness for Money Borrowed under Section 1007 hereof;
(3) immediately after giving effect to such transaction, no
event which, after notice or lapse of time, or both, would become an Event of
Default shall have occurred and be continuing; and
(4) either the Company or the successor Person shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
stating that such consolidation, merger, conveyance, transfer or lease and such
supplemental indenture comply with this Article and that all conditions
precedent herein provided for relating to such transaction have been complied
with.
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SECTION 802. SUCCESSOR PERSON SUBSTITUTED FOR COMPANY.
Upon any consolidation or merger or any conveyance, transfer or lease
of all or substantially all the properties and assets of the Company to any
Person in accordance with Section 801, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein;
and thereafter, except in the case of a lease to another Person, the predecessor
Person shall be released from all obligations and covenants under this Indenture
and the Notes.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holder of Notes, the Company (when
authorized by or pursuant to a Board Resolution) and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental
hereto, which shall conform with the requirements of the Trust Indenture Act as
then in effect and be in form satisfactory to the Trustee, for any of the
following purposes:
(1) to evidence the succession of another Person to the
Company, and the assumption by any such successor of the covenants of the
Company herein and in the Notes; or
(2) to add to or change any of the provisions of this
Indenture to change or eliminate any restrictions on the payment of principal of
(or premium, if any, on) or interest on Notes or to permit or facilitate the
issuance of Notes in uncertificated form, provided any such action shall not
adversely affect the interests of the Holders of Notes in any material respect;
or
(3) to cure any ambiguity or to correct or supplement any
provision herein which may be defective or inconsistent with any other provision
herein, or to make any other provisions with respect to matters or questions
arising under this Indenture which shall not adversely affect the interests of
the Holders of Notes in any material respect; or
(4) to supplement any of the provisions of this Indenture to
such extent as shall be necessary to permit or facilitate the discharge or
defeasance of any Notes pursuant to Article Four or Twelve; provided that any
such action shall not adversely affect the interests of any Holder of a Note in
any material respect; or
(5) to add to the covenants of the Company for the benefit of
the Holders of the Notes (as shall be specified in such supplemental indenture
or indentures) or to surrender any right or power herein conferred upon the
Company; or
(6) to evidence and provide acceptance of the appointment of a
successor Trustee hereunder; or
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(7) to add any additional Events of Default; or
(8) to comply with the requirements of the Commission in
connection with the qualification of this Indenture under the Trust Indenture
Act; or
(9) to make any change that does not adversely affect the
interests of any Holder of Notes.
SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Notes, by Act of said Holders
delivered to the Company and the Trustee, the Company (when authorized by or
pursuant to a Board Resolution), and the Trustee may enter into one or more
indentures supplemental hereto (which shall conform with the requirements of the
Trust Indenture Act as then in effect) for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of this
Indenture or of modifying in any manner the rights of the Holders of Notes under
this Indenture; provided, however, that no such supplemental indenture, without
the consent of the Holder of each Outstanding Note, shall
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount payable
upon the redemption thereof or otherwise, or reduce the rate of interest
thereon, or change the Place of Payment, currency in which the principal of (or
premium, if any, on) or interest on, is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or
(2) reduce the percentage in aggregate principal amount of the
Outstanding Notes, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is required for
any waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, or Section
513 or Section 1012, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Note affected thereby; or
(4) modify any provisions of this Indenture relating to the
relative ranking of the Notes in a manner adverse to the Holders thereof.
It shall not be necessary for any Act of Holders of Notes under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trust created by this
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Indenture, the Trustee shall be entitled to receive, and (subject to Section
601) shall be fully protected in relying upon, an Opinion of Counsel stating
that the execution of such supplemental indenture is authorized or permitted by
this Indenture. The Trustee may, but shall not be obligated to, enter into any
such supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of a Note theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
SECTION 905. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee in exchange for
Outstanding Notes.
SECTION 906. EFFECT ON SENIOR INDEBTEDNESS.
No supplemental indenture shall adversely affect the rights of the
holders of Senior Indebtedness under Article Thirteen unless expressly consented
to in writing by or on behalf of such holders or by any specified percentage of
holders of a class of Senior Indebtedness required to consent thereto pursuant
to the terms of the agreement or instrument creating, evidencing or governing
such Senior Indebtedness, in which event such supplemental indenture shall be
binding on all successors and assigns of such holders and on all persons who
become holders of such Senior Indebtedness issued after the date of such
amendment or modification.
SECTION 907. RECORD DATE.
If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other action, the Company
may, but shall not be obligated to, fix a record date for the purpose of
determining the Holders entitled to consent to any supplemental indenture,
agreement or instrument or any waiver, and shall promptly notify the Trustee of
any such record date. If a record date is fixed those Persons who were Holders
at such record date (or their duly designated proxies), and only those Persons,
shall be entitled to consent to such supplemental indenture, agreement or
instrument or waiver or to revoke any consent previously given, whether or not
such Persons continue to be Holders after such record date. The record date
shall be a date no more than 30 days prior to the first solicitation of Holders
generally in connection therewith and no later than the date such solicitation
is completed. No such consent shall be valid or effective for more than six
months after such record date. Subject to applicable law, until any supplemental
indenture, agreement, instrument or waiver becomes effective, or a consent to it
by a Holder of a Note shall cease to be valid and effective as set forth in the
preceding sentence, such consent is a continuing consent by
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the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the consenting Holder's Note.
ARTICLE TEN
COVENANTS
SECTION 1001. PAYMENT OF PRINCIPAL AND INTEREST.
The principal of (and premium, if any) and interest on the Notes shall
be payable at the Office or Agency of the Company in New York, New York ("Place
of Payment") maintained for such purposes pursuant to Section 1002; provided,
however, that, at the option of the Company, payment of interest on certificated
Notes on any Interest Payment Date other than at Maturity may be made (subject
to collection) by check mailed to the address of the Person entitled thereto as
such address shall appear on the Note Register. Payments of principal, premium,
if any, and interest at Maturity shall be made against presentation of Notes at
such Office or Agency. The Company will duly and punctually pay the principal of
(and premium, if any, on) and interest on the Notes in accordance with the terms
thereof and this Indenture. Principal, premium, if any, and interest shall be
considered paid on the date due if by 11:00 a.m., Eastern time, on such date the
Trustee or Paying Agent (other than the Company or its Affiliates) holds in
accordance with this Indenture Money sufficient to pay all principal, premium,
if any, and interest then due and the Trustee or the Paying Agent, as the case
may be, is not prohibited from paying such Money to the Holders of Notes on that
date pursuant to the terms of this Indenture.
SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in each Place of Payment an Office or Agency
where Notes may be presented or surrendered for payment, where Notes may be
surrendered for registration, transfer or exchange and where notices and demands
to or upon the Company in respect of the Notes and this Indenture may be served.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such Office or Agency. The Company hereby
initially designates the Corporate Trust Office of the Trustee as its Office or
Agency for each of the foregoing purposes. If at any time the Company shall fail
to maintain any such required Office or Agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office of the Trustee, and
the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
Offices or Agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other Office or
Agency.
SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it shall,
on or before each due date of the principal of (and premium, if any, on) or
interest on the Notes, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum of Money
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sufficient to pay the principal, premium, if any, or interest so becoming due
until such sums shall be paid to such Persons or otherwise disposed of as herein
provided, and shall promptly notify the Trustee of its action or failure so to
act.
Whenever the Company shall have one or more Paying Agents, it shall, on
or prior to each due date of the principal of (or premium, if any, on) or
interest on the Notes, deposit with any Paying Agent a sum of Money sufficient
to pay the principal, premium, if any, or interest so becoming due, such sum to
be held in trust for the benefit of the Persons entitled thereto, and (unless
such Paying Agent is the Trustee) the Company will promptly notify the Trustee
of its action or failure so to act.
The Company shall cause each Paying Agent other than the Trustee or the
Company to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee, subject to the provisions of this Section,
that such Paying Agent shall:
(1) hold all sums held by it for the payment of the principal
of (or premium, if any, on) or interest on Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as provided in this Indenture;
(2) give the Trustee notice of any Event of Default by the
Company (or any other obligor upon the Notes) in the making of any payment of
principal (or premium, if any, on) or interest on the Notes; and
(3) at any time during the continuance of any such Event of
Default, upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent for payment in respect of the
Notes.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same terms as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums. The Trustee and each Paying Agent shall promptly pay to the Company
upon Company Request any Money held by them (other than pursuant to Article
Twelve) at any time in excess of amounts required to pay principal of (or
premium, if any, on) or interest on the Notes.
Any Money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (or premium, if
any, on) or interest on any Note and remaining unclaimed for one year after such
principal, premium, if any, or interest shall have become due and payable shall
be paid to the Company on Company Request, or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust Money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, shall at the
expense of the Company cause to be published once, in an Authorized Newspaper
published in The City of New York, notice
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that such Money remains unclaimed and that, after a date specified therein,
which shall not be less than 30 days from the date of such publication, any
unclaimed balance of such Money then remaining will be repaid to the Company.
SECTION 1004. CORPORATE EXISTENCE.
Subject to Article Eight, the Company shall do or cause to be done all
things reasonably necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the
Company and its Material Subsidiaries; provided, however, that the foregoing
shall not obligate the Company to preserve any such right or franchise if the
Company shall determine that the preservation thereof is no longer desirable in
the conduct of the business of the Company and its Material Subsidiaries, taken
as a whole, and that the loss thereof is not disadvantageous in any material
respect to the Holders of the Notes.
SECTION 1005. MAINTENANCE OF PROPERTIES.
The Company will cause its properties and the properties of its
Material Subsidiaries (other than properties obtained by the Company or any
Material Subsidiary through foreclosure or other resolution of any loan) used or
held for use in the conduct of the business of the Company and its Material
Subsidiaries to be maintained and kept in good condition, repair and working
order (ordinary wear and tear excepted), all as in the judgment of the Company
may be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that the
foregoing shall not prevent the Company or a Material Subsidiary from
discontinuing the operation and maintenance of any of its properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any Material Subsidiary and not disadvantageous
in any material respect to the Holders of the Notes.
SECTION 1006. RESTRICTIONS ON DIVIDENDS, REDEMPTIONS AND OTHER
PAYMENTS.
(a) The Company shall not, either directly or indirectly through any
Restricted Subsidiary, (i) declare or pay any dividend, either in cash or
property, on any shares of its capital stock (except dividends or other
distributions payable solely in shares of capital stock of the Company), (ii)
purchase, redeem or retire any shares of its capital stock or any warrants,
rights or options to purchase or acquire any shares of its capital stock or
(iii) make any other payment or distribution, in respect of the Company's
capital stock (such dividends, purchases, redemptions, retirements, payments and
distributions being herein collectively called "Restricted Payments") if, after
giving effect thereto,
(1) an Event of Default would have occurred; or
(2) (A) the sum of (i) such Restricted Payments plus (ii) the
aggregate amount of all Restricted Payments made during the period after the
date of this Indenture would exceed (B) the sum of (i) 50% of the Company's
Consolidated Net Income subsequent to June 30, 1999 (with 100% reduction for a
loss), plus (ii) the cumulative net proceeds received by the Company from the
issuance or sale after the date of this Indenture of capital stock of the
Company (including in such net proceeds the face amount of any indebtedness that
has been converted into common stock of the Company after the date of this
Indenture).
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(b) Notwithstanding paragraph (a) above, the Company may take the
following actions (so long as no Event of Default shall have occurred and be
continuing):
(i) make Restricted Payments that are not otherwise permitted
pursuant to paragraph (a) above so long as such Restricted Payments do not
exceed $10,000,000 in aggregate amount since the date of this Indenture;
(ii) the payment of regular periodic dividends on any of the
shares of the Series A Preferred Stock of the Company;
(iii) the payment of regular periodic dividends on any of the
shares of the preferred stock of the Company (other than the Series A Preferred
Stock of the Company); and
(iv) the repurchase, redemption or other acquisition or
retirement of any shares of any class of capital stock of the Company or any
Restricted Subsidiary, in exchange for, or out of the aggregate net cash
proceeds of a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of shares of common stock of the Company.
The actions described in clauses (i), (ii), (iii) and (iv) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken in
accordance with this Section and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (2) of paragraph
(a); provided, however, that dividends declared or paid on shares of the
Company's preferred stock described in clause (iii) of this paragraph (b) will
reduce the amount that would otherwise be available for Restricted Payments
under clause (2) of paragraph (a) of this Section 1006 (provided that any
dividend paid pursuant to clause (iii) of this paragraph (b) shall reduce the
amount that would otherwise be available under clause (2) of paragraph (a) when
declared, but not also when subsequently paid pursuant to such clause (iii)).
For purposes of this Section 1006, the amount of any Restricted Payment payable
in property shall be deemed to be the fair market value of such property as
determined by the Board of Directors of the Company.
SECTION 1007. LIMITATIONS ON INDEBTEDNESS FOR MONEY BORROWED.
(a) The Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume, guarantee or become liable (collectively "incur")
with respect to any Indebtedness for Money Borrowed (including Acquired
Indebtedness but excluding Permitted Indebtedness) if, immediately after giving
effect to any such creation, incurrence, assumption or guarantee (including
giving effect to the retirement of any existing Indebtedness for Money Borrowed
from the proceeds of such additional Indebtedness for Money Borrowed):
(i) The ratio of (a) the aggregate amount of the outstanding
Indebtedness for Money Borrowed of the Company and its Restricted
Subsidiaries at the end of the immediately preceding fiscal quarter of
the Company, as determined on a Consolidated basis in accordance with
GAAP, to (b) the Consolidated EBITDA for the immediately preceding four
fiscal quarter of the Company, would exceed 10.0 to 1.0; or
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(ii) The Interest Coverage Ratio would be less than 1.1 to
1.0.
(b) The Company will not permit any Restricted Subsidiary to incur any
Indebtedness for Money Borrowed (except Indebtedness for Money Borrowed to the
Company or another Restricted Subsidiary) that is expressly subordinate in right
of payment to any other Indebtedness for Money Borrowed of such Restricted
Subsidiary.
SECTION 1008. LIMITATION LIENS.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind, except for Permitted Liens, upon any of their respective assets or
properties, whether now owned or acquired after the date of this Indenture, or
any income or profits therefrom to secure any Pari Passu Indebtedness or
Subordinated Indebtedness, unless prior to or contemporaneously therewith the
Notes are directly secured equally and ratably, provided that (1) if such
secured indebtedness is Pari Passu Indebtedness, the Lien securing such Pari
Passu Indebtedness shall be subordinate and junior to, or pari passu with, the
Lien securing the Notes and (2) if such secured indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the Notes at least to the same
extent as such Subordinated Indebtedness is subordinated to the Notes. The
foregoing covenant will not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the properties or assets that were
subject to such Lien prior to the related acquisition by the Company or such
Restricted Subsidiary and was not created, incurred or assumed in contemplation
of such transaction.
SECTION 1009. INSURANCE.
The Company shall carry and maintain, and cause each of its Restricted
Subsidiaries to carry and maintain, insurance with financially sound and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by similarly-situated companies engaged in similar
operations and owning similar properties in similar geographic areas in which
the Company or such Restricted Subsidiary operates, provided that such insurance
is generally available at commercially reasonable rates, and provided further
that the Company or any Restricted Subsidiary may self-insure, or insure through
captive insurers or insurance cooperatives to the extent consistent with prudent
business practices.
SECTION 1010. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or property of the Company or any
Restricted Subsidiary and (2) all material lawful claims for labor, materials
and supplies which, if unpaid, might by law become a Lien upon the property of
the Company or any Restricted Subsidiary; provided, however, that the Company
and its Restricted Subsidiaries shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which appropriate provision has been made in
accordance with GAAP.
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SECTION 1011. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company and within 45 days after the end of each of
the first, second and third quarters of each fiscal year of the Company, an
Officers' Certificate, stating whether or not to the best knowledge of the
signers thereof (one of whom shall be the principal executive officer, the
principal financial officer or the principal accounting officer of the Company)
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder), and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge. In addition, the Company shall deliver to the
Trustee, forthwith upon any of its officers becoming aware of any Default or
Event of Default, an Officers' Certificate specifying such Default or Event of
Default and what action the Company is taking or proposes to take with respect
thereto.
SECTION 1012. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 1005 through 1011 and 1013
through 1015 if, before or after the time for such compliance the Holders of at
least a majority in aggregate principal amount of the Outstanding Notes, by Act
of such Holders, either shall waive such compliance in such instance or
generally shall have waived compliance with such term, provision or condition,
but no such waiver shall extend to or affect such term, provision or condition
except to the extent so expressly waived, and, until such waiver shall become
effective, the obligations of the Company and the duties of the Trustee in
respect of any such term, provision or condition shall remain in full force and
effect.
SECTION 1013. LIMITATION ON RANKING OF FUTURE INDEBTEDNESS.
The Company will not incur (as such term is defined in Section 1007(a))
or permit to remain outstanding any Indebtedness for Money Borrowed (including
Acquired Indebtedness and Permitted Indebtedness) which is expressly subordinate
in right of payment to any Senior Indebtedness, other than Subordinated
Indebtedness or Pari Passu Indebtedness. For purposes of this Section 1013, the
incurrence of Senior Indebtedness which is unsecured shall not, because of its
unsecured status, be deemed to be subordinate in right of payment to any Senior
Indebtedness which is secured.
SECTION 1014. LIMITATIONS ON RESTRICTING SUBSIDIARY DIVIDENDS.
The Company shall not and shall not permit any Restricted Subsidiary
to, directly or indirectly, create or otherwise cause to become effective any
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (a) pay dividends in cash or make any other distribution on its
capital stock to the Company or any other Restricted Subsidiary, (b) pay any
indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans, advances, or capital contributions to the Company or any other Restricted
Subsidiary, or (d) transfer any of its properties or assets to the Company or
another Restricted Subsidiary, except in each instance (i) as set forth in the
instrument evidencing or the agreement governing Acquired Indebtedness of any
acquired Person which becomes a Restricted Subsidiary, provided, that any
restriction or encumbrance
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under such instrument or agreement existed at the time of acquisition, was not
put in place in anticipation of such acquisition, and is not applicable to any
Person, other than the Person or property or assets of the Person so acquired;
(ii) customary provisions of any lease or license of the Company or any
Restricted Subsidiary relating to the property covered thereby and entered into
in the ordinary course of business; (iii) any encumbrance or restriction arising
under applicable law; (iv) any encumbrance or restriction arising under this
Indenture, the Credit Facility, or other indebtedness or other agreements
existing on the Issue Date; (v) any restrictions with respect to a Restricted
Subsidiary imposed pursuant to an agreement that has been entered into for the
sale or disposition of the stock, business, assets or properties of such
Restricted Subsidiary; (vi) any encumbrance or restriction arising under the
terms of purchase money obligations, but only to the extent such purchase money
obligations restrict or prohibit the transfer of the property so acquired; (vii)
any encumbrance or restriction arising under customary non-assignment provisions
in installment purchase contracts; (viii) any encumbrance or restriction on the
ability of any Restricted Subsidiary to transfer any of its property acquired
after the date of this Indenture to the Company or any other Restricted
Subsidiary that is required by a lender to, or purchaser of any indebtedness of,
such Restricted Subsidiary in connection with a financing of the acquisition of
such property (including with respect to the purchase of asset portfolios and
pursuant to the underwriting or origination of mortgage loans) by such
Restricted Subsidiary; and (ix) any encumbrance or restriction pursuant to any
agreement that extends, refinances, renews or replaces any agreement described
in the foregoing clauses (i) through (viii); and except with respect to clause
(d) only, restrictions in the form of Liens which are not prohibited under
Section 1008 and which contain customary limitations on the transfer of
collateral.
SECTION 1015. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any transaction (or series of related transactions),
including, without limitation, the sale, purchase, lease or exchange of any
property or the rendering of any service (a "Transaction"), involving payments
in excess of $50,000, with any Affiliate of the Company (other than the Company
or a Restricted Subsidiary), on terms and conditions less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available at such time in a comparable Transaction in arm's length dealings with
an unrelated Person as determined by the Board of Directors, such approval to be
evidenced by a Board Resolution.
The provisions of the immediately preceding paragraph will not apply
to:
(1) Restricted Payments otherwise permitted under Section
1006;
(2) fees and compensation (including amounts paid pursuant to
employee benefit plans) paid to, and indemnity provided on behalf of, officers,
directors, employees or consultants of the Company or any Restricted Subsidiary,
as determined by the Board of Directors or the senior management thereof in the
exercise of their reasonable business judgment; or
(3) payments for goods and services purchased in the ordinary
course of business on an arm's length basis.
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SECTION 1016. CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes, in
whole or in part, in a principal amount that is an integral multiple of $1,000,
pursuant to the offer described in paragraphs (b) and (c) of this Section 1016
(the "Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Purchase Date"). The Company will not be required to make a
Change of Control Offer upon a Change of Control if a third party makes the
Change of Control Offer at the same purchase price, at the same times and
otherwise in substantial compliance with the requirements applicable to a Change
of Control Offer made by the Company and purchases all Notes validly tendered
and not withdrawn under such Change of Control Offer.
(b) The Change of Control Offer is required to remain open for at least
20 Business Days and until the close of business on the Change of Control
Purchase Date.
(c) Within 30 calendar days after the date of any Change of Control,
the Company, or the Trustee at the request and expense of the Company, shall
send to each Holder, in the manner provided in Section 106, a notice (the
"Change of Control Notice") prepared by the Company describing the transaction
or transactions that constitute the Change of Control and stating:
(i) that a Change of Control has occurred and a Change of
Control Offer is being made pursuant to this Section 1016, and that all
Notes that are timely tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the Change of
Control Purchase Date, which date shall be a Business Day no earlier
than 30 calendar days nor later than 60 calendar days subsequent to the
date such notice is mailed;
(iii) that any Notes or portions thereof not tendered or
accepted for payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the
Change of Control Purchase Price with respect thereto, all Notes or
portions thereof accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest from and after the Change of
Control Purchase Date;
(v) that any Holder electing to have any Notes or portions
thereof purchased pursuant to a Change of Control Offer will be
required to surrender such Notes, with the form to elect purchase by
the Company pursuant to this Section 1016 completed, to the Paying
Agent at the address specified in the notice, prior to the close of
business on the third Business Day preceding the Change of Control
Purchase Date;
(vi) that any Holder shall be entitled to withdraw such
election if the Paying Agent receives, not later than the close of
business on the second Business Day preceding the Change of Control
Purchase Date, a
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facsimile transmission or letter, setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement
that such Holder is withdrawing such Holder's election to have such
Notes or portions thereof purchased pursuant to the Change of Control
Offer;
(vii) that any Holder electing to have Notes purchased
pursuant to the Change of Control offer must specify the principal
amount that is being tendered for purchase, which principal amount must
be $1,000 or an integral multiple thereof;
(viii) if Physical Notes have been issued pursuant to Section
201, that any Holder of Physical Notes whose Physical Notes are being
purchased only in part will be issued new Physical Notes equal in
principal amount to the unpurchased portion of the Physical Notes
surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to
tender Notes and to have such Notes purchased pursuant to this Section
1016.
If any of the Notes subject to a Change of Control Offer is in the form of a
Global Note, then the Company shall modify the Change of Control Notice to the
extent necessary to accord with the procedures of the Depository applicable to
repurchases.
(d) On the Change of Control Payment Date, the Company shall (1) accept
for payment all Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (2) irrevocably deposit with the Paying Agent, by 11:00
a.m., Eastern time, on such date, in immediately available funds, an amount
equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so accepted and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent shall promptly send, in the manner provided in Section
106, to each Holder of Notes or portions thereof so accepted for payment the
Change of Control Purchase Price for such Notes or portions thereof. The Company
shall publicly announce the results of the Change of Control Offer on or as soon
as practicable after the Change of Control Payment Date. For purposes of this
Section 1016, the Trustee shall act as the Paying Agent.
(e) Upon surrender and cancellation of a Physical Security that is
purchased in part pursuant to the Change of Control Offer, the Company shall
promptly issue and the Trustee shall authenticate and deliver to the
surrendering Holder of such Physical Security a new Physical Security equal in
principal amount to the unpurchased portion of such surrendered Physical
Security; provided that each such new Physical Security shall be in a principal
amount of $1,000 or an integral multiple thereof.
(f) The Company shall comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that a Change of Control occurs and the
Company is required to purchase Notes as described in this Section 1016. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions relating to the
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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
under this Section 1016 by virtue thereof.
(g) Prior to complying with the provisions of this Section 1016, but in
any event within 30 days following a Change of Control, the Company shall either
repay all outstanding Senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Indebtedness to permit
the repurchase of Notes required by this Section 1016.
ARTICLE ELEVEN
REDEMPTION OF NOTES
SECTION 1101. RIGHT OF REDEMPTION.
The Notes shall not be redeemable at the option of the Company prior to
March 15, 2001. The Company may, at its option, redeem all or any part of the
Notes at any time on or after March 15, 2001, at the Redemption Price of 100% of
the principal amount thereof, without premium, together with interest accrued to
the Redemption Date. Redemption of Notes at the option of the Company as
permitted hereby shall be made in accordance with the terms of such Notes and
this Article.
SECTION 1102. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Notes shall be evidenced by
or pursuant to a Board Resolution. In case of any redemption at the election of
the Company of less than all of the Notes (including any such redemption
affecting only a single Note), the Company shall, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date and of
the principal amount of Notes to be redeemed. Any election to redeem Notes shall
be revocable until the Company gives a notice of redemption pursuant to Section
1104 to the Holders of Notes to be redeemed.
SECTION 1103. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED.
If less than all the Notes are to be redeemed (unless such redemption
affects only a single Note), the particular Notes to be redeemed shall be
selected not less than 30 days prior to the Redemption Date by the Trustee from
the Outstanding Notes, by lot or such other method as the Trustee shall deem
fair and appropriate and which may provide for the selection for redemption of
portions of the principal amount of Notes; provided, however, that no such
partial redemption shall reduce the portion of the principal amount of a Note
not redeemed to less than the minimum denomination for a Note established
herein.
The Trustee shall promptly notify the Company and the Note Registrar
(if other than itself) in writing of the Notes selected for redemption and, in
the case of any Notes selected for partial redemption, the principal amount
thereof to be redeemed.
The provisions of the two preceding paragraphs shall not apply with
respect to any redemption affecting only a single Note, whether such Note is to
be redeemed in whole or in part. In the case of any such redemption in part, the
unredeemed portion of the
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principal amount of the Note shall be in an authorized denomination (which shall
not be less than the minimum authorized denomination) for such Note.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Notes shall relate, in
the case of any Notes redeemed or to be redeemed only in part, to the portion of
the principal of such Notes which has been or is to be redeemed.
SECTION 1104. NOTICE OF REDEMPTION.
Notice of redemption shall be given in the manner provided in Section
106, not less than 30 nor more than 60 days prior to the Redemption Date, to the
Holders of Notes to be redeemed. Failure to give notice by mailing in the manner
herein provided to the Holder of any Notes designated for redemption as a whole
or in part, or any defect in the notice to any such Holder, shall not affect the
validity of the proceedings for the redemption of any other Notes or portion
thereof.
Any notice that is mailed to the Holder of any Notes in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not such Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if fewer than all Outstanding Notes consisting of more
than a single Note are to be redeemed, the identification (and, in the case of
partial redemption of any such Notes, the principal amounts) of the particular
Notes to be redeemed and, if less than all the Outstanding Notes consisting of a
single Note are to be redeemed, the principal amount of the particular Note to
be redeemed,
(4) that, on the Redemption Date, the Redemption Price shall
become due and payable upon each such Note or portion thereof to be redeemed and
that interest thereon shall cease to accrue on and after said date,
(5) the place or places where such Notes are to be surrendered
for payment of the Redemption Price, and
(6) the CUSIP number of such Notes, if any (or any other
numbers used by a Depository to identify such Notes).
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 1105. DEPOSIT OF REDEMPTION PRICE.
On or before 11:00 a.m., Eastern time, on any Redemption Date, the
Company shall deposit with the Trustee or with a Paying Agent (or, if the
Company is acting as its own
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Paying Agent, segregate and hold in trust as provided in Section 1003) Money in
an amount sufficient to pay the Redemption Price of, and (except if the
Redemption Date shall be an Interest Payment Date) any accrued interest on, all
the Notes or portions thereof which are to be redeemed on that date. Upon
Company Order, the Paying Agent shall promptly return to the Company any Money
so deposited which is not required for such purpose.
SECTION 1106. NOTES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Notes so to be
redeemed shall, on the Redemption Date, become due and payable at the Redemption
Price therein specified, and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such Notes
shall cease to bear interest. Upon surrender of any such Note for redemption in
accordance with said notice, such Note shall be paid by the Company at the
Redemption Price, together with any accrued interest to the Redemption Date;
provided, however, that installments of interest on Notes whose Stated Maturity
is on or prior to the Redemption Date shall be payable to the Holders of such
Notes, or one or more Predecessor Notes, registered as such at the close of
business on the Regular Record Dates therefor according to their terms and the
provisions of Section 307.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any), until paid, shall
bear interest from the Redemption Date at the rate prescribed therefor in the
Note.
SECTION 1107. NOTES REDEEMED IN PART.
Any Note which is to be redeemed only in part shall be surrendered at
the Office or Agency for such Note indicated in the notice of redemption (with,
if the Company or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Trustee duly
executed by, the Holder thereof or such Holder's attorney duly authorized in
writing), and the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such Note, without service charge, a new Note or Notes,
of any authorized denomination as requested by such Holder in aggregate
principal amount equal to and in exchange for the unredeemed portion of the
principal of the Note so surrendered.
SECTION 1108. PURCHASE OF NOTES.
The Company shall have the right at any time and from time to time to
purchase Notes in the open market or otherwise at any price.
ARTICLE TWELVE
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1201. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT
DEFEASANCE.
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 1202 or Section 1203 be
applied to all Outstanding Notes upon compliance with the conditions set forth
below in this Article Twelve.
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SECTION 1202. DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 1201 of the option applicable
to this Section 1202, the Company shall be deemed to have been discharged from
its obligations with respect to all Outstanding Notes on the date the conditions
set forth in Section 1204 hereof are satisfied (hereinafter, "legal
defeasance"). For this purpose, such legal defeasance means that the Company
shall be deemed (i) to have paid and discharged its obligations under the
Outstanding Notes; provided, however, that the Notes shall continue to be deemed
to be "Outstanding" for purposes of Section 1205 and the other Sections of this
Indenture referred to in clauses (A) and (B) below, and (ii) to have satisfied
all their other obligations with respect to such Notes and this Indenture (and
the Trustee, at the expense and direction of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (A) the rights of
Holders of Outstanding Notes to receive, solely from the trust fund described in
Section 1204 hereof and as more fully set forth in such Section, payments in
respect of the principal of (and premium, if any, on) and interest on such Notes
when such payments are due (or at such time as the Notes would be subject to
redemption at the option of the Company in accordance with this Indenture), (B)
the obligations of the Company under Sections 303, 304, 305, 306, 607, 609, 610,
1002, and 1003, (C) the rights, powers, trusts, duties and immunities of the
Trustee hereunder, and (D) the obligations of the Company under this Article
Twelve. Subject to compliance with this Article Twelve, the Company may exercise
its option under this Section 1202 notwithstanding the prior exercise of its
option under Section 1203 with respect to the Notes.
SECTION 1203. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 1201 of the option applicable
to this Section 1203, (i) the Company shall be released from its obligations
under any covenant contained in Article Eight, in Sections 1005 through 1015 and
any covenant added to this Indenture pursuant to Section 901(2), and (ii) the
occurrence of any event specified in Section 501(3) (with respect to any of
Article Eight, Sections 1005 through 1015, and any covenant added to this
Indenture pursuant to Section 901(2)), 501(4), 501(5), or 501(8)) shall be
deemed not to be or result in an Event of Default, in each case with respect to
the Outstanding Notes on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter
be deemed not to be "Outstanding" for the purposes of any direction, waiver,
consent, declaration or other action of any Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"Outstanding" for all other purposes hereunder. For this purpose, such covenant
defeasance means that, with respect to the Outstanding Notes, the Company may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such Section (to the extent so
specified in the case of Section 50l(3) hereof) whether directly or indirectly,
by reason of any reference elsewhere herein to any such Section or by reason of
any reference in any such Section to any other provision herein or in any other
document, but, except as specified above, the remainder of this Indenture and
such Notes shall be unaffected thereby.
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SECTION 1204. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of either Section
1202 or Section 1203 hereof to the Outstanding Notes:
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements of
Section 608 hereof who shall agree to comply with the provisions of this Article
Twelve applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of such Notes, (A) Money in an amount, or (B)
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, Money in an amount, or
(C) a combination thereof, sufficient, in the opinion of a firm of Independent
Public Accountants expressed in a written certification thereof delivered to the
Trustee, to pay and discharge, and which shall be applied by the Trustee (or
other qualifying trustee) to pay and discharge, the principal of (and premium,
if any, on) and interest on the Outstanding Notes on the Stated Maturity thereof
(or Redemption Date, if applicable), provided that the Trustee shall have been
irrevocably instructed in writing by the Company to apply such Money or the
proceeds of such Government Obligations to said payments with respect to the
Notes. Before such a deposit, the Company may give to the Trustee, in accordance
with Section 1102, a notice of its election to redeem all of the Outstanding
Notes at a future date in accordance with Article Eleven, which notice shall be
irrevocable. Such irrevocable redemption notice, if given, shall be given effect
in applying the foregoing.
(b) No Default or Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as Section 501(6) or 501(7)
is concerned, at any time during the period ending on the 91st day after the
date of such deposit.
(c) Such legal defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest under this Indenture or the Trust
Indenture Act with respect to any securities of the Company.
(d) Such legal defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any other material
agreement or instrument to which the Company is a party or by which it is bound,
as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee
concurrently with such deposit.
(e) In the case of an election under Section 1202 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of this Indenture there has been a
change in the applicable federal income tax laws, in either case providing that
the Holders of the Outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such legal defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such legal defeasance had not occurred
(it being understood that (x) such Opinion of Counsel shall also state that such
ruling or applicable law is consistent with the conclusions reached in such
Opinion of Counsel and (y) the Trustee shall be under no obligation to
investigate the basis or correctness of such ruling).
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(f) In the case of an election under Section 1203 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred.
(g) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, which, taken together, state that all
conditions precedent provided for relating to either the legal defeasance under
Section 1202 hereof or the covenant defeasance under Section 1203 (as the case
may be) have been complied with.
SECTION 1205. DEPOSITED MONEY AND GOVERNMENT OBLIGATIONS TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to the provisions of the last paragraph of Section 1003 hereof,
all Money and Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 1205, the "Trustee") pursuant to Section 1204 in respect of the
Outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Holders of such Notes of
all sums due and to become due thereon in respect of principal, premium, if any,
and interest, but such Money need not be segregated from other funds except to
the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the Government Obligations deposited
pursuant to Section 1204 hereof or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Notes.
Anything in this Article Twelve to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any Money or Government Obligations held by it as provided in Section
1204 which, in the opinion of a firm of Independent Public Accountants expressed
in a written certification thereof delivered to the Trustee, are in excess of
the amount thereof which would then be required to be deposited to effect an
equivalent legal defeasance or covenant defeasance as applicable, in accordance
with this Article.
SECTION 1206. REINSTATEMENT.
If the Trustee or any Paying Agent is unable to apply any Money in
accordance with Section 1205 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 1204 until such time as the Trustee or Paying Agent is permitted to
apply all such Money in accordance with Section 1205; provided, however, that if
the Company makes any payment of principal of (or premium, if any, on) or
interest on any Note following the reinstatement of its obligations, the
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Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
ARTICLE THIRTEEN
SUBORDINATION OF NOTES
SECTION 1301. NOTES SUBORDINATE TO SENIOR INDEBTEDNESS.
The Company covenants and agrees, and each Holder of a Note, by his
acceptance thereof, likewise covenants and agrees, for the benefit of the
holders, from time to time, of Senior Indebtedness, that, to the extent and in
the manner hereinafter set forth in this Article, the indebtedness represented
by the Notes and the payment of the principal of (and premium, if any, on) and
interest on each and all of the Notes are hereby expressly made subordinate and
subject in right of payment as provided in this Article to the prior payment in
full of all Senior Indebtedness, whether outstanding on the date of this
Indenture or thereafter created, incurred, assumed or guaranteed; provided,
however, that the Notes, the indebtedness represented thereby and the payment of
the principal of (and premium, if any, on) and interest on the Notes in all
respects shall rank equally with, or prior to, all existing and future unsecured
indebtedness (including, without limitation, Indebtedness for Money Borrowed) of
the Company that is subordinated to Senior Indebtedness.
This Article Thirteen shall constitute a continuing offer to all
Persons who, in reliance upon such provisions, become holders of, or continue to
hold, Senior Indebtedness, and such provisions are made for the benefit of the
holders of Senior Indebtedness, and such holders are made obligees hereunder and
any one or more of them may enforce such provisions.
SECTION 1302. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
Upon any distribution of Properties of the Company or payment on behalf
of the Company with respect to the Notes in the event of any Insolvency or
Liquidation Proceeding with respect to the Company:
(a) the holders of Senior Indebtedness shall be entitled to receive
payment in full of such Senior Indebtedness, or provision must be made for such
payment, before the Holders of the Notes are entitled to receive any direct or
indirect payment or distribution of any kind or character, whether in cash,
property or securities (other than Permitted Junior Securities) on account of
principal of (or premium, if any, on) or interest on the Notes or on account of
the purchase or redemption or other acquisition of Notes; and
(b) any direct or indirect payment or distribution of Properties of the
Company of any kind or character, whether in cash, property or securities (other
than a payment or distribution in the form of Permitted Junior Securities), by
set-off or otherwise, to which the Holders or the Trustee, on behalf of the
Holders, would be entitled but for the provisions of this Article shall be paid
by the Company or by any liquidating trustee or agent or other Person making
such payment or distribution, whether a trustee in bankruptcy, a receiver or
liquidating trustee or otherwise, directly to the holders of Senior Indebtedness
or their representative or representatives or to the trustee or trustees under
any indenture under which any instruments evidencing any of such Senior
Indebtedness
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may have been issued, ratably according to the aggregate amounts remaining
unpaid on account of the Senior Indebtedness held or represented by each, to the
extent necessary to make payment in full of all Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of such Senior
Indebtedness; and
(c) in the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Note shall have received any payment
or distribution of Properties of the Company of any kind or character, whether
in cash, property or securities, by set-off or otherwise, in respect of
principal of (or premium, if any, on) or interest on the Notes before all Senior
Indebtedness is paid or provided for in full, then and in such event such
payment or distribution (other than a payment or distribution in the form of
Permitted Junior Securities) shall be received and held in trust for and shall
be paid over or delivered forthwith to the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company, to the extent necessary to pay all
Senior Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
The consolidation of the Company with, or the merger of the Company
into, another Person or the liquidation or dissolution of the Company following
the sale, assignment, conveyance, transfer, lease or other disposition of all or
substantially all its Properties to another Person or group of Affiliated
Persons pursuant to, and in compliance with, the terms and conditions set forth
in Article Eight hereof shall not be deemed an Insolvency or Liquidation
Proceeding (requiring the repayment of all Senior Indebtedness in full as a
prerequisite to any payments being made to the Holders) for the purposes of this
Section.
SECTION 1303. SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN
DEFAULT.
(a) Upon (1) the occurrence of a Payment Event of Default and (2)
receipt by the Trustee of written notice of such occurrence, then no payment or
distribution of any Properties of the Company of any kind or character (other
than Permitted Junior Securities) shall be made by the Company on account of
principal of (or premium, if any, on) or interest on the Notes or on account of
the purchase or redemption or other acquisition of Notes unless and until such
Payment Event of Default shall have been cured or waived in writing or shall
have ceased to exist or such Specified Senior Indebtedness shall have been paid
in full or otherwise discharged, after which (unless otherwise prohibited by
Section 1302) the Company shall resume making any and all required payments in
respect of the Notes, including any missed payments.
(b) Upon (1) the occurrence of a Non-payment Event of Default with
respect to any Specified Senior Indebtedness and (2) receipt by the Trustee and
the Company of written notice of such occurrence from one or more of the holders
of such Specified Senior Indebtedness (or their representative), then no payment
or distribution of any Properties of the Company of any kind or character (other
than Permitted Junior Securities) shall be made by the Company on account of any
principal of (or premium, if any, on) or interest on the Notes or on account of
the purchase or redemption or other acquisition of Notes for the period
specified below (the "Payment Blockage Period"). The Payment Blockage Period
will commence upon the earlier of the dates of receipt by the Trustee or the
Company of such notice (the "Payment Blockage Notice") from one or more of the
holders of such Specified Senior Indebtedness (or their representative) and
shall end on the earliest of (i) 179 days thereafter, (ii) the date, as set
forth in a written notice from
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the holders of the Specified Senior Indebtedness (or their representative) to
the Company or the Trustee, on which such Non-payment Event of Default is cured,
waived in writing or ceases to exist or such Specified Senior Indebtedness is
discharged or (iii) the date on which such Payment Blockage Period shall have
been terminated by written notice to the Company or the Trustee from one or more
of the holders (or their representative) initiating such Payment Blockage
Period, after which the Company will resume (unless otherwise prohibited
pursuant to the immediately preceding paragraph or Section 1302) making any and
all required payments in respect of the Notes, including any missed payments. In
any event, not more than one Payment Blockage Period may be commenced during any
period of 360 consecutive days. No Non-payment Event of Default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee will be, or can be, made the basis for the commencement of a subsequent
Payment Blockage Period.
(c) In the event that the Trustee or any Holder receives any payment
with respect to the Notes at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by the
foregoing provisions of this Section 1303, then and in such event such payment
shall be paid over and delivered forthwith to the Company.
SECTION 1304 .PAYMENT PERMITTED IF NO DEFAULT.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Notes shall prevent the Company, at any time except during the
pendency of any Insolvency or Liquidation Proceeding referred to in Section 1302
or under the conditions described in Section 1303, from making payments at any
time of principal of (or premium, if any, on) or interest on the Notes.
SECTION 1305. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
After the payment in full of all Senior Indebtedness, the Holders of
the Notes shall be subrogated (equally and ratably with the holders of all
indebtedness of the Company which by its express terms is subordinated to Senior
Indebtedness to substantially the same extent as the Notes are so subordinated
and which is entitled to like rights of subrogation as a result of the payments
made to the holders of Senior Indebtedness) to the rights of the holders of
Senior Indebtedness to receive payments and distributions of cash, property and
securities applicable to Senior Indebtedness until all amounts owing on the
Notes shall be paid in full. For purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness by or on behalf of the
Company or by or on behalf of the Holders by virtue of this Article which
otherwise would have been made to the Holders shall, as between the Company, its
creditors other than holders of Senior Indebtedness, and the Holders of the
Notes, be deemed to be a payment or distribution by the Company to or on account
of the Senior Indebtedness.
SECTION 1306. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.
The provisions of this Article are, and are intended solely, for the
purpose of defining the relative rights of the Holders of the Notes on the one
hand and the holders of Senior Indebtedness on the other hand. Nothing contained
in this Article or elsewhere in this Indenture or in the Notes is intended to or
shall (a) impair, as between the Company and the Holders of the Notes, the
obligation of the Company, which is absolute and unconditional, to pay to the
Holders of the Notes the principal of (and premium, if any,
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on) and interest on the Notes as and when the same shall become due and payable
in accordance with their terms; or (b) affect the relative rights against the
Company of the Holders of the Notes and creditors of the Company other than the
holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any
Note from exercising all remedies otherwise permitted by applicable law upon
default under this Indenture, subject to the rights, if any, under this Article
of the holders of Senior Indebtedness.
SECTION 1307. TRUSTEE TO EFFECTUATE SUBORDINATION.
Each Holder of a Note by his acceptance thereof authorizes and directs
the Trustee on his behalf to take such action as may be necessary or appropriate
to effectuate the subordination provided in this Article and appoints the
Trustee as his attorney-in-fact for any and all such purposes, including, in the
event of any Insolvency or Liquidation Proceeding with respect to the Company,
the immediate filing of a claim for the unpaid balance of his Notes pursuant to
this Indenture in the form required in said proceedings and the causing of said
claim to be approved.
SECTION 1308. NO WAIVER OF SUBORDINATION PROVISION.
(a) No right of any present or future holder of any Senior Indebtedness
to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any non-compliance by
the Company with the terms of this Indenture, regardless of any knowledge
thereof which any such holder may have or be otherwise charged with.
(b) Without in any way limiting the generality of paragraph (a) of this
Section, the holders of any Senior Indebtedness, in accordance with the terms of
the instrument or agreement evidencing their Senior Indebtedness, may, at any
time and from time to time, without the consent of or notice to the Trustee or
the Holders of the Notes, without incurring responsibility to the Holders of the
Notes and without impairing or releasing the subordination or other benefits
provided in this Article, or the obligations hereunder of the Holders of the
Notes to the holders of Senior Indebtedness, do any one or more of the
following: (1) change the manner, place or terms of payment or extend the time
of payment of, or renew, exchange, amend, increase or alter, Senior Indebtedness
or the terms of any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding or any liability of any obligor thereon
(unless such change, extension, amendment, increase or other alteration results
in such Indebtedness no longer being Senior Indebtedness as defined in this
Indenture); (2) sell, exchange, release or otherwise deal with any Property
pledged, mortgaged or otherwise securing Senior Indebtedness; (3) settle or
compromise any Senior Indebtedness or any liability of any obligor thereon or
release any Person liable in any manner for the collection of Senior
Indebtedness; and (4) exercise or refrain from exercising any rights against the
Company and any other Person.
SECTION 1309. NOTICE TO TRUSTEE.
(a) The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Notes. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the
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existence of any facts which would prohibit the making of any payment to or by
the Trustee in respect of the Notes, unless and until the Trustee shall have
received written notice thereof from the Company or one or more of the holders
of Senior Indebtedness (or their representative), with respect to a Payment
Default, or one or more of the holders of Specified Senior Indebtedness (or
their representative), with respect to a Non-payment Event of Default, or from
any trustee, fiduciary or agent therefor; and, prior to the receipt of any such
written notice, the Trustee, subject to Sections 315(a) through 315(d) of the
Trust Indenture Act, shall be entitled in all respects to assume that no such
facts exist; provided, however, that, if the Trustee shall not have received the
notice provided for in this Section prior to 11:00 a.m. Eastern time on the date
which is two Business Days prior to the date upon which by the terms hereof any
Money may become payable for any purpose (including, without limitation, the
payment of the principal of (or premium, if any, on) or interest on any Note),
then, anything herein contained to the contrary notwithstanding, the Trustee
shall have full power and authority to receive such Money and to apply the same
to the purpose for which such Money was received and shall not be affected by
any notice to the contrary which may be received by it on or after 11:00 a.m.
Eastern time two Business Days prior to such payment date.
(b) Subject to Sections 315(a) through 315(d) of the Trust Indenture
Act, the Trustee shall be entitled to rely on the delivery to it of a written
notice by a Person representing himself to be a holder of Senior Indebtedness
(or a trustee, fiduciary or agent therefore) to establish that such notice has
been given by a holder of Senior Indebtedness (or a trustee, fiduciary or agent
therefor). In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any Person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee, for the purpose of ascertaining the
Persons entitled to participate in such payment or distribution, the holders of
Senior Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article.
SECTION 1310. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING
AGENT BANK.
Upon any payment or distribution of assets of the Company referred to
in this Article, the Trustee, subject to Sections 315(a) through 315(d) of the
Trust Indenture Act, and the Holders of the Notes shall be entitled to rely upon
any order or decree entered by any court of competent jurisdiction in which such
Insolvency or Liquidation Proceeding is pending, or a certificate of the trustee
in bankruptcy, receiver, liquidating trustee, custodian, assignee for the
benefit of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders of Notes, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of Senior Indebtedness and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
SECTION 1311. RIGHTS OF TRUSTEE AS A HOLDER OF SENIOR INDEBTEDNESS:
PRESERVATION OF TRUSTEE'S RIGHTS.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness, which
may at any time be held by it,
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to the same extent as any other holder of Senior Indebtedness, and nothing in
this Indenture shall deprive the Trustee of any of its rights as such holder.
Nothing in this Article shall apply to claims of, or payments to, the Trustee
under or pursuant to Section 607.
SECTION 1312. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time a Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1311 hereof shall not apply to the Company or any
Affiliate of the Company if it or such Affiliate acts as Paying Agent.
SECTION 1313. NO SUSPENSION OF REMEDIES.
Nothing contained in this Article shall limit the right of the Trustee
or the Holders of Notes to take any action to accelerate the maturity of the
Notes pursuant to Article Five or to pursue any rights or remedies hereunder or
under applicable law, except as provided in Article Five.
SECTION 1314. TRUST MONEY NOT SUBORDINATED.
Notwithstanding anything contained herein to the contrary, payments
from cash or the proceeds of Government Obligations held in trust under Article
Twelve hereof by the Trustee (or other qualifying trustee) and which were
deposited in accordance with the terms of Article Twelve and not in violation of
Section 1302 or 1303 for the payment of principal of (and premium, if any, on)
and interest on the Notes shall not be subordinated to the prior payment of any
Senior Indebtedness or subject to the restrictions set forth in this Article
Thirteen, and none of the Holders shall be obligated to pay over any such amount
to the Company or any holder of Senior Indebtedness or any other creditor of the
Company.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the day and year first above written.
CALLON PETROLEUM COMPANY
By
-------------------------------------
Name:
Title:
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By
-------------------------------------
Name:
Title:
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 19, 1999 on the financial statements of Callon Petroleum
Company (and to all references to our Firm) included in or made a part of this
Amendment No. 1 to Form S-2 of Callon Petroleum Company.
/s/ ARTHUR ANDERSEN LLP
New Orleans, Louisiana
June 25, 1999
