Exhibit 99.1
Confidential Memorandum
CALLON PETROLEUM COMPANY
Offer to Exchange
9.75% Senior Notes due 2010
(CUSIP No. 13123XAP7)
for
13% Senior Secured Notes due 2016 and shares of Common and Preferred Stock
and
Solicitation of Consent to Amendments to the Existing Indenture
The Exchange Offer will Expire at 5:00 p.m., New York City Time,
on Wednesday, November 18, 2009
Unless Extended or Earlier Terminated by Us
The contact information is listed on page 93.
The Exchange Offer
Callon Petroleum Company currently has outstanding $200 million of 9.75% Senior Notes due
2010, which we refer to as Old Notes. We have authorized a new issuance of $150 million of 13%
Senior Secured Notes due 2016, which we refer to as Exchange Notes. In exchange for the Old
Notes, we are offering:
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the Exchange Notes, |
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an aggregate of 4.125 million shares of our common stock, which we refer to as the
Common Shares, and |
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an aggregate of 337,500 shares of a new issue of preferred stock convertible into
shares of our common stock on a ten-for-one basis, which we refer to as the Preferred
Shares. |
If you validly tender and do not withdraw your Old Notes on or before the expiration date
described below, we will pay you $750 principal amount of Exchange Notes, and 20.625 Common Shares
and 1.6875 Preferred Shares for each $1,000 principal amount of Old Notes. We will pay accrued and
unpaid interest at 9.75% through November 18, 2009 on each Old Note accepted for exchange and at
13% from November 19, 2009 and thereafter on each Exchange Note issued to such holder of such Old
Note, with such interest to be paid on the next scheduled interest payment date of the Exchange
Notes.
The exchange offer:
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expires at 5:00 p.m., New York City time, on Wednesday, November 18, 2009, which we
refer to as the expiration date, unless extended or earlier terminated by us; |
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is conditional upon there being validly tendered and accepted for exchange at least
80% in principal amount of Old Notes; |
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is not subject to any other condition other than that it not violate applicable laws
or any applicable interpretation of the staff of the Securities and Exchange Commission
or the New York Stock Exchange; and |
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provides that Old Notes tendered may be withdrawn at any time before 5:00 p.m., New
York City time, on the expiration date. |
The Exchange Notes
The Exchange Notes will:
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have an interest rate of 13% per annum from November 19, 2009, payable quarterly on
each September 30, December 31, March 31 and June 30; |
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up to September 15, 2012, allow us to repay with the proceeds from a common stock
offering or from the liquidation of our Entrada properties up to 35% of the outstanding
Exchange Notes at 113% of the principal amount thereof, plus accrued and unpaid
interest; |
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permit us to call the Exchange Notes at any time on or after September 15, 2012 at
prices between 106.5% and 100% of the principal amount thereof, plus accrued and unpaid
interest; |
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be secured by a second lien on our oil and gas properties until less than $10
million in principal amount of the Old Notes remain outstanding; |
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mature on September 15, 2016; and |
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have covenants identical to those in the Old Notes in all material respects except
for the changes that we have described more fully in this memorandum. |
The Preferred Shares
The Preferred Shares will:
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be non-voting, participating shares of preferred stock, |
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have a dividend rate of 18% per annum payable semi-annually on each September 15 and
March 15, beginning six months following the closing of the exchange offer, which
dividend rate shall escalate by 1% each semi-annual dividend period if not converted
into common stock, subject to a cap of 25%; |
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be convertible into an aggregate of 3.375 million shares of common stock, and no
dividend shall be payable if the preferred stock is converted before the first dividend
date. |
The Common Shares
Our common stock is listed on the New York Stock Exchange under the symbol CPE. On October
19, 2009, the last reported sale price per share of our common stock on the New York Stock Exchange
was $2.00. The Common Shares to be issued in the exchange offer and the common stock to be issued
upon conversion of the Preferred Shares are expected to be approved for listing on the New York
Stock Exchange. The New York Stock Exchange has notified us that our shares will be subject to
delisting after October 21, 2010, unless we satisfy the continuing listing requirement that the
market value of our common stock owned by non-affiliates exceeds $50 million.
The Consent Solicitation
If you tender your Old Notes in the exchange offer you will be deemed to consent to amendments
to the indenture governing the Old Notes. These amendments would, in substance, (a) eliminate our
obligation to comply with the provisions of Article III. Covenants (except for Sections 3.14(b) and
3.15) and Article IV. Successor Company, (b) eliminate as Events of Default the events described
in Section 6.1(b), 6.1(c)(i) and 6.1(d)-(h), and (c) eliminate Article X. Subsidiary Guarantee and
any reference to the Subsidiary Guarantees or Subsidiary Guarantors. We will execute a
supplement to the indenture governing the Old Notes on the date that we consummate the exchange
offer if we receive consents representing at least a majority of the outstanding principal amount
of Old Notes. If the amendments become operative with respect to the indenture governing the Old
Notes, the amendments will be binding on all non-tendering holders.
ii
See Risk Factors beginning on page 17 of this Confidential Memorandum to read about
important factors you should consider before exchanging the Old Notes for Exchange Notes and Common
and Preferred Shares.
Contact information for the Company and the Information Agent can be found on the last page of
this Confidential Memorandum.
We are making this exchange offer in reliance upon the exemption from registration provided by
Section 3(a)(9) of the Securities Act of 1933, and similar exemptions provided by state securities
laws. As a result, the Exchange Notes, Common Shares and Preferred Shares will have similar
characteristics to the Old Notes with respect to transfers to third parties.
The Exchange Agreement
We have entered into an exchange agreement with holders of 73.5% principal amount of Old
Notes. In the exchange agreement, we agreed to make this exchange offer and the holders of Old
Notes agreed to tender their Old Notes in the exchange offer and to consent to the amendments to
the indenture for the Old Notes in the consent solicitation.
Date of this Confidential Memorandum is October 21, 2009
iii
This memorandum is confidential. You are authorized to use this memorandum solely for the
purpose of considering the exchange offer described herein. We and other sources identified herein
have provided the information contained in this memorandum. You may not reproduce or distribute
this memorandum, in whole or in part, and you may not disclose any of the contents of this
memorandum or use any information herein for any purpose other than considering the purchase of the
Exchange Notes and Common and Preferred Shares. You agree to the foregoing by accepting delivery of
this memorandum.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The distribution of this memorandum and the issuance of the Exchange Notes and Common and
Preferred Shares in the exchange offer may be restricted by law in certain jurisdictions. We
require persons in whose possession this memorandum comes to inform themselves about and to observe
any such restrictions. This memorandum does not constitute an offer of, or an invitation to
purchase, any of the Exchange Notes or Common and Preferred Shares in any jurisdiction in which
such offer or invitation would be unlawful.
iv
TABLE OF CONTENTS
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Page |
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WHERE YOU CAN FIND MORE INFORMATION |
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1 |
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FORWARD-LOOKING STATEMENTS |
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2 |
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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER AND CONSENT SOLICITATION |
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SUMMARY |
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8 |
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COMPARISON OF THE OLD NOTES AND THE EXCHANGE NOTES |
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13 |
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SUMMARY OF EXCHANGE NOTES |
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14 |
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SUMMARY OF PREFERRED STOCK |
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16 |
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RISK FACTORS |
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RATIO OF EARNINGS TO FIXED CHARGES |
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34 |
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USE OF PROCEEDS |
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34 |
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CAPITALIZATION |
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34 |
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY |
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35 |
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THE EXCHANGE OFFER |
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THE CONSENT SOLICITATION |
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THE EXCHANGE AGREEMENT |
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DESCRIPTION OF THE EXCHANGE NOTES |
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41 |
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DESCRIPTION OF CAPITAL STOCK |
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80 |
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COMPARISON OF RIGHTS OF HOLDERS OF OLD NOTES AND HOLDERS OF COMMON AND PREFERRED SHARES |
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84 |
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS |
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85 |
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EXCHANGE AGENT |
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93 |
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INFORMATION AGENT |
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93 |
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v
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission (the SEC). You may read and copy any public offering document
we file with the SEC without charge at the SECs public reference facilities at 100 F Street, N.E.,
Washington, DC 20549.
You can request copies of all, or any portion, of these documents by writing the Public
Reference Section and paying certain prescribed fees. Please call the SEC at 1-800-SEC-0330 for
further information on the Public Reference Section. Additionally, these documents are available to
the public from the SECs web site at http://www.sec.gov. You can also inspect reports, proxy
statements and other information about us at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
You may also obtain information about us, including copies of our SEC reports through our
website www.callon.com. This website address is included in this document as an inactive textual
reference only. Any documents, references, links or other materials of any kind contained or
referred to on such website are not part of this memorandum.
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 memorandum, 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 15(d) of the Securities Exchange Act of 1934 until we terminate or close the
exchange offer, except that unless we indicate otherwise, we are not incorporating any information
furnished under Item 7.01 or Item 2.02 of any Current Report on Form 8-K.
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Our Annual Report on Form 10-K for the year ended December 31, 2008; |
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Our Quarterly Report on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009; and |
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Our Current Reports on Form 8-K filed August 7, 2009, September 2, 2009 and
September 11, 2009. |
You may request a copy of these filings at no cost, by writing or telephoning us at the
following address:
Callon Petroleum Company
200 North Canal Street
Natchez, MS 39120
Attn: Corporate Secretary
Phone: (800) 451-1294 ext. 700
You should rely only on the information provided or incorporated by reference in this
memorandum or any supplement. We have not authorized anyone else to provide you with different
information. We are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information included or incorporated by reference in this
memorandum or any documents incorporated by reference herein is accurate as of any date other than
the date on the front of such document.
FORWARD-LOOKING STATEMENTS
This memorandum contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other
than statements of historical fact are forward-looking statements for purposes of federal and
state securities laws. Forward-looking statements may include the words may, will, plans,
believes, estimates, expects, intends and other similar expressions. Our forward-looking
statements are subject to risks and uncertainty, including those discussed elsewhere in this
report. Forward-looking statements include statements regarding:
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our oil and gas reserve quantities, and the discounted present value of these
reserves; |
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the amount and nature of our capital expenditures; |
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drilling of wells; |
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our ability to consummate the exchange offer; |
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our ability to service our indebtedness, including indebtedness under the Exchange
Notes; |
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the timing and amount of future production and operating costs; |
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business strategies and plans of management; and |
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prospect development and property acquisitions. |
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:
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the current global economic downturn; |
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general economic conditions or including the availability of credit and access to
existing lines of credit; |
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the volatility of oil and natural gas prices; |
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the uncertainty of estimates of oil and natural gas reserves; |
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the impact of competition; |
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the availability and cost of seismic, drilling and other equipment; |
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operating hazards inherent in the exploration for and production of oil and natural
gas; |
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difficulties encountered during the exploration for and production of oil and
natural gas; |
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difficulties encountered in delivering oil and natural gas to commercial markets; |
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changes in customer demand and producers supply; |
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the uncertainty of our ability to attract capital and obtain financing on favorable
terms; |
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compliance with, or the effect of changes in, the extensive governmental regulations
regarding the oil and natural gas business including those related to climate change
and greenhouse gases; |
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actions of operators of our oil and gas properties; and |
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weather conditions. |
Although we believe that the assumptions underlying our forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that
the forward-looking statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the inclusion of such
information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved. Some of these and other risks and
uncertainties that could cause actual results to differ materially from such forward-looking
statements are more fully described under Risk
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Factors and elsewhere in this memorandum, or in
the documents incorporated by reference herein. We assume no obligation to modify or revise any
forward-looking statements to reflect any subsequent events or circumstances arising after the date
that the statement was made.
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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER AND CONSENT SOLICITATION
The following are some of the questions you may have as a holder of the Old Notes and the
answers to those questions. You should refer to the more detailed information set forth in this
memorandum and to which we refer you for more complete information about us and the exchange offer.
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Who is making the exchange offer? |
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Callon Petroleum Company, the issuer of the Old Notes, is making the exchange offer. |
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Why is the Company making the exchange offer? |
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The Old Notes mature in December 2010. Under current economic conditions, we
believe that it will be difficult to refinance the Old Notes, and perhaps impossible.
We are offering the Exchange Notes and Common and Preferred Shares to holders of our
Old Notes as an alternative to the steps we may be required to take if we are unable to
refinance the Old Notes. |
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When will the exchange offer expire? |
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The exchange offer will expire at 5:00 p.m. New York City time, on Wednesday,
November 18, 2009, unless extended or earlier terminated by us. We may extend the
expiration date for any reason, but we will not extend the offer beyond December 31,
2009, unless we have not had the indenture governing the Exchange Notes qualified by
the SEC by such date. If we decide to extend it, we will announce any extensions by
press release or other permitted means no later than 9:00 a.m. on the business day
after the scheduled expiration of the exchange offer. |
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What will I receive in the exchange offer if I tender my Old Notes and they are accepted? |
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For each $1,000 principal amount of Old Notes that we accept in the exchange,
you will, upon the terms and subject to the conditions set forth in this document,
receive $750 principal amount of Exchange Notes, 20.625 Common Shares and 1.6875
Preferred Shares. We will pay accrued and unpaid interest at 9.75% through November 18,
2009 on each Old Note accepted for exchange and at 13% from November 19, 2009 and
thereafter on each Exchange Note issued to such holder of such Old Note, with such
interest to be paid on the next scheduled interest payment date of the Exchange Notes.
The Preferred Shares are convertible into shares of our common stock on a ten-for-one
basis. If you are entitled to a fractional share of common stock, we will round up to
the next whole share. |
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If the exchange offer is consummated but I do not tender my Old Notes, how will my rights be
affected? |
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If you do not exchange your Old Notes in this exchange offer, or if your Old
Notes are not accepted for exchange, you will continue to hold your Old Notes and will
be entitled to all the rights and subject to all the limitations applicable to the Old
Notes but you will not have the rights under the Exchange Notes. If 75% in principal
amount or more of the Old Notes are accepted for exchange, the indenture governing the
Old Notes will be amended as provided herein. Pursuant to the exchange agreement,
holders of 73.5% of our Old Notes have agreed to tender their Old Notes for exchange. |
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In addition, because the Exchange Notes are secured by substantially all of our
assets and the assets of our subsidiaries, any Old Notes that remain outstanding will
effectively be subordinated to the Exchange Notes. |
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What is the purpose of the consent solicitation? |
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We are seeking consent to amendments to the indenture governing the Old Notes
to remove substantially all of the covenants in the Old Notes. The amendments (a)
eliminate our obligation to comply with the provisions of Article III. Covenants
(except for Sections 3.14(b) and 3.15) and Article IV. Successor Company, (b) eliminate
as Events of Default the events described in Section 6.1(b), 6.1(c)(i) and
6.1(d)-(h), and (c) eliminate Article X. Subsidiary Guarantee and any reference to the
Subsidiary Guarantees or Subsidiary Guarantors. |
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May I tender my Old Notes for exchange and object to the amendments requested in the consent
solicitation? |
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No. If you tender and do not withdraw your Old Notes for exchange and we accept
your Old Notes for exchange, you will be deemed to have consented to the amendments to
the indenture governing the Old Notes. |
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What amount of Old Notes is the Company willing to accept in the exchange offer? |
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We are willing to exchange all $200,000,000 of our outstanding Old Notes. |
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What is the minimum amount of Old Notes required to be tendered in the exchange offer? |
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The exchange offer is conditioned upon the valid tender of at least 80% of the
outstanding aggregate principal amount of Old Notes. Pursuant to the exchange
agreement, holders of 73.5% of our Old Notes have agreed to tender their Old Notes in
the exchange offer. |
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Will the Company exchange all of the Old Notes validly tendered? |
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Yes. We will exchange all of the Old Notes validly tendered pursuant to the
terms of the exchange offer. |
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What are the conditions to the completion of the exchange offer? |
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In addition to the condition that at least 80% of the Old Notes be validly
tendered and accepted for exchange, the exchange offer is subject to the condition that
it not violate applicable laws or any applicable interpretation of the staff of the SEC
or the New York Stock Exchange. The exchange offer is also subject to our right to
terminate or withdraw the exchange offer, which we may do in our sole discretion. |
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What are the conditions to the consent solicitation? |
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The consent solicitation will not be effective unless the exchange offer is
consummated. In addition, the amendments to the indenture governing the Old Notes will
not be effective unless 75% or more in principal amount of the Old Notes approves the
amendments, which will occur if 75% or more in principal amount of the Old Notes are
tendered and accepted for exchange by us even if persons who do not exchange their Old
Notes do not vote for the amendments. Pursuant to the exchange agreement, holders of
73.5% of our Old Notes have agreed to tender their Old Notes in the exchange offer. |
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Who may participate in the exchange offer? |
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All holders of the Old Notes may participate in the exchange offer. |
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Do I have to tender all of my Old Notes to participate in the exchange offer? |
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No. You do not have to tender all of your Old Notes to participate in the
exchange offer. Old Notes accepted in the exchange will be retired and cancelled. |
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Will the Exchange Notes and Common and Preferred Shares be freely tradable? |
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The exchange offer is being made to you in reliance on an exemption from
registration provided by Section 3(a)(9) of the Securities Act of 1933. As a result,
the Exchange Notes and Common and Preferred Shares we issue to you in exchange for your
Old Notes will have similar characteristics to the Old Notes with respect to transfers
to third parties. If your Old Notes are freely tradable, the Exchange Notes and Common
and Preferred Shares can be transferred freely. If you are or become an affiliate of
ours as a result of the exchange offer or otherwise, you will be subject to additional
restrictions on your transfer of the Exchange Notes and Common and Preferred Shares you
own. |
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Will the Exchange Notes or Preferred Shares be listed? |
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We have not applied and do not intend to apply for listing of the Exchange
Notes and Preferred Shares on any securities exchange. We expect that the Common Shares
will be approved for listing on the New York Stock Exchange. The New York Stock
Exchange has advised us that our common stock will become subject to delisting after
October 21, 2010, unless we satisfy the exchanges continuing listing criteria that the
market value of our common stock owned by non-affiliates exceeds $50 million. See
Recent Developments below. |
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What risks should I consider in deciding whether or not to tender my Old Notes? |
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In deciding whether to participate in the exchange offer, you should carefully
consider the discussion of risks and uncertainties affecting our business and the
Exchange Notes and Common and Preferred Shares described in the section of this
memorandum entitled Risk Factors, and the documents incorporated by reference into
this memorandum. |
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How do I participate in the exchange offer? |
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In order to exchange Old Notes, you must tender the Old Notes. We describe the
procedures for participating in the exchange offer in more detail in the section titled
The Exchange Offer Procedures for Exchange. |
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May I withdraw my tender of Old Notes? |
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Yes. You may withdraw any tendered Old Notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date of the exchange offer. |
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What happens if my Old Notes are not accepted in the exchange offer? |
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If we do not accept your Old Notes for exchange for any reason, the Old Notes
tendered by book entry transfer into the exchange agents account at The Depository
Trust Company will be credited to your account at DTC. |
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If I decide to tender my Old Notes, will I have to pay any fees or commissions to the Company
or the exchange agent? |
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We will pay transfer taxes, if any, applicable to the transfer of Old Notes
pursuant to the exchange offer. Additionally, we will pay all other expenses related
to the exchange offer. However, we will not pay any commissions or concessions of any
broker or dealer or any other person for soliciting or recommending participation in
the exchange offer. |
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How will I be taxed on the exchange of my Old Notes? |
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Please see the section of this memorandum titled Certain United States Federal
Income Tax Considerations. The tax consequences to you of the exchange offer will
depend on your |
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individual circumstances. You should consult your own tax advisor for a full
understanding of the tax consequences of participating in the exchange offer. |
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Has the Board of Directors adopted a position on the exchange offer? |
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Our Board of Directors has approved the making of the exchange offer. However,
our directors do not make any recommendation as to whether you should tender Old Notes
pursuant to the exchange offer. You must make the decision whether to tender Old Notes
and, if so, how many Old Notes to tender. |
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Who can I call with questions about how to tender my Old Notes? |
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You should direct any questions regarding procedures for tendering Old Notes or
requests for additional copies of this memorandum or the documents incorporated by
reference in this memorandum to Global Bondholder Services. Its address and telephone
number are included on the back cover of this memorandum. |
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SUMMARY
This summary highlights information contained elsewhere in this memorandum and the documents
incorporated by reference. Because it is a summary, it does not contain all of the information that
you should consider before investing in our securities. You should read carefully the entire
memorandum, including the section entitled Risk Factors; the financial statements and related
notes to those financial statements incorporated by reference herein and the documents incorporated
by reference. As used in this memorandum, unless otherwise required by the context, the terms we,
us and our refer to Callon Petroleum Company and its subsidiaries.
Our Business
General
We have been engaged in the exploration, development, acquisition and production of oil and
gas properties since 1950. In the past several years, our activities have been focused in the shelf
and deepwater areas of the Gulf of Mexico. Production from wells in this area is characterized by
high initial production rates and steep decline curves. Accordingly, we are required to make
material expenditures to explore for and discover reserves to replace those produced.
Recent Developments
Disruptions in Capital Markets. The capital markets are experiencing significant disruptions,
and many financial institutions have liquidity concerns, prompting government intervention to
mitigate pressure on the credit markets. Our primary exposure to the current credit market crisis
includes our senior secured revolving credit facility, senior notes and counterparty nonperformance
risks.
Our senior secured revolving credit facility was committed in the amount of $43.7 million as
of June 30, 2009. Subsequent to June 30, 2009, our borrowing base redetermination was completed and
reduced to $35 million due to lower commodity prices and reserves. In addition, (i) a monthly
commitment reduction was implemented commencing September 1, 2009 in the amount of $4.7 million per
month, and (ii) a further limitation was implemented which only permits borrowings in excess of $10
million to be used to fund acquisitions approved by the lenders. If not extended, the credit
facility matures on September 25, 2012, unless the 2010 Senior Notes have not been extended or
refinanced to a maturity date occurring after September 25, 2012 in which case the credit facility
will mature on June 15, 2010. Should current credit market tightening be prolonged for several
years, future extensions of our credit facility may contain terms that are less favorable than
those of our current credit facility. The amounts which may be outstanding under our credit
facility are limited to an amount which is established by our lenders and based on the value of our
proved reserves using prices, costs and other assumptions determined by our lenders. Continued
disruptions in the capital markets could cause our lenders to be more restrictive in calculating
the amount of credit available under the credit facility.
Current market conditions also elevate the concern over counterparty risks related to our
commodity derivative contracts and trade credit. At June 30, 2009, our open commodity derivative
instruments were in a net receivable position with a fair value of $7.1 million. We have all of our
commodity derivative instruments with a major financial institution. Should the financial
counterparty not perform, we may not realize the benefit of some of our derivative instruments
under lower commodity prices and we could incur a loss.
We sell our production to a variety of purchasers. Some of these parties may experience
liquidity problems. Credit enhancements have been obtained from some parties in the way of parental
guarantees or letters of credit; however, we do not have all of our trade credit enhanced through
guarantees or credit support.
Abandonment of the Entrada Project. In late November 2008, we and our joint working interest
owner, CIECO, decided to abandon the Entrada project. Under the terms of our agreements with CIECO,
Callon Entrada is responsible for its share of the costs to plug and abandon the Entrada project,
which we estimate to be $46 million, $23 million net to Callon Entrada. As of June 30, 2009 the
wind down of the Entrada project was substantially complete and most of the costs had been paid. In
addition, prior to abandonment of the project, CIECO failed to
- 8 -
fund two loan requests totaling $40 million under our non-recourse credit agreement with them
stating that it was not required to fund such loans under the terms of the current agreement. CIECO
also failed to fund its working interest share of a settlement payment to terminate a drilling
contract for the Entrada project stating that it was not required to make such payment under the
terms of the operating agreement. Callon made the entire settlement payment.
The CIECO Non-Recourse Credit Facility. The Callon Entrada credit facility is a direct
obligation of Callon Entrada, an indirect, wholly-owned subsidiary of Callon Petroleum Company. The
Callon Entrada credit facility is secured by a lien on the assets of Callon Entrada which generally
are comprised of the Entrada Field and related equipment. At June 30, 2009, there was no value
included on the balance sheet for these assets. Neither Callon Petroleum Company nor any other
subsidiary of Callon Petroleum Company guaranteed or otherwise agreed to pay the principal or
interest payments due on the Callon Entrada credit facility, so such facility is effectively
non-recourse to Callon Petroleum Company and its other subsidiaries
On April 2, 2009, Callon Entrada received a notice from CIECO advising Callon Entrada that
certain events of default occurred under the non-recourse credit agreement relating to failure to
pay interest when due and the breach of various other covenants related to the decision to abandon
the Entrada project. The lenders under our senior secured revolving credit facility have amended
the Second Amended and Restated Credit Agreement dated September 25, 2008 to state that a default
under the Callon Entrada non-recourse credit facility is not a default under their facility. In
addition, this amendment eliminates a possible cross default with regard to our $200 million senior
notes due 2010. Accordingly, we do not believe that a default under the CIECO agreement will have a
material negative impact on our financial position, results of operations and cash flows.
NYSE Continued Listing Standards. On March 16, 2009, we were notified by the New York Stock
Exchange that we had fallen below one of the NYSEs continued listing standards. We received this
notification pursuant to Rule 802.01B(I) of the NYSE Listed Company Manual because our average
market capitalization has been less than $75 million over a 30-day trading period and our last
reported stockholders equity was less than $75 million. We submitted a plan with the NYSE on April
30, 2009, which demonstrated our ability to achieve compliance with Rule 802.01B(I) within an
18-month cure period. On June 1, 2009, the NYSE received approval from the SEC to lower the market
capitalization threshold requirement to $50 million. The NYSE accepted our plan on June 12, 2009.
Our common stock will continue to be listed on the NYSE during the cure period, subject to ongoing
monitoring and our compliance with other NYSE continued listing requirements.
Waiver under our Senior Secured Credit Facility. During the third quarter of 2009, we
obtained waivers of certain covenants in our senior secured credit facility with Union Bank N.A. If
we had not received these waivers, we would have been in default under the senior secured credit
facility. We expect to require similar waivers at the end of the fourth quarter of 2009. No
assurances can be made that we will receive such waivers from our bank.
Reason for the Exchange Offer and the Consent Solicitation
The Old Notes mature in December 2010. Under current economic conditions, we believe that it
will be difficult to refinance the Old Notes, and perhaps impossible. We are offering the Exchange
Notes and Common and Preferred Shares to holders of our Old Notes as an alternative to the step we
may be required to take if we are unable to refinance the Old Notes.
- 9 -
Summary of the Exchange Offer and Consent Solicitation
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Purpose of the Exchange Offer
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The Old Notes mature in
December 2010. Under current
economic conditions, we believe
that it will be difficult to
refinance the Old Notes, and
perhaps impossible. We are
making the exchange offer to
provide an alternative to the
holders of Old Notes to the
steps we may be required to
take if we are unable to
refinance the Old Notes. These
steps may include bankruptcy or
insolvency proceedings. |
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The Exchange Offer
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We are offering to exchange
$750 principal amount of
Exchange Notes, 20.625 Common
Shares and 1.6875 Preferred
Shares for each $1,000
principal amount of Old Notes
accepted for exchange. We will
pay accrued and unpaid interest
at 9.75% through November 18,
2009 on each Old Note accepted
for exchange and at 13% from
November 19, 2009 and
thereafter on each Exchange
Note issued to such holder of
such Old Note, with such
interest to be paid on the next
scheduled interest payment date
of the Exchange Notes. |
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Conditions to Exchange Offer
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The exchange offer is subject
to the requirement that at
least 80% in principal amount
of Old Notes be validly
tendered and accepted for
exchange, and to certain other
customary conditions. |
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Consent
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If you tender your Old Notes in
the exchange offer you will be
deemed to consent to amendments
to the indenture governing the
Old Notes. The amendments
would, in substance, (a)
eliminate our obligation to
comply with the provisions of
Article III. Covenants (except
for Sections 3.14(b) and 3.15)
and Article IV. Successor
Company, (b) eliminate as
Events of Default the events
described in Section 6.1(b),
6.1(c)(i) and 6.1(d)-(h), and
(c) eliminate Article X.
Subsidiary Guarantee and any
reference to the Subsidiary
Guarantees or Subsidiary
Guarantors. |
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Required Consents
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The amendments to the indenture
governing the Old Notes require
the consent of holders of at
least 75% of the outstanding
principal amount of the Old
Notes. Once holders of 75% in
principal amount of the Old
Notes are exchanged for
Exchange Notes, the amendments
to the indenture governing the
Old Notes will be approved even
if persons retaining the Old
Notes have not voted in favor
of the amendments. |
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Exchange Agreement
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We have entered into an
exchange agreement with holders
of 73.5% of our Old Notes. In
this agreement we agreed to
make the exchange offer and the
holders of the Old Notes agreed
to tender their old Notes in
the exchange offer and to
consent to the indenture
amendments in the consent
solicitation. The holders of
the Old Notes also agree in the
exchange agreement to certain
restrictions on the sale of
Common Shares received by them
in the exchange offer. |
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Expiration Date
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The exchange offer will expire
at 5:00 p.m. New York |
- 10 -
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City
time, on Wednesday, November
18, 2009, unless extended or
earlier terminated by us. We
may extend the expiration date
for any reason, but we will not
extend the offer beyond
December 31, 2009 unless we
have not had the indenture
governing the Exchange Notes
qualified by the SEC by such
date. If we decide to extend
it, we will announce any
extensions by press release or
other permitted means no later
than 9:00 a.m. on the business
day after the scheduled
expiration of the exchange
offer. |
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Withdrawal of Tenders
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Tenders of Old Notes may be
withdrawn in writing at any
time prior to 5:00 p.m., New
York City time, on the
expiration date. |
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Procedures for Exchange
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In order to exchange Old Notes,
you must tender the Old Notes.
All of the Old Notes are
currently represented by a
Global Note held by DTC, so all
beneficial holders will need to
comply with DTCs ATOP
procedures described below. We
will determine in our
reasonable discretion whether
any Old Notes have been validly
tendered. |
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Old Notes may be tendered by
electronic transmission of
acceptance through The
Depository Trust Companys, or
DTCs, Automated Tender Offer
Program, or ATOP, procedures
for transfer. Custodial
entities that are participants
in DTC must tender Old Notes
through DTCs ATOP. Please
carefully follow the
instructions contained in this
document on how to tender your
securities. |
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If you decide to tender Old
Notes in the exchange offer,
you may withdraw them at any
time prior to the expiration of
the exchange offer. |
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If the conditions to this
exchange offer are not met or
we decide for any reason not to
accept any Old Notes for
exchange, we will promptly
return Old Notes that have been
tendered without expense
promptly after the expiration
or termination of the exchange
offer. |
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Acceptance of Old Notes
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We will accept all Old Notes
validly tendered and not
withdrawn as of the expiration
of the exchange offer and will
issue the Exchange Notes and
Common and Preferred Shares
promptly after expiration of
the exchange offer, upon the
terms and subject to the
conditions in this memorandum.
We will accept Old Notes for
exchange after the exchange
agent has received a timely
book-entry confirmation of
transfer of Old Notes into the
exchange agents DTC account.
Our oral or written notice of
acceptance to the exchange
agent will be considered our
acceptance of the exchange
offer. |
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Amendment of the Exchange Offer
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We reserve the right not to
accept any of the Old Notes
tendered, and to otherwise
interpret or modify the terms
of this exchange offer,
provided that we will comply
with applicable laws that
require us to extend the period
during which securities may be
tendered or withdrawn as a
result |
- 11 -
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of changes in the terms
of or information relating to
the exchange offer. |
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Use of Proceeds
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We will not receive any
proceeds from this exchange
offer. Old Notes that are
validly tendered and exchanged
pursuant to the exchange offer
will be retired and canceled.
Accordingly, our issuance of
Exchange Notes and Common and
Preferred Shares will not
result in any cash proceeds to
us. |
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Taxation
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Although it is not entirely
free from doubt, it is likely
that the exchange of Old Notes
for Exchange Notes and Common
and Preferred Shares will
constitute a tax-free
recapitalization. Consequently,
holders generally should not
recognize any income or gain on
the exchange, except to the
extent of any accrued and
unpaid interest on the Old
Notes not previously included
in income by the holders.
Holders of Old Notes are urged
to consult their own tax
advisors. See Certain United
States Federal Income Tax
Consequences. |
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Old Notes Not Validly Tendered or Accepted
for Exchange
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Any Old Notes not validly
tendered or not accepted for
exchange for any other reason
will be returned without
expense to you as promptly as
practicable after the
expiration or termination of
this exchange offer. If you do
not exchange your Old Notes in
this exchange offer, or if your
Old Notes are not accepted for
exchange, you will continue to
hold your Old Notes and will be
entitled to all the rights and
subject to all the limitations
applicable to the Old Notes. |
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Exchange Agent
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American Stock Transfer & Trust
Company is the exchange agent
for this exchange offer. Its
address and telephone numbers
are located on the back cover
of this memorandum. |
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Global Note
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The Old Notes were, and any
Exchange Notes issued in
exchange for Old Notes tendered
pursuant to DTCs ATOP
procedures will be, issued in
the form of one or more fully
registered global certificates
(the Global Notes). The
Global Notes will be deposited
upon issuance with the Trustee
as custodian for The Depository
Trust Company (DTC), in New
York, New York, and registered
in the name of DTC or its
nominee, in each case for
credit to an account of a
direct or indirect participant
in DTC. Where the indenture
refers to a specified
percentage of Holders voting,
giving notices or taking other
action thereunder the term
Holder will mean the beneficial
holders of such specified
percentage. |
- 12 -
Material Differences Between The Old Notes And Exchange Notes
The material differences between the Old Notes and Exchange Notes are illustrated in the table
below. The table below is qualified in its entirety by the information contained in this memorandum
and the documents governing the Old Notes and the Exchange Notes, copies of which have been filed
with the SEC. For a more detailed description of the Exchange Notes, see Description of Exchange
Notes. The Old Notes and the Exchange Notes differ only in the manner described below.
COMPARISON OF THE OLD NOTES
AND THE EXCHANGE NOTES
The comparison of selected terms between the Old Notes and the Exchange Notes illustrated in
this section is qualified in its entirety by information contained in this memorandum, the
applicable indenture and other documents governing the Old Notes and the Exchange Notes, copies of
which will be provided on request to Callon at the address set forth under Documents Incorporated
by Reference. For a more complete description, see Description of the Exchange Notes.
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Old Notes |
|
Exchange Notes |
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Maturity Date
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December 8, 2010
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|
September 15, 2016 |
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Interest Rate
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9.75% per annum
payable quarterly
on each September
30, December 31,
March 31 and June
30.
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13% per annum
payable quarterly
on each September
30, December 31,
March 31 and June
30. |
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Repayment Period
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Permit us to call
the Old Notes at
any time until
December 8, 2009 at
101% and thereafter
at 100% of the
principal amount
thereof, plus
accrued and unpaid
interest.
|
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Up to September 15,
2012, allow us to
repay with the
proceeds from a
common stock
offering or from
liquidation of our
Entrada properties
up to 35% of the
outstanding
Exchange Notes at
113% of the
principal amount
thereof, plus
accrued and unpaid
interest. |
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Permit us to call
the Exchange Notes
at any time on or
after September 15,
2012 at prices
between 106.5% and
100% of the
principal amount
thereof, plus
accrued and unpaid
interest. |
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Conversion Rights
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None.
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None. |
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Subordination
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Unsecured and equal
in ranking to all
of Callons other
existing and future
unsecured senior
indebtedness and
effectively
subordinated to all
existing and future
secured
indebtedness of
Callon and its
subsidiaries.
|
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Secured by a second
lien on our oil and
gas properties
until less than $10
million in
principal amount of
the Old Notes
remain outstanding. |
- 13 -
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Old Notes |
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Exchange Notes |
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Securities Act Registration
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Freely transferable
by the holders,
unless such holders
are our affiliates.
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Freely transferable
by the holders,
unless such holders
are our affiliates. |
SUMMARY OF EXCHANGE NOTES
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Issuer
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Callon Petroleum Company |
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Exchange Note Guarantees
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The Exchange Notes will be fully and unconditionally
guaranteed on a senior secured basis by each of our
existing subsidiaries (other than our Unrestricted
Subsidiaries) and any domestic restricted subsidiaries
created or acquired by us after the issue date. |
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Exchange Notes
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Up to $150,000,000 aggregate principal amount of 13%
Senior Notes due September 15, 2016. |
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Offering Price
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100% of the principal amount of the Exchange Notes. |
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Maturity of Notes
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September 15, 2016. |
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Interest Payment Dates
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September 30, December 31, March 31 and June 30 of each
year, commencing on September 30, 2009. Interest on the
Exchange Notes will begin to accrue as of November 18,
2009. Interest on any tendered Old Notes will accrue
through November 19, 2009. |
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Ranking
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The Exchange Notes will be our senior secured obligations.
The Exchange Notes will rank equally with all of our
other senior indebtedness and will rank senior to all of
our subordinated indebtedness. The Exchange Note
guarantees will be secured and will rank equally in right
of payment with all of the existing and future senior
indebtedness of the note guarantors and senior to all of
the existing and future subordinated obligations of the
note guarantors. In addition to the $200.0 million in
principal amount of Old Notes, we had no borrowings in
senior secured indebtedness outstanding under our senior
secured credit facility as of September 30, 2009. |
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Security
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The Exchange Notes and Exchange Notes guarantees will be
secured by a second lien on substantially all of our
assets and the assets of the Exchange Note guarantors
pursuant to certain mortgages, security agreements and
other collateral documents between us and Regions Bank, as
Collateral Agent for the holders of the Exchange Notes.
The indebtedness under our senior secured credit facility
is secured by a first lien on all of the assets securing
the Exchange Notes, so the Exchange Notes are effectively
subordinated to the indebtedness under our senior secured
credit facility. All liens securing the Exchange Notes and
the Exchange Notes guarantees will be released when the
aggregate outstanding principal amount of the Old Notes is
less than $10,000,000. |
- 14 -
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Sinking Fund
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None. |
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Redemption of Exchange Notes at
Our Option
|
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The Exchange Notes may not be redeemed at our option until
September 15, 2012. During each 12 month period ending on
September 15 of the year set forth below, the Exchange
Notes may be redeemed at our option for the principal
amount set forth below: |
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2013 106.5
2014 103.25
2015 101.625
2016 100% |
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In addition, we may redeem up to 35% of the principal
amount of Exchange Notes at 113% of principal amount from
the proceeds of an equity offering or from the cash
proceeds of the wind down of our Entrada project not
reflected on our balance sheet. |
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Repurchase at Option of Holder Upon a
Change of Control
|
|
If we experience specific kinds of changes in control, we
will be required to offer to repurchase the Exchange Notes
for cash at a 1% premium as described under Description
of the Exchange Notes Change in Control. Our senior
secured credit facility currently prohibits us from
purchasing any of the Exchange Notes, which would include
any purchase we may be required to make as a result of a
change in control. We cannot assure you that we will be
able to amend the senior secured credit facility to permit
the purchase of Exchange Notes or refinance the senior
secured credit facility with lenders who will allow us to
make the required purchases. Also, if a change in control
were to occur, there can be no assurance that we will have
sufficient funds to purchase any of the Exchange Notes or
be permitted under the terms of other agreements to
purchase the Exchange Notes. See Risk Factors for a
description of the possible effects if we are unable to
purchase the Exchange Notes upon a change in control. |
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Certain Covenants
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We will issue the Exchange Notes under an indenture with
American Stock Transfer & Trust Company. The indenture
governing the Exchange Notes contains covenants that limit
our ability and the ability of certain of our subsidiaries
to, among other things: |
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incur additional indebtedness;
pay dividends or repurchase our capital stock;
enter into transactions with our affiliates;
dispose of assets; or
engage in mergers and consolidations. |
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These covenants are subject to a number of important
qualifications and limitations. |
- 15 -
See Description of the Exchange Notes for more detailed information about the terms of the
Exchange Notes.
SUMMARY OF PREFERRED STOCK
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Issuer
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Callon Petroleum Company |
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Offering Price
|
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$66.67 per share. |
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Aggregate Amount
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$22.5 million. |
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Dividend Amount
|
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18% per annum, payable semi-annually on each
September 15 and March 15, beginning March 15,
2010, and increasing by 1% on each March 15 and
September 15 beginning September 15, 2010, subject
to a cap of 25%. |
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Conversion
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Upon the amendment of our charter to increase the
number of authorized common shares, the preferred
stock is automatically convertible by the company
into 10 shares of common stock for each share of
preferred stock, or an aggregate of 3.375 million
shares of common stock for all shares of preferred
stock outstanding (assuming all of the Old Notes
participate in the exchange offer). |
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Sinking fund
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None. |
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NYSE rules
|
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Under the rules of the New York Stock Exchange we
cannot convert the preferred stock in exchange for
our common stock without prior shareholder
approval. |
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Authorized Common Stock
|
|
We currently are authorized to issue 30 million
shares of common stock, and following the exchange
offer expect to have outstanding 25,958,094 shares
of common stock if the holders of all of the Old
Notes participate in the exchange offer. |
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Shareholder Approval
|
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We plan to ask our shareholders to approve the
issuance of common stock upon conversion of the
preferred stock and to increase the number of our
authorized shares following the closing of the
exchange offer. If these are approved by our
shareholders, promptly thereafter the preferred
shares will be converted into common shares. |
- 16 -
RISK FACTORS
You should carefully consider the specific risk factors set forth below, as well as the
specific risk factors relating to our business and our industry before deciding to invest in the
Exchange Notes and Common and Preferred Shares. You should also consider the other information
contained or incorporated by reference in this memorandum before deciding to invest in the Exchange
Notes and Common and Preferred Shares. This memorandum contains or incorporates statements that
constitute forward-looking statements regarding, among other matters, our intent, belief or current
expectations about our business. These forward-looking statements are subject to risks,
uncertainties and assumptions.
Risks Related to the Exchange Notes and Common and Preferred Shares
Our substantial debt could adversely affect our cash flow and prevent us from fulfilling our
obligations under the Exchange Notes and Preferred Shares.
As of June 30, 2009 we had $200.7 million of total debt and stockholders deficit of $140.7
million. Our ability to make payments on our debt, operate our business and to fund planned capital
expenditures will depend on our ability to generate cash in the future. The Exchange Notes and
Preferred Shares will require us to pay annually an aggregate of $23.6 million in interest to our
noteholders and holders of the Preferred Shares. Our substantial debt service obligations could
have important consequences to you, including the following:
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|
limit our ability to borrow money or sell stock to fund our working capital, capital
expenditures, debt service requirements or other purposes; |
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make it more difficult for us to satisfy our obligations on the Exchange Notes; |
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increase our vulnerability to compete effectively or operate successfully under
adverse economic and industry conditions; |
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limit our ability to obtain additional financing and our flexibility in planning
for, or reacting to, changes in our business or industry; |
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the dedication of a substantial portion of our cash flow from operations to the
payment of principal of, and interest on, our indebtedness would reduce the amount of
cash available for other purposes; |
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|
increase our vulnerability to interest rate increases as the borrowings under our
senior secured revolving credit facility are at variable interest rates; |
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place us at a competitive disadvantage to many of our competitors who are less
leveraged than we are; and |
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cause a material adverse effect on our business and financial condition if we were
unable to service our indebtedness or obtain additional financing, as needed. |
Despite our substantial indebtedness, we may still be able to incur significantly more debt,
which would further reduce the cash we have available to invest in our operations or to service our
debt obligations. The terms of the indenture governing the Exchange Notes and the terms of our
senior secured revolving credit facility and the agreements governing our other indebtedness,
limit, but do not prohibit, the incurrence of additional indebtedness by us and our subsidiaries in
the future.
As of June 30, 2009, we had approximately $38.7 million available for additional borrowings
under the revolving credit facility portion of our senior credit facility. The more leveraged we
become, the more we, and in turn the holders of our indebtedness, become exposed to the risks
described above.
To service our debt, we will require a significant amount of cash, which may not be available to
us.
Our ability to make payments on, or repay or refinance, our debt, including the Exchange
Notes, to make interest payments on the Preferred Shares, and to fund planned capital expenditures
will depend largely upon our
- 17 -
future operating performance. Our future performance, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond
our control. In addition, our ability to borrow funds in the future will depend on the satisfaction
of the covenants in our senior credit facility and our other debt agreements, including the
indenture governing the Exchange Notes, and other agreements we may enter into in the future.
Specifically, we will need to maintain certain financial ratios. We cannot assure you that our
business will generate sufficient cash flow from operations or that future borrowings will be
available to us under our senior credit facility or from other sources in an amount sufficient to
enable us to pay our debt, including the Exchange Notes, or to fund our other liquidity needs.
In addition, prior to the repayment of the Exchange Notes, we will be required to repay or
refinance our senior secured credit facility, which matures in 2012. We cannot assure you that we
will be able to refinance any of our debt on commercially reasonable terms or at all. If we were
unable to make payments or refinance our debt or obtain new financing under these circumstances, we
would have to consider other options, such as sales of assets, sales of equity and/or negotiations
with our lenders to restructure the applicable debt. Our credit agreements and the indenture
governing the Exchange Notes may restrict our business or market conditions may limit our ability
to do some of these things.
Our debt instruments include restrictive and financial covenants that limit our operating
flexibility.
Our senior secured credit facility requires us to maintain certain financial ratios, and our
senior secured credit facility and the indenture governing the Exchange Notes contain covenants
that, among other things, restrict our ability to take specific actions, even if we believe such
actions are in our best interest. These include, among other things, restrictions on our ability
to:
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incur additional debt; |
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create liens or negative pledges with respect to our assets; |
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pay dividends or distributions on, or redeem or repurchase, our capital stock; |
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make investments, loans or advances or other forms of payments; |
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issue, sell or allow distributions on capital stock of specified subsidiaries; |
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enter new lines of business; |
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prepay or defease specified indebtedness, including the Exchange Notes; |
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enter into transactions with affiliates; or |
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merge, consolidate or sell our assets. |
Any failure to comply with the restrictions of our senior secured credit facility or the
indenture governing the Exchange Notes or existing and any subsequent financing agreements may
result in an event of default. Such default may allow our creditors to accelerate the related debt
and may result in the acceleration of any other debt to which a cross-acceleration or cross-default
provision applies. In addition, these creditors may be able to terminate any commitments they had
made to provide us with further funds. See Description of the Exchange NotesCertain Covenants
for more information on our restrictive and financial covenants.
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Waiver under our senior secured credit facility.
During the third quarter of 2009, we obtained waivers of certain covenants in our senior
secured credit facility with Union Bank N.A. If we had not received these waivers, we would have
been in default under the senior secured credit facility. We expect to require similar waivers at
the end of the fourth quarter of 2009. No assurances can be made that we will receive such waivers
from our bank.
Although the Exchange Notes are referred to as senior secured notes, they are effectively
subordinated to our and the subsidiary guarantors debt under our senior secured credit facility.
Borrowings under our senior secured credit facility are secured by a first priority security
interest in substantially all of our and our subsidiary guarantors tangible and intangible
property and assets, including substantially all of our reserves, and will include a lien on all
capital stock of our present and future domestic restricted subsidiaries. The Exchange Notes will
be secured by a second lien on those assets. The lenders under our senior credit facility have
agreed to an Intercreditor Agreement that will be binding upon completion of the exchange offer on
the holders of the Exchange Notes. The Intercreditor Agreement provides for certain correlative
rights of the lenders under our senior secured credit facility, on the one hand and the holders of
the Exchange Notes, on the other hand with respect to the enforcement and exercise of remedies with
respect to their respective liens on our assets and related matters.
The guarantees may not be enforceable because of fraudulent conveyance laws or state corporate laws
prohibiting shareholder distributions by an insolvent subsidiary.
The subsidiary guarantors guarantees of the Exchange Notes may be subject to review under
U.S. federal bankruptcy law or relevant state fraudulent conveyance laws or state laws prohibiting
guarantees or other shareholder distributions by an insolvent subsidiary if a bankruptcy lawsuit or
other action is commenced by or on behalf of our or the subsidiary guarantors unpaid creditors.
Under these laws, if in such a lawsuit a court were to find that, at the time a subsidiary
guarantor incurred debt (including debt represented by the guarantee), such subsidiary guarantor:
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incurred this debt with the intent of hindering, delaying or defrauding current or
future creditors; |
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received less than reasonably equivalent value or fair consideration for incurring
this debt and the subsidiary guarantor (a) was insolvent or was rendered insolvent by
reason of incurring this debt, (b) was engaged, or about to engage, in a business or
transaction for which its remaining assets constituted unreasonably small capital to
carry on its business or (c) intended to incur, or believed that it would incur, debts
beyond its ability to pay these debts as they mature; or |
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in some states, had assets valued at less than its liabilities, or would not be able
to pay its debts as they become due in the usual course of business (regardless of the
consideration for incurring the debt); |
then the court could void the guarantee or subordinate the amounts owing under the guarantee to the
subsidiary guarantors presently existing or future debt or take other actions detrimental to you.
The subsidiary guarantors may be subject to the allegation that, since they incurred their
guarantees for our benefit, they incurred the obligations under the guarantees for less than
reasonably equivalent value or fair consideration. The measure of insolvency for purposes of the
foregoing considerations will vary depending upon the law of the jurisdiction that is being applied
in any such proceeding. Generally, a company would be considered insolvent if, at the time it
incurred the debt or issued the guarantee:
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it could not pay its debts or contingent liabilities as they become due; |
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the sum of its debts, including contingent liabilities, is greater than its assets
at fair valuation; or |
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the present fair saleable value of its assets is less than the amount required to
pay the probable liability on its total existing debts and liabilities, including
contingent liabilities, as they become absolute and mature. |
If a guarantee is voided as a fraudulent conveyance, is a prohibited distribution to the
parent shareholder or found to be unenforceable for any other reason, you will not have a claim
against that obligor and will only be a creditor of Callon Petroleum Company or that of any
subsidiary guarantor whose obligation was not set aside or found to be unenforceable. In addition,
the loss of a guarantee will constitute a default under the indenture, which default could cause
all outstanding Exchange Notes to become immediately due and payable.
We may be unable to make a change of control offer required by the indenture governing the Exchange
Notes, which would cause defaults under the indenture governing the Exchange Notes, our senior
secured credit facility and other financing arrangements.
The terms of the Exchange Notes require us to make an offer to repurchase the Exchange Notes
upon the occurrence of a change of control at a purchase price equal to 101% of the principal
amount of the Exchange Notes, plus accrued and unpaid interest, if any, to the date of the
purchase. The terms of our senior secured credit facility require, and future financing and other
arrangements may require, repayment of amounts outstanding in the event of a change of control and
prohibit us from repurchasing your Exchange Notes while commitments or amounts are outstanding
under the senior secured credit facility. It is possible that we will not have sufficient funds at
the time of the change of control to make the required repurchase of Exchange Notes or that
restrictions in our senior credit facility, and other financing agreements will not allow the
repurchases. See Description of the Exchange NotesRepurchase Upon a Change of Control.
In addition, it is not certain whether we would be required to make a change in control offer
to repurchase the Exchange Notes upon certain asset sales, because the meaning of substantially
all assets, the sale of which would constitute a change of control, is not established under
applicable law. 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 Exchange Notes to require us to repurchase such Exchange Notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets
of the company and its subsidiaries taken as a whole to another person or group may be uncertain.
See Description of the Exchange NotesCertain CovenantsAsset Sales.
We will be required to pay the principal of any Old Notes not acquired by us in the exchange offer
on December 8, 2010. No assurances can be made that we will have sufficient funds available to us
to make such payments.
We may close the exchange offer if at least $160 million of Old Notes is exchanged in the
offer. This could leave up to $40 million in principal amount of Old Notes outstanding after the
exchange offer, which we would be required to pay on their maturity date of December 8, 2010. We
cannot assure you that we will have sufficient cash available to us to make such payments on that
date. If we are unable to pay any Old Notes upon maturity, an event of default would occur under
the indenture for the Old Notes.
There is no public market for the Exchange Notes or Preferred Shares.
The Exchange Notes and Preferred Shares are new securities for which there currently is no
market. Any market that develops may not last. We do not intend to apply for listing of the
Exchange Notes or Preferred Shares on any securities exchange or other stock market.
The market price of the Common Shares could decrease as a result of the impact of the significant
increase in the number of our outstanding shares that may result from the issuance of Common Shares
and convertible Preferred Shares in the exchange offer.
As of September 30, 2009, we had approximately 21,805,311 outstanding shares of common stock,
all of which are transferable without restriction or further registration under the Securities Act,
except for any shares held
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by our affiliates. As of that date, we also had outstanding options
held by management and directors to purchase
approximately 904,675 shares of our common stock, approximately 804,800 shares of our common
stock subject to future vesting of performance shares and restricted stock units, and under our
current stock incentive plans, we may issue stock awards for an additional 488,862 shares of our
common stock. Assuming that all of the Old Notes are exchanged in the exchange offer, we would
issue 4,125,000 Common Shares and Preferred Shares convertible into 3,375,000 Common Shares in the
exchange offer. The impact of the issuance of a significant amount of common stock may place
substantial downward pressure on the market price of our common stock.
The Common Stock issued pursuant to the exchange offer is expected to be freely tradable and
will not constitute restricted securities as defined in Rule 144 of the Securities Act and may
generally be resold by a holder who is not (i) an affiliate of Callon within the meaning of Rule
144 of the Securities Act or (ii) a broker-dealer without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such common stock was acquired
in the ordinary course of such holders business and such holders have no arrangement or
understanding with any person to participate in the distribution of common stock.
The sale or expectation of sales of a large number of shares of common stock in the public
market might negatively affect the market price of our common stock.
All of our debt obligations will have priority over our common stock with respect to payment in the
event of a liquidation or bankruptcy.
Upon any voluntary or involuntary liquidation or bankruptcy of Callon, holders of our common
stock will not be entitled to receive any payment or other distribution of assets upon the
liquidation or bankruptcy until after our obligations to our debt holders (secured and unsecured)
have been satisfied.
If we arent able to achieve compliance with the continued listing standards of the NYSE, our
common stock could be delisted.
On March 16, 2009, we were notified by the New York Stock Exchange that we had fallen below
one of the NYSEs continued listing standards. We received this notification pursuant to Rule
802.01B(I) of the NYSE Listed Company Manual because our average market capitalization has been
less than $75 million over a 30-day trading period and our last reported stockholders equity was
less than $75 million. We submitted a plan with the NYSE on April 30, 2009, which demonstrated our
ability to achieve compliance with Rule 802.01B(I) within an 18 month cure period. On June 1, 2009,
the NYSE received approval from the SEC to lower the market capitalization threshold requirement to
$50 million. The NYSE accepted the plan on June 12, 2009. Our common stock will continue to be
listed on the NYSE during the cure period, subject to ongoing monitoring and our compliance with
other NYSE continued listing requirements.
We do not expect to pay dividends on our common stock in the foreseeable future.
Our Board of Directors has not declared cash dividends on our common stock and it is unlikely
that we will pay any dividends on our Common Stock in the foreseeable future. In any event, the
declaration and payment of future dividends by our Board of Directors will be dependent upon our
earnings and financial condition, economic and market conditions and other factors deemed relevant
by the Board of Directors.
The holders of the Exchange Notes may not be able to realize fully the value of the liens securing
the Exchange Notes.
The Exchange Notes are secured by second-priority liens on substantially all of our assets and
the assets of our subsidiary guarantors, subject to certain permitted prior liens. Such
second-priority liens will be released when the aggregate outstanding principal amount of the Old
Notes is less than $10 million, at which time the Exchange Notes will become general unsecured
obligations. The same assets have also been pledged to secure existing and future first-priority
secured debt. To the extent that any of these assets are released from the liens securing our
senior secured credit facility, these assets will also be released from the liens securing the
Exchange Notes. The Exchange Notes will be effectively subordinated in right of payment to all of
our and our subsidiary guarantors existing and future first-
priority secured debt to the extent of
the value of the assets securing that debt. The holders of the first-
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priority liens will receive
all proceeds from the liquidation of the collateral until all obligations secured by such liens
are paid in full. Following payment of the first-priority liens in full, the holders of the
second-priority liens will receive all proceeds from the liquidation of the collateral until all
obligations secured by such liens are paid in full. The amount to be received from a liquidation of
the collateral will depend upon numerous factors including market and economic conditions, the
availability of buyers, the timing and manner of sale and similar factors. There can be no
assurance that the collateral can or will be liquidated in a short period of time. No independent
appraisals of any of the pledged property have been prepared by or on behalf of us in connection
with the issuance of Exchange Notes. Accordingly, we cannot assure you that the proceeds of any
sale of the pledged assets following an acceleration of the maturity of the Exchange Notes would be
sufficient to satisfy, or would not be substantially less than, amounts due on the Exchange Notes
after satisfying our obligations secured by the first-priority and other permitted liens.
If the proceeds of any sale of the pledged assets were not sufficient to repay all amounts due
on the Exchange Notes, the holders of the Exchange Notes (to the extent the Exchange Notes were not
repaid from the proceeds of the sale of the pledged assets) would have only an unsecured claim
against our remaining assets.
In addition, the Exchange Notes may not be guaranteed by all of our subsidiaries in the
future, and any non-guarantor subsidiaries are permitted to incur some indebtedness under the terms
of the indenture. If a guarantor is released from its guarantee of our senior secured credit
facility, that guarantors guarantee of the Exchange Notes will also be released. As a result,
holders of the Exchange Notes offered hereby will be effectively subordinated to claims of
third-party creditors of our non-guarantor subsidiaries. Claims of those other creditors, including
trade creditors, holders of indebtedness or guarantees issued by these non-guarantor subsidiaries
will generally have priority as to the assets of the non-guarantor subsidiary over our claims and
equity interests. As a result, holders of our indebtedness, including the holders of the Exchange
Notes, will be effectively subordinated to all those claims. As of the closing date, all of our
subsidiaries other than Callon Entrada Company will be guarantors of the Exchange Notes.
The lien ranking and voting provisions set forth in the indenture and the Intercreditor
Agreement substantially limit the rights of the holders of the Exchange Notes with respect to the
collateral securing the Exchange Notes.
The rights of the holders of the Exchange Notes with respect to the collateral securing the
Exchange Notes are substantially limited pursuant to the terms of the lien-ranking and voting
provisions set forth in the indenture and the Intercreditor Agreement. Under those provisions, at
any time that obligations that have the benefit of the first-priority liens are outstanding, any
actions that may be taken in respect of the collateral, including the ability to cause the
commencement of enforcement proceedings against the collateral and to control the conduct of such
proceedings, and the approval of amendments to, releases of collateral from the lien of, and
waivers of past defaults under, the security documents, will be at the direction of the holders of
the obligations secured by the first-priority liens. The trustee, on behalf of the holders of the
Exchange Notes, does not have the ability to control or direct such actions, even if the rights of
the holders of the Exchange Notes are adversely affected. Our creditors with first-priority liens
may have interests that are different from the interests of the holders of the Exchange Notes.
Additional releases of collateral from the second-priority lien securing the Exchange Notes may be
permitted under some circumstances.
The potential environmental liability of secured lenders may affect the value of the
collateral for the Exchange Notes.
We have mortgaged real property as collateral for the Exchange Notes. Real property mortgaged
as security to a lender may be subject to both known and unknown environmental risks. As a holder
of a security interest in real property, under certain circumstances you could be held liable for
the environmental costs of remediating or preventing releases or threatened releases of hazardous
substances at the mortgaged property. Under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, a lender that participates in the management or operation of a mortgaged
property can be liable as an owner or operator for certain environmental costs. In addition, if the
mortgaged property were subject to material contamination, the value of the property could be
substantially reduced and the lender may choose not to foreclose.
Your interest in the collateral may be adversely affected by the failure to perfect security
interests in certain collateral acquired in the future.
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The security interest in the collateral securing the Exchange Notes includes certain of our
personal property and real property and that of our subsidiaries, a pledge of certain stock and
other equity interests, intercompany notes and the proceeds of the foregoing, whether now owned or
acquired or arising in the future. Applicable law requires that certain property and rights
acquired after the grant of a general security interest can be perfected only at the time such
property and rights are acquired and identified. We cannot assure you that the collateral agent
will monitor, or that we will inform the collateral agent of, any future acquisition of property
and rights that constitute collateral, and that the necessary action will be taken to properly
perfect the security interest in such after-acquired collateral. Such failure may result in the
loss of the security interest therein or the priority of the security interest in favor of the
Exchange Notes against third parties.
Your rights may be adversely affected by bankruptcy proceedings.
An investment in the Exchange Notes, as in any type of security, involves certain insolvency
and bankruptcy considerations that investors should carefully consider. In the event we, or any of
our subsidiary guarantors, were to become a debtor subject to insolvency proceedings under the
United States Bankruptcy Code (Bankruptcy Code), it is likely delays in payment of the Exchange
Notes and in enforcing remedies under the Exchange Notes, any guarantee or the liens securing the
Exchange Notes and the guarantees would result. Provisions under the Bankruptcy Code or general
principles of equity that could result in the impairment of your rights include, but are not
limited to, the automatic stay, avoidance of preferential transfers by a trustee or
debtor-in-possession, substantive consolidation, limitations on collectability of unmatured
interest or attorney fees and forced restructuring of the Exchange Notes.
Under the Bankruptcy Code, a secured creditor such as the trustee or collateral agent is
prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of
security repossessed from such debtor, without bankruptcy court approval. Moreover, bankruptcy law
permits the debtor to continue to retain and to use collateral, and the proceeds, products, rents,
or profits of such collateral, even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given adequate protection. The term adequate
protection is not defined under bankruptcy law and, because of the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the Exchange Notes could be
delayed following commencement of a bankruptcy case, whether or when the trustee or collateral
agent would repossess or dispose of the collateral, or whether or to what extent holders of the
Exchange Notes would be compensated for any delay in payment or loss of value of the collateral
through the requirements of adequate protection. Furthermore, in the event the bankruptcy court
determines that the value of the collateral is not sufficient to repay all amounts due on the
Exchange Notes, the holders of the Exchange Notes would have undersecured claims. Federal
bankruptcy laws do not permit the payment or accrual of interest, costs, and attorneys fees for
undersecured claims during the debtors bankruptcy case. Furthermore, the undersecured portion of
such claims are unsecured claims and have a lower priority than secured claims in a bankruptcy and
there is a risk that the principal amount of such claims may not be repaid in full.
Under the Bankruptcy Code, a trustee or debtor-in-possession may generally recover payments or
transfers of property of a debtor if such payment or transfer:
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was in payment of an antecedent debt owed before the transfer was made; |
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was made while the debtor was insolvent; |
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was within 90 days (or one year if the payment was to an insider of the debtor) before the
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enabled the creditor to receive more than it would have received in a liquidation under
Chapter 7 of the Bankruptcy Code if the transfer had not been made and the creditor received
payment of the debt as provided in the Bankruptcy Code. |
By way of example, if payments were made on the Exchange Notes prior to the filing of a
bankruptcy case and a court subsequently determined that the value of the collateral pledged by the
entity making the payment was less than the debt owed, such payments could be subject to avoidance
as a preferential transfer.
A financial failure by us could also result in impairment of payment of the Exchange Notes if
a bankruptcy court were to substantively consolidate us with our subsidiaries. If a bankruptcy
court substantively consolidated us with our subsidiaries, the assets of each entity would be
subject to the claims of creditors for all entities. Such a
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consolidation would expose the holders of the Exchange Notes not only to the usual impairments
arising from bankruptcy, but also to potential dilution of the amount ultimately recoverable
because of the larger creditor base.
Forced restructuring of the Exchange Notes could occur through the cram-down provision of
the Bankruptcy Code. Under this provision, the Exchange Notes could be restructured over the
objections of holders of the Exchange Notes as to their general terms, primarily interest rate and
maturity. Additionally, the Exchange Notes could be bifurcated into secured debt and unsecured debt
if a bankruptcy court were to find that the debt owed by us exceeded the value of the collateral.
If this were to occur, the unsecured portion of the debt could be afforded different treatment than
the secured portion of the debt, including, but not limited to, the disallowance of the accrual of
post-petition interest on the Exchange Notes.
In addition, the Intercreditor Agreement provides that, in the event of a bankruptcy, the
trustee and the collateral agent may not object to a number of important matters following the
filing of a bankruptcy petition so long as any first-priority lien debt is outstanding. After such
a filing, the value of your collateral could materially deteriorate and you would be unable to
raise an objection. The right of the holders of obligations secured by first-priority liens on the
collateral to foreclose upon and sell the collateral upon the occurrence of an event of default
also would be subject to limitations under applicable bankruptcy laws if we or any of our
subsidiaries become subject to a bankruptcy proceeding.
Any future pledge of collateral might be avoidable in bankruptcy.
Any future pledge of collateral in favor of the collateral trustee, including pursuant to
collateral agreements delivered after the date of the indenture, might be avoidable by the pledgor
(as debtor-in-possession) or by its trustee in bankruptcy if certain events or circumstances exist
or occur, including, among others, if the pledgor is insolvent at the time of the pledge, the
pledge permits the holders of the Exchange Notes to receive a greater recovery than if the pledge
had not been given and a bankruptcy proceeding in respect of the pledgor is commenced within 90
days following the pledge, or, in certain circumstances, a longer period.
A subsidiary guarantee and the liens securing a guarantee could be voided if it constitutes a
fraudulent transfer under the bankruptcy code or similar state law.
Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a
guarantee and the liens securing a guarantee can be voided, or claims under the guarantee and the
liens securing a guarantee may be subordinated to all other debts of that guarantor if, among other
things, the guarantor received less than reasonably equivalent value or fair consideration for the
incurrence of the guarantee and:
was insolvent at the time of, or rendered insolvent by reason of, the incurrence of the
guarantee;
was engaged in a business or transaction for which the guarantors remaining assets
constituted unreasonably small capital; or
intended to incur, or believed that it would incur, debts beyond its ability to pay those
debts as they mature.
A guarantee may also be voided, without regard to the above factors, if a court found that the
guarantor entered into the guarantee with the actual intent to hinder, delay or defraud its
creditors.
A court would likely find that a guarantor did not receive reasonably equivalent value or fair
consideration for its guarantee if the guarantor did not substantially benefit directly or
indirectly from the issuance of the guarantees. If a court were to void a subsidiary guarantee, you
would no longer have a claim against that subsidiary guarantor. Sufficient funds to repay the
Exchange Notes may not be available from other sources, including the remaining guarantors, if any.
In addition, the court might direct you to repay any amounts that you already received from the
subsidiary guarantor.
The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the
governing law. Generally a guarantor would be considered insolvent if:
the sum of its debts, including contingent liabilities, were greater than the fair saleable
value of all its assets;
the present fair saleable value of its assets is less than the amount that would be required
to pay its probable liability on its existing debts, including contingent liabilities, as they
become absolute and mature; or
it could not pay its debts as they become due.
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Each subsidiary guarantee will contain a provision intended to limit the guarantors liability
to the maximum amount that it could incur without causing the incurrence of obligations under its
subsidiary guarantee to be a fraudulent transfer. This provision may not be effective to protect
the subsidiary guarantee from being voided under fraudulent transfer law.
Risks Relating to the Exchange Offer
If you do not exchange your Old Notes, the Exchange Notes will be secured by a second lien on our
assets and the assets of our subsidiary guarantors, and will be effectively senior to the Old Notes
with respect to such collateral.
The Exchange Notes will be guaranteed by a second lien on our assets and the assets of the
subsidiary guarantors until the aggregate outstanding principal amount of the Old Notes is less
than $10 million. If a default were to occur with respect to the Exchange Notes at a time when more
than $10 million of the Old Notes were outstanding, the holders of the Old Notes may receive the
proceeds of the sale of collateral securing the Exchange Notes after the Exchange Notes are paid in
full.
If you do not exchange your Old Notes, the Old Notes you retain may become less liquid as a result
of the exchange offer.
If a significant number of Old Notes are exchanged in the exchange offer, the liquidity of the
trading market for the Old Notes, if any, after the completion of the exchange offer may be
substantially reduced. Any Old Notes exchanged will reduce the aggregate number of Old Notes
outstanding. As a result, the Old Notes may trade at a discount to the price at which they would
trade if the transactions contemplated by this memorandum were not consummated, subject to
prevailing interest rates, the market for similar securities and other factors. We cannot assure
you that an active market in the Old Notes will exist or be maintained and we cannot assure you as
to the prices at which the Old Notes may be traded.
Our Board of Directors has not made a recommendation with regard to whether or not you should
tender your Old Notes in the exchange offer and we have not obtained a third-party determination
that the exchange offer is fair to holders of the Old Notes.
We are not making a recommendation as to whether holders of the Old Notes should exchange
them. We have not retained and do not intend to retain any unaffiliated representative to act
solely on behalf of the holders of the Old Notes for purposes of negotiating the terms of the
exchange offer and/or preparing a report concerning the fairness of the exchange offer. We cannot
assure holders of the Old Notes that the value of the Exchange Notes and Common and Preferred
Shares received in the exchange offer will in the future equal or exceed the value of the Old Notes
tendered and we do not take a position as to whether you ought to participate in the exchange
offer.
Risks Relating to our Business
If the United States experiences a sustained economic downturn or recession, oil and natural gas
prices may fall or remain at their current depressed price for an extended period of time, which
may adversely affect our results of operations.
The unprecedented disruption in the U.S. and international credit markets has resulted in a
rapid deterioration in the worldwide economy and tightening of the financial markets in the second
half of 2008, and the outlook for the economy in 2009 is uncertain. The current global credit and
economic environment has reduced worldwide demand for energy and resulted in significantly lower
oil and natural gas prices. A sustained reduction in the prices we receive for our oil and natural
gas production could have a material adverse effect on our results of operations. For example, for
the quarter ending December 31, 2008, a 10% reduction in the price we received for oil and natural
gas would have reduced our revenues by approximately $1.6 million. The continuation, or worsening,
of domestic and global economic conditions could continue to adversely affect our business and
results of operations.
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We may not be able to obtain funding on acceptable terms or at all because of the deterioration of
the credit and capital markets. This may hinder or prevent us from meeting our future capital needs
including the need to refinance $200 million in senior notes in 2010.
Global financial markets and economic conditions have been, and continue to be, disrupted and
volatile due to a variety of factors. As a result, the cost of raising money in the debt and equity
capital markets has increased substantially while the availability of funds from those markets has
diminished significantly. As a result of concerns about the stability of financial markets
generally and the solvency of lending counterparties specifically, the cost of obtaining money from
the credit markets generally has increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards, refused to refinance existing debt on
similar terms or at all and reduced, or in some cases ceased, to provide funding to borrowers. In
addition, lending counterparties under our existing senior secured credit facility and $200 million
in senior notes may be unwilling or unable to meet their funding obligations.
Due to these factors, we cannot be certain that new debt or equity financing will be available
on acceptable terms. Over the next 15 months, we will be required to refinance our $200 million of
senior notes. If funding is not available when needed, or is available only on unfavorable terms,
we may be unable to meet our obligations as they come due. Moreover, without adequate funding, we
may be unable to execute our growth strategy, take advantage of other business opportunities or
respond to competitive pressures, any of which could have a negative effect on our revenues and
results of operations.
We may be unable to integrate successfully the operations of future acquisitions with our
operations and we may not realize all the anticipated benefits of any future acquisition.
We intend to focus on producing property acquisitions. Integration of corporate acquisitions
with our existing business and operations will be a complex, time consuming and costly process. We
cannot assure you that we will achieve the desired profitability from any acquisitions we may
complete in the future. In addition, failure to assimilate future acquisitions successfully could
adversely affect our financial condition and results of operations.
Our acquisitions may involve numerous risks, including:
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operating a larger combined organization and adding operations; |
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difficulties in the assimilation of the assets and operations of the acquired
business, especially if the assets acquired are in a new business segment or geographic
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the risk that oil and natural gas reserves acquired may not be of the anticipated
magnitude or may not be developed as anticipated; |
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the loss of significant key employees from the acquired business: |
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the diversion of managements attention from other business concerns; |
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the failure to realize expected profitability or growth; |
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|
the failure to realize expected synergies and cost savings; |
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|
coordinating geographically disparate organizations, systems and facilities; and |
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|
coordinating or consolidating corporate and administrative functions. |
Further, unexpected costs and challenges may arise whenever businesses with different
operations or management are combined, and we may experience unanticipated delays in realizing the
benefits of an acquisition. If we consummate any future acquisition, our capitalization and results
of operation may change significantly, and you may not have the opportunity to evaluate the
economic, financial and other relevant information that we will consider in evaluating future
acquisitions.
- 26 -
Hedging transactions and receivables expose us to counterparty credit risk.
Our hedging transactions expose us to risk of financial loss if a counterparty fails to
perform under a contract. We use master agreements which allow us, in the event of default, to
elect early termination of all contracts with the defaulting counterparty. If we choose to elect
early termination, all asset and liability positions with the defaulting counterparty would be net
settled at the time of election. We also monitor the creditworthiness of our counterparty on an
ongoing basis. However, the current disruptions occurring in the financial markets could lead to
sudden changes in a counterpartys liquidity, which could impair their ability to perform under the
terms of the hedging contract. We are unable to predict sudden changes in a counterpartys
creditworthiness or ability to perform. Even if we do accurately predict sudden changes, our
ability to negate the risk may be limited depending upon market conditions.
During periods of falling commodity prices, such as in late 2008, our hedge receivable
positions increase, which increases our exposure. If the creditworthiness of our counterparty,
which is a major financial institution, deteriorates and results in its nonperformance, we could
incur a significant loss.
Some of our customers are experiencing, or may experience in the future, severe financial
problems that have had or may have a significant impact on their creditworthiness. We cannot
provide assurance that one or more of our financially distressed customers will not default on
their obligations to us or that such a default or defaults will not have a material adverse effect
on our business, financial position, future results of operations, or future cash flows.
Furthermore, the bankruptcy of one or more of our customers, or some other similar proceeding or
liquidity constraint, might make it unlikely that we would be able to collect all or a significant
portion of amounts owed by the distressed entity or entities. In addition, such events might force
such customers to reduce or curtail their future use of our products and services, which could have
a material adverse effect on our results of operations and financial condition.
Continued depressed oil and gas prices may adversely affect our results of operations and financial
condition.
Our success is highly dependent on prices for oil and gas, which are extremely volatile. Oil
and gas prices are currently lower than in early 2008. Extended low prices for oil or gas will 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 levels of
production, actions by OPEC and other countries and government actions. Prices of oil and gas will
affect the following aspects of our business:
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our revenues, cash flows and earnings; |
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|
the amount of oil and gas that we are economically able to produce; |
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our ability to attract capital to finance our operations and the cost of the
capital; |
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the amount we are allowed to borrow under our senior secured credit facility; |
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the value of our oil and gas properties; and |
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the profit or loss we incur in exploring for and developing our reserves. |
Our reserve information represents estimates that may turn out to be incorrect if the assumptions
upon which these estimates are based are inaccurate. Any material inaccuracies in these reserve
estimates or underlying assumptions will materially affect the quantities and present value of our
reserves.
The process of estimating oil and gas reserves is complex. It requires interpretations of
available technical data and various assumptions, including assumptions relating to economic
factors. Any significant inaccuracies in these interpretations or assumptions could materially
affect the estimated quantities and present value of reserves shown in this annual report.
In order to prepare these estimates, we must project production rates and the timing of
development expenditures. The assumptions regarding the timing and costs to commence production
from our deepwater wells
- 27 -
used in preparing our reserves are often subject to revisions over time as described under
Our deepwater operations have special operational risks that may negatively affect the value of
those assets. We must also analyze available geological, geophysical, production and engineering
data, the extent, quality and reliability of which can vary. The process also requires us to make
economic assumptions, such as oil and gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. Therefore, estimates of oil and gas reserves are
inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves most likely will vary from
the estimates. Any significant variance could materially affect the estimated quantities and
present value of reserves shown in this report. In addition, estimates of proved reserves may be
adjusted to reflect production history, results of exploration and development, prevailing oil and
gas prices and other factors, many of which are beyond our control.
Also, under MMS rules governing our deepwater Medusa property and several of our shallow
water, deep natural gas properties and prospects, we are eligible for royalty suspensions depending
on the difference between the average monthly New York Mercantile Exchange (NYMEX) sales price for
oil or gas and price thresholds set by the MMS. As a result, our reserve estimates may increase or
decrease depending upon the relation of price thresholds versus the average NYMEX prices. You
should not assume that the present value of future net cash flows from our proved reserves referred
to in this report is the current market value of our estimated oil and gas reserves. In accordance
with SEC requirements, we generally base the estimated discounted future net cash flows from our
proved reserves on prices and costs on the date of the estimate. Actual future prices and costs may
differ materially from those used in the present value estimate.
The discounted present value of our oil and gas reserves is prepared in accordance with
guidelines established by the SEC. A purchaser of reserves would use numerous other factors to
value the reserves. The discounted present value of reserves, therefore, does not necessarily
represent the fair market value of those reserves.
On December 31, 2008, approximately 26% of the discounted present value of our estimated net
proved reserves was proved undeveloped. Proved undeveloped reserves represented 24% of total proved
reserves. Most of these proved undeveloped reserves were attributable to our deepwater properties.
Development of these properties is subject to additional risks as described below.
Information about reserves constitutes forward-looking information. See Forward-Looking
Statements for information regarding forward-looking information.
Unless we are able to replace reserves which we have produced, our cash flows and production will
decrease over time.
Our future success depends upon our ability to acquire, find and develop oil and gas reserves
that are economically recoverable. As is generally the case for Gulf of Mexico properties, our
producing properties usually have high initial production rates, followed by a steep decline in
production. As a result, we must continually 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. This is
particularly so during the present banking and economic crisis coinciding with periods of high
operating costs when it is expensive to contract for drilling rigs and other equipment and
personnel necessary to explore for oil and gas. 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.
Also, because of the aggregate short life of our reserves, our return on the investment we
make in our oil and gas wells and the value of our oil and gas wells will depend significantly on
prices prevailing during relatively short production periods.
A significant part of the value of our production and reserves is concentrated in a small
number of offshore properties, and any production problems or inaccuracies in reserve estimates
related to those properties would
- 28 -
adversely impact our business. During 2008, approximately 74% of our daily production came
from five of our properties in the Gulf of Mexico. Moreover, one property accounted for 31% of our
production during this period. In addition, at December 31, 2008, most of our proved reserves were
located in two fields in the Gulf of Mexico, with approximately 80% of our total net proved
reserves attributable to these properties. If mechanical problems, storms or other events curtailed
a substantial portion of this production or if the actual reserves associated with any one of these
producing properties are less than our estimated reserves, our results of operations and financial
condition could be adversely affected.
Our exploration projects increases the risks inherent in our oil and gas activities.
Part of our business strategy is to replace 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 or at an acceptable cost. Additionally, we are often uncertain as to the future costs
and timing of drilling, completing and producing wells. Our drilling operations may be curtailed,
delayed or canceled as a result of a variety of factors, including:
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unexpected drilling conditions; |
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|
pressure or inequalities in formations; |
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equipment failures or accidents; |
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adverse weather conditions; |
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|
governmental requirements; and |
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|
shortages or delays in the availability of drilling rigs and the delivery of
equipment. |
We do not operate all of our properties and have limited influence over the operations of some of
these properties, particularly two of our deepwater properties.
Our lack of control could result in the following:
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the operator may initiate exploration or development at a faster or slower pace than
we prefer; |
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|
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 |
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|
if an operator refuses to initiate a project, we may be unable to pursue the
project. |
Any of these events could materially reduce the value of our non-operated properties.
Our deepwater operations have special operational risks that may negatively affect the value of
those assets.
Drilling operations in the deepwater area are by their nature more difficult and costly than
drilling operations in shallow water. Deepwater drilling operations require the application of more
advanced drilling technologies involving a higher risk of technological failure and usually have
significantly higher drilling costs than shallow water drilling operations. Deepwater wells are
completed using sub-sea completion techniques that require substantial time and the use of advanced
remote installation equipment. These operations involve a high risk of mechanical difficulties and
equipment failures that could result in significant cost overruns.
In deepwater, the time required to commence production following a discovery is much longer
than in shallow water and on-shore. Deepwater discoveries require the construction of expensive
production facilities and pipelines prior to production. We cannot estimate the costs and timing of
the construction of these facilities with certainty, and the accuracy of our estimates will be
affected by a number of factors beyond our control, including the following:
- 29 -
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decisions made by the operators of our deepwater wells; |
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the availability of materials necessary to construct the facilities; |
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the proximity of our discoveries to pipelines; |
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|
the price of oil and natural gas; and |
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|
regulatory requirements. |
Delays and cost overruns in the commencement of production will affect the value of our
deepwater prospects and the discounted present value of reserves attributable to those prospects.
Competitive industry conditions may negatively affect our ability to conduct operations.
We operate in the highly competitive areas of oil and gas exploration, development and
production. We compete for the purchase of leases in the Gulf of Mexico granted by the U. S.
government and from other oil and gas companies. These leases include exploration prospects as well
as properties with proved reserves. Factors that affect our ability to compete in the marketplace
include:
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our access to the capital necessary to drill wells and acquire properties; |
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our ability to acquire and analyze seismic, geological and other information
relating to a property; |
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our ability to retain the personnel necessary to properly evaluate seismic and other
information relating to a property; |
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the location of, and our ability to access, platforms, pipelines and other
facilities used to produce and transport oil and gas production; |
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the standards we establish for the minimum projected return on an investment of our
capital; and |
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the availability of alternate fuel sources. |
Our competitors include major integrated oil companies, substantial independent energy
companies, and affiliates of major interstate and intrastate pipelines and national and local gas
gatherers, many of which possess greater financial, technological and other resources than we do.
Our competitors may use superior technology, which we may be unable to afford or which would
require costly investment by us in order to compete.
Our industry is subject to rapid and significant advancements in technology, including the
introduction of new products and services using new technologies. As our competitors use or develop
new technologies, we may be placed at a competitive disadvantage, and competitive pressures may
force us to implement new technologies at a substantial cost. In addition, our competitors may have
greater financial, technical and personnel resources that allow them to enjoy technological
advantages and may in the future allow them to implement new technologies before we can. We cannot
be certain that we will be able to implement technologies on a timely basis or at a cost that is
acceptable to us. One or more of the technologies that we currently use or that we may implement in
the future may become obsolete, and we may be adversely affected. For example, marine seismic
acquisition technology has been characterized by rapid technological advancements in recent years,
and further significant technological developments could substantially impair our 3-D seismic
datas value.
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 acquire proved producing
properties, develop our existing reserves, and to discover new oil and gas reserves.
Historically, we have financed these expenditures primarily with cash from operations,
proceeds from bank borrowings and proceeds from the sale of debt and equity securities. We cannot
assure you that we will be able to
- 30 -
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.
We expect to continue using our senior secured revolving credit facility to borrow funds to
supplement our available cash. The amount we may borrow under our senior secured credit facility
may not exceed a certain amount determined by the lenders under such facility based on their
projections of our future production, production costs, taxes, commodity prices and any other
factors deemed relevant by our lenders. We cannot control the assumptions the lenders use to
calculate the amount we can borrow. The lenders may, without our consent, adjust the amount we can
borrow quarterly or in situations where we purchase or sell assets or issue debt securities. If our
borrowings under the senior secured credit facility exceed the permitted amount, the lenders may
require that we repay the excess. If this were to occur, we might have to sell assets or seek
financing from other sources. Sales of assets could further reduce the amount we can borrow.
We cannot assure you that we would be successful in selling assets or arranging substitute
financing. If we were not able to repay borrowings under our senior secured credit facility to
reduce the outstanding amount to less than the permitted amount, we would be in default under our
senior secured credit facility.
Our decision to drill a prospect is subject to a number of factors, and we may decide to alter our
drilling schedule or not drill at all.
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:
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|
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receipt of additional seismic data or the reprocessing of existing data; |
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|
material changes in oil or gas prices; |
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|
the costs and availability of drilling rigs; |
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|
|
the success or failure of wells drilled in similar formations or which would use the
same production facilities; |
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|
availability and cost of capital; |
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|
changes in the estimates of the costs to drill or complete wells; |
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|
our ability to attract other industry partners to acquire a portion of the working
interest to reduce exposure to costs and drilling risks; and |
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|
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.
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:
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|
our drilling operations may encounter unexpected formations or pressures, which
could cause damage to equipment or personal injury; |
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we may experience equipment failures which curtail or stop production; |
- 31 -
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|
we could experience blowouts or other damages to the productive formations that may
require a well to be re-drilled or other corrective action to be taken; and |
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|
because of these or other events, we could experience environmental hazards,
including release of oil and gas from spills, gas leaks, and ruptures. |
In the event of any of the foregoing, we may be subject to interrupted production or
substantial environmental liability due to injury to persons or loss of life, damage to or
destruction of property, natural resources and equipment, pollution and other environmental damage,
investigation and remediation requirements, and fines and penalties and injunctive relief.
Moreover, a substantial portion of our operations are offshore and are subject to a variety of
risks peculiar to the marine environment such as capsizing, collisions, hurricanes and other
adverse weather conditions, which can result in substantial damage to facilities and interrupt
production, as well as 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.
We may not have production to offset hedges; by hedging, we may not benefit from price increases.
Part of our business strategy is to reduce our exposure to the volatility of oil and gas
prices by hedging a portion of our production. In a typical hedge transaction, we will have the
right to receive from the other parties to the hedge the excess of the fixed price specified in the
hedge over a floating price based on a market index, multiplied by the quantity hedged. If the
floating price exceeds the fixed price, we are required to pay the other parties this difference
multiplied by the quantity hedged. We are required to pay the difference between the floating price
and the fixed 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. 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. Another type of hedging
contract we have entered into is a put contract. Under a put, if the price falls below the set
floor price, the counter-party to the contract pays the difference to us.
Compliance with environmental and other government regulations could be costly and could negatively
impact production.
Our operations are subject to numerous laws and regulations governing the operation and
maintenance of our facilities and the discharge of materials into the environment or otherwise
relating to environmental protection. These laws and regulations may:
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require that we acquire permits before commencing drilling; |
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impose operational and other conditions on our activities; |
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restrict the substances that can be released into the environment in connection with
drilling and production activities; |
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limit or prohibit drilling activities on protected areas such as wetlands,
wilderness areas or coral reefs; and |
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require measures to remediate or mitigate pollution and environmental impacts from
current and former operations, such as cleaning up spills or dismantling abandoned
production facilities. |
Under these laws and regulations, we could be liable for costs of investigation, removal and
remediation, damages to and loss of use of natural resources, loss of profits or impairment of
earning capacity, property damages,
costs of and increased public services, as well as administrative, civil and criminal fines
and penalties, and
- 32 -
injunctive relief. We could also be affected by more stringent laws and
regulations adopted in the future, including any related climate change and greenhouse gases. Under
the common law, we could be liable for injuries to people and property. 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. Also, 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 incidents.
Factors beyond our control affect our ability to market production and our financial results.
The ability to market oil and gas from our wells depends upon numerous factors beyond our
control. These factors include:
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the extent of domestic production and imports of oil and gas; |
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the proximity of the gas production to gas pipelines; |
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the availability of pipeline capacity; |
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|
the demand for oil and gas by utilities and other end users; |
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the availability of alternative fuel sources; |
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|
the effects of inclement weather; |
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|
state and federal regulation of oil and gas marketing; and |
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|
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.
If oil and gas prices decrease further or remain depressed for extended periods of time, we may be
required to take additional writedowns of the carrying value of our oil and gas properties.
We may be required to writedown the carrying value of our oil and gas properties when oil and
gas prices are low or if we have substantial downward adjustments to our estimated net proved
reserves, increases in our estimates of development costs or deterioration in our exploration
results. Under the full-cost method which we use to account for our oil and gas properties, the net
capitalized costs of our oil and gas properties may not exceed the present value, discounted at
10%, of future net cash flows from estimated net proved reserves, using period end oil and gas
prices or prices as of the date of our auditors report, plus the lower of cost or fair market
value of our unproved properties. If net capitalized costs of our oil and gas properties exceed
this limit, we must charge the amount of the excess to earnings. This type of charge will not
affect our cash flows, but will reduce the book value of our stockholders equity. We review the
carrying value of our properties quarterly, based on prices in effect as of the end of each quarter
or at the time of reporting our results. Once incurred, a writedown of oil and gas properties is
not reversible at a later date, even if prices increase.
There are inherent limitations in all control systems, and misstatements due to error or fraud that
could seriously harm our business may occur and not be detected.
Our management, including our Chief Executive and Financial Officers, do not expect that our
internal controls and disclosure controls will prevent all possible error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. In addition, the design of a control
system must reflect the fact that there are resource constraints and the benefit of controls must
be relative to their costs. Because of the inherent limitations in all control systems, an
evaluation of controls can only provide reasonable assurance that all material control issues and
instances of fraud, if any, in our company have been detected. These inherent limitations include
the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or
mistake. Further, controls
- 33 -
can be circumvented by the individual acts of some persons or by
collusion of two or more persons. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Because of
inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. A failure of our controls and procedures to detect error or fraud could
seriously harm our business and results of operations.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratio of earnings to fixed charges for each of
the periods indicated. For purposes of computing ratio of earnings to fixed charges, earnings
consist of the sum of our pre-tax income from continuing operations and fixed charges minus
capitalized interest. Fixed charges consist of interest expense, including amounts capitalized,
amortization of capitalized expenses related to indebtedness, and estimated interest factor of rent
expense. Rent expense excludes taxes and common area maintenance charges.
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Years Ended December 31, |
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
June 30, 2008 |
|
June 30, 2009 |
Ratio of Earnings to Fixed Charges |
|
|
4.6x |
|
|
|
1.7x |
|
|
|
|
|
|
|
2.3x |
|
|
|
1.1x |
|
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. Old Notes that are validly tendered
and exchanged pursuant to the exchange offer will be retired and canceled. Accordingly, our
issuance of Exchange Notes and Common and Preferred Shares will not result in any cash proceeds to
us.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2009 on an actual basis and
on an as adjusted basis to give effect to this exchange offer.
|
|
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|
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As of June 30, 2009 |
|
|
|
|
|
|
As Adjusted |
|
|
Actual |
|
For This Offering |
|
|
(In thousands) |
|
|
(Unaudited)(1) |
Debt
|
|
$ |
283,570 |
|
|
$ |
222,841 |
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit)
|
|
$ |
(140,715 |
) |
|
$ |
(79,986 |
) |
|
|
|
|
|
|
|
|
|
Total Capitalization
|
|
$ |
142,855 |
|
|
$ |
142,855 |
|
|
|
|
(1) |
|
Assumes that all of the outstanding Old Notes are tendered for conversion pursuant to the
exchange offer. As of June 30, 2009, there were approximately $200 million aggregate principal
amount of Old Notes outstanding and 21,676,067 shares of common stock issued and outstanding.
If all of the outstanding Old Notes are validly tendered and accepted for conversion in
accordance with this exchange offer, there would be an aggregate of approximately 25,958,094
shares of common stock outstanding. Upon conversion of the Preferred Shares, there would be an
aggregate of approximately 29,333,094 shares of common stock outstanding. |
- 34 -
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the NYSE under the symbol CPE. The following table sets forth,
for the periods indicated, the high and low sale prices per share of our common stock as reported
on the NYSE
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
High |
|
Low |
2009 |
|
|
|
|
|
|
|
|
March 31 |
|
$ |
3.50 |
|
|
$ |
.93 |
|
June 30 |
|
|
3.15 |
|
|
|
1.01 |
|
September 30 |
|
|
2.43 |
|
|
|
1.37 |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
March 31 |
|
$ |
19.22 |
|
|
$ |
13.42 |
|
June 30 |
|
|
28.93 |
|
|
|
17.63 |
|
September 30 |
|
|
28.00 |
|
|
|
16.18 |
|
December 31 |
|
|
18.06 |
|
|
|
1.02 |
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
March 31 |
|
$ |
15.00 |
|
|
$ |
12.54 |
|
June 30 |
|
|
15.19 |
|
|
|
13.26 |
|
September 30 |
|
|
15.68 |
|
|
|
11.50 |
|
December 31 |
|
|
17.21 |
|
|
|
13.33 |
|
On September 30, 2009 the closing price for our common stock as reported on the NYSE was $1.83
per share.
Our Board of Directors has not declared cash dividends on our common stock and it is unlikely
that we will pay any dividends on our common stock in the foreseeable future. In any event, the
declaration and payment of future dividends by our Board of Directors will be dependent upon our
earnings and financial condition, economic and market conditions and other factors deemed relevant
by our Board of Directors. Therefore, no assurance can be given as to the amount or timing of the
declaration and payment of future dividends.
- 35 -
THE EXCHANGE OFFER
NEITHER CALLON NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER YOU SHOULD
TENDER OLD NOTES OR REFRAIN FROM TENDERING OLD NOTES IN THE EXCHANGE OFFER. ACCORDINGLY, YOU MUST
MAKE YOUR OWN DECISION AS TO WHETHER TO TENDER OLD NOTES IN THE EXCHANGE OFFER. PARTICIPATION IN
THE EXCHANGE OFFER IS VOLUNTARY, AND YOU SHOULD CAREFULLY CONSIDER WHETHER TO PARTICIPATE. BEFORE
YOU MAKE YOUR DECISION, WE URGE YOU TO CAREFULLY READ THIS MEMORANDUM IN ITS ENTIRETY, INCLUDING
THE INFORMATION SET FORTH IN THE SECTION ENTITLED RISK FACTORS AND THE INFORMATION INCORPORATED
BY REFERENCE HEREIN. WE ALSO URGE YOU TO CONSULT YOUR OWN FINANCIAL AND TAX ADVISORS IN MAKING YOUR
OWN DECISIONS ON WHAT ACTION, IF ANY, TO TAKE IN LIGHT OF YOUR OWN PARTICULAR CIRCUMSTANCES.
Securities Subject to the Exchange Offer
We are offering, upon the terms and subject to the conditions set forth in this offer to
exchange, to exchange $750 principal amount of Exchange Notes, 20.625 Common Shares and 1.6875
Preferred Shares for each $1,000 principal amount of validly tendered and accepted Old Notes. We
are offering to exchange all of the Old Notes. However, the exchange offer is subject to the
conditions described in this memorandum.
Based on the principal amount of the Old Notes outstanding as of the date of this memorandum,
we are offering to acquire up to $200,000,000 aggregate principal amount of Old Notes that are
validly tendered on the terms and subject to the conditions set forth in the offer to exchange.
You may tender all, some or none of your Old Notes, subject to the terms and conditions of the
exchange offer. Holders of Old Notes must tender their Old Notes in a minimum $1,000 principal
amount and multiples thereof.
The exchange offer is not being made to, and we will not accept tenders for exchange from,
holders of Old Notes in any jurisdiction in which the exchange offer or the acceptance of the offer
would not be in compliance with the securities or blue sky laws of that jurisdiction.
Our Board of Directors and officers do not make any recommendation to the holders of the Old
Notes as to whether or not to exchange all or any portion of their Old Notes. In addition, we have
not authorized anyone to make any recommendation. You must make your own decision whether to
tender your Old Notes for exchange and, if so, the amount of Old Notes to tender.
Consent Solicitation
If you tender your Old Notes in the exchange offer, you will be deemed to consent to
amendments to the indenture governing the Old Notes. You may not tender your Old Notes pursuant to
the exchange offer unless you consent to the proposed amendments to the indenture.
The solicitation date will be the same date as the expiration date for the exchange offer. For
more information about the consent solicitation, see The Consent Solicitation.
Conditions to the Exchange Offer
We will not be required to accept for exchange any Old Notes tendered, and we may terminate or
amend this offer if we deem it inadvisable to proceed with the offer or with the acceptance for
exchange and issuance of the Exchange Notes, Common Shares and Preferred Shares.
We may, at any time before the expiration of the exchange offer:
|
(a) |
|
terminate the exchange offer and return all tendered Old Notes to the holders thereof; |
- 36 -
|
(b) |
|
modify, extend or otherwise amend the exchange offer and retain all tendered
Old Notes until the expiration date, as may be extended; or |
|
|
(c) |
|
waive the unsatisfied conditions and accept all Old Notes tendered and not previously
withdrawn. |
Except for the requirements of applicable United States federal and state securities laws, we
know of no federal or state regulatory requirements to be complied with or approvals to be obtained
by us in connection with the exchange offer which, if not complied with or obtained, would have a
material adverse effect on us.
Expiration Date; Extensions; Amendments
For purposes of the exchange offer, the term expiration date shall mean 5:00 p.m., New York
City time, on Wednesday, November 18, 2009, subject to our right to extend such date and time for
the exchange offer in our sole discretion, in which case, the expiration date shall mean the latest
date and time to which the exchange offer is extended. We will not extend the expiration date
beyond December 31, 2009 unless we have not had the indenture governing the Exchange Notes
qualified by the SEC by such date.
We reserve the right, in our sole discretion, to (1) extend the exchange offer as set forth
above, (2) terminate the exchange offer upon failure to satisfy any of the conditions listed above
or (3) amend the exchange offer, by giving oral (promptly confirmed in writing) or written notice
of such delay, extension, termination or amendment to the exchange agent. Any such extension,
termination or amendment will be followed promptly by a public announcement thereof which, in the
case of an extension, will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
If we amend the exchange offer in a manner that we determine constitutes a material or
significant change, we will extend the exchange offer for a period of five to twenty business days,
depending upon the significance of the amendment, if the exchange offer would otherwise have
expired during such five to twenty business day period. Any change in the consideration offered to
holders of Old Notes in the exchange offer shall be paid to all holders whose Old Notes have
previously been tendered pursuant to the exchange offer.
Without limiting the manner in which we may choose to make a public announcement of any delay,
extension, amendment or termination of the exchange offer, we will comply with applicable
securities laws by disclosing any such amendment by means of a memorandum supplement that we
distribute to the holders of the Old Notes. We will have no other obligation to publish, advertise
or otherwise communicate any such public announcement other than by making a timely release to any
appropriate news agency, including Bloomberg Business News and the Dow Jones News Service.
Effect of Tender
Any valid tender by a holder of Old Notes that is not validly withdrawn prior to the
expiration date of the exchange offer will constitute a binding agreement between that holder and
us upon the terms and subject to the conditions of the exchange offer. The acceptance of the
exchange offer by a tendering holder of Old Notes will constitute the agreement by that holder to
deliver good and marketable title to the tendered Old Notes, free and clear of all liens, charges,
claims, encumbrances, interests and restrictions of any kind. We will pay accrued and unpaid
interest at 9.75% through November 18, 2009 on each Old Note accepted for exchange and at 13% from
November 19, 2009 and thereafter on each Exchange Note issued to such holder of such Old Note, with
such interest to be paid on the next scheduled interest payment date of the Exchange Notes. In
addition, a validly tendered Old Note that is accepted for exchange will be deemed to have
consented to the amendments to the indenture governing the Old Notes.
Absence of Dissenters Rights
Holders of the Old Notes do not have any appraisal or dissenters rights under applicable law
in connection with the exchange offer.
- 37 -
Acceptance of Old Notes for Exchange
The Exchange Notes will be delivered in book-entry form promptly following the expiration date
of the exchange offer.
We will be deemed to have accepted validly tendered Old Notes when, and if, we have given oral
(promptly confirmed in writing) or written notice thereof to the exchange agent. Subject to the
terms and conditions of the exchange offer, the issuance of Exchange Notes will be recorded in
book-entry form by the exchange agent on the exchange date upon receipt of such notice. The
exchange agent will act as agent for tendering holders of the Old Notes for the purpose of
receiving book-entry transfers of Old Notes in the exchange agents account at DTC. If any validly
tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the
exchange offer, including if Old Notes are validly withdrawn, such withdrawn Old Notes will be
returned without expense to the tendering holder or such Old Notes will be credited to an account
maintained at DTC designated by the DTC participant who so delivered such Old Notes, in either
case, promptly after the expiration or termination of the exchange offer.
Procedures for Exchange
If you hold Old Notes and wish to have such securities exchanged for Exchange Notes, Common
Shares and Preferred Shares you must validly tender, or cause the valid tender of, your Old Notes
using the procedures described in this offer to exchange.
Only registered holders of Old Notes (or their DTC participants, as described below) are
authorized to tender the Old Notes (at the instruction of the beneficial holders as applicable).
The procedures by which you may tender or cause to be tendered Old Notes will depend upon the
manner in which the Old Notes are held, as described below.
Tender of Old Notes Held Through a Nominee
If you are a beneficial owner of Old Notes that are held of record by a custodian bank,
depositary, broker, dealer, trust company or other nominee, and you wish to tender Old Notes in the
exchange offer, you should contact the record holder promptly and instruct the record holder to
tender the Old Notes on your behalf using one of the procedures described below. Your nominee will
provide you with its instruction letter, which you must use to give these instructions.
Tender of Old Notes Through DTC
Pursuant to authority granted by DTC, if you are a DTC participant that has Old Notes credited
to your DTC account and thereby held of record by DTCs nominee, you may directly tender your Old
Notes as if you were the record holder. Because of this, references herein to registered or record
holders include DTC participants with Old Notes credited to their accounts. If you are not a DTC
participant, you may tender your Old Notes by book-entry transfer by contacting your broker or
opening an account with a DTC participant. Within two business days after the date of this offer to
exchange, the exchange agent will establish accounts with respect to the Old Notes at DTC for
purposes of the exchange offer.
Any participant in DTC may tender Old Notes effecting a book-entry transfer of the Old Notes
to be tendered in the exchange offer into the account of the exchange agent at DTC by
electronically transmitting its acceptance of the exchange offer through DTCs Automated Tender
Offer Program, or ATOP, procedures for transfer; if ATOP procedures are followed, DTC will then
verify the acceptance, execute a book-entry delivery to the exchange agents account at DTC and
send an agents message to the exchange agent. DTC participants following this procedure should
allow sufficient time for completion of the ATOP procedures prior to 5:00 p.m. New York City time
on the expiration date of the exchange offer. The exchange agent and DTC have confirmed that the
exchange offer is eligible for ATOP.
Withdrawal of Tenders
- 38 -
Tenders of Old Notes in connection with the exchange offer may be withdrawn at any time prior
to 5:00 p.m. the expiration date of the exchange offer, but you must withdraw all of your Old Notes
previously tendered. Tenders of Old Notes may not be withdrawn at any time after such date unless
the exchange offer is extended, in which case tenders of Old Notes may be withdrawn at any time
prior to the expiration date, as extended.
Beneficial owners desiring to withdraw Old Notes previously tendered should contact the DTC
participant through which such beneficial owners hold their Old Notes. In order to withdraw Old
Notes previously tendered, a DTC participant may, prior to the expiration date of the exchange
offer, withdraw its instruction previously transmitted through ATOP by (i) withdrawing its
acceptance through ATOP or (ii) delivering to the exchange agent by mail, hand delivery or
facsimile transmission, notice of withdrawal of such instruction. The notice of withdrawal must
contain the name and number of the DTC participant. The method of notification is at the risk and
election of the holder and must be timely received by the exchange agent. Withdrawal of a prior
instruction will be effective upon receipt of the notice of withdrawal by the exchange agent. All
signatures on a notice of withdrawal must be guaranteed by a recognized participant in the
Securities Transfer Agents Medallion Program, the NYSE Medallion Signature Program or the Stock
Exchange Medallion Program. However, signatures on the notice of withdrawal need not be guaranteed
if the Old Notes being withdrawn are held for the account of an eligible guarantor institution. A
withdrawal of an instruction must be executed by a DTC participant in the same manner as such DTC
participants name appears on its transmission through ATOP to which such withdrawal relates. A DTC
participant may withdraw a tender only if such withdrawal complies with the provisions described in
this paragraph.
Withdrawals of tenders of Old Notes may not be rescinded and any Old Notes withdrawn will
thereafter be deemed not validly tendered for purposes of the exchange offer. Properly withdrawn
Old Notes, however, may be retendered by following the procedures described above at any time prior
to the expiration date of the exchange offer.
Miscellaneous
All questions as to the validity, form, eligibility (including time of receipt) and acceptance
for exchange of any tender of Old Notes in connection with the exchange offer will be determined by
us, in our sole discretion, and our determination will be final and binding. We reserve the
absolute right to reject any and all tenders not in proper form or the acceptance for exchange of
which may, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive
any defect or irregularity in the tender of any Old Notes in the exchange offer, and the
interpretation by us of the terms and conditions of the exchange offer will be final and binding on
all parties, provided that we will not waive any condition to the offer with respect to an
individual holder of Old Notes unless we waive that condition for all such holders. None of us, the
exchange agent, or any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such notification.
Tenders of Old Notes involving any irregularities will not be deemed to have been made until
such irregularities have been cured or waived. Old Notes received by the exchange agent in
connection with the exchange offer that are not validly tendered and as to which the irregularities
have not been cured or waived will be returned by the exchange agent to the DTC participant who
delivered such Old Notes by crediting an account maintained at DTC designated by such DTC
participant promptly after the expiration date of the exchange offer or the withdrawal or
termination of the exchange offer.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the transfer and exchange of Old Notes
to us in the exchange offer. If transfer taxes are imposed for any other reason, the amount of
those transfer taxes, whether imposed on the registered holder or any other persons, will be
payable by the tendering holder.
Exchange Agent
American Stock Transfer & Trust Company has been appointed the exchange agent for the exchange
offer. All correspondence in connection with the exchange offer should be sent or delivered by each
holder of Old Notes,
- 39 -
or a beneficial owners custodian bank, depositary, broker, dealer, trust
company or other nominee, to the exchange
agent at the address set forth on the back cover page of this memorandum. We will pay the
exchange agent reasonable and customary fees for its services and will reimburse it for its
reasonable, out-of-pocket expenses in connection therewith.
Other Fees and Expenses
Tendering holders of Old Notes will not be required to pay any expenses of soliciting tenders
in the exchange offer. However if a tendering holder handles the transaction through its broker,
dealer, commercial bank, trust company or other institution, such holder may be required to pay
brokerage fees or commissions.
Resales of Exchange Notes, Common Shares and Preferred Shares
This exchange offer is being made pursuant to an exemption from the registration requirements
of the Securities Act contained in Section 3(a)(9) of the Securities Act. Consistent with past
interpretations of Section 3(a)(9) by the staff of the SEC, the Common Shares, Preferred Shares and
Exchange Notes received in exchange for the Old Notes tendered pursuant to the exchange offer will
be freely transferable without registration under the Securities Act and without regard to any
holding period by those tendering holders who are not our affiliates (as defined in the
Securities Act) because the Old Notes have met the minimum holding period requirements under Rule
144 of the Securities Act (Rule 144). Common Shares, Preferred Shares and Exchange Notes issued
pursuant to the exchange offer to a holder of Old Notes who is deemed to be our affiliate must be
sold or transferred by such affiliate in accordance with the requirements of Rule 144, and the
holding period of Old Notes tendered by such recipients can be tacked to the Common Shares,
Preferred Shares and Exchange Notes received for the Old Notes for the purpose of satisfying the
holding period requirements of Rule 144.
THE CONSENT SOLICITATION
In connection with the exchange offer, we are soliciting consents to proposed amendments to
the indenture governing the Old Notes.
How to Consent or Revoke Consent
If you tender your Old Notes in the exchange offer you will be deemed to have consented to the
proposed amendments to the indenture governing the Old Notes. You may not participate in the
exchange offer unless you consent to proposed amendments to the indenture.
Your consent may not be revoked unless you also withdraw the Old Notes from the exchange
offer. If you tender your Old Notes in the exchange offer and then withdraw them, you will also be
deemed to have revoked the consent to the amendments to the indenture governing the Old Notes. For
a description of your ability to withdraw Old Notes tendered in the exchange offer, see The
Exchange Offer Withdrawal Rights.
If you are a beneficial owner of Old Notes that are held of record by a custodian bank,
depositary, broker, dealer, trust company or other nominee, and you wish to consent without
tendering your Old Notes in the exchange offer, you should contact the record holder and instruct
the record holder to consent to the amendments to the indenture governing the Old Notes. Your
nominee will provide you with its instruction letter, which you must use to give these
instructions.
Amendments to the Old Notes
The proposed amendments to the indenture for the Old Notes would, in substance, (a) eliminate
our obligation to comply with the provisions of Article III. Covenants (except for Sections 3.14(b)
and 3.15) and Article IV. Successor Company, (b) eliminate as Events of Default the events
described in Section 6.1(b), 6.1(c)(i) and 6.1(d)-(h), and (c) eliminate Article X. Subsidiary
Guarantee and any reference to the Subsidiary Guarantees or Subsidiary Guarantors.
- 40 -
When Amendments Become Effective
We intend to execute the supplemental indenture governing the Old Notes on the date we close
the exchange offer if we receive the approval of at least a majority of the outstanding principal
amount of Old Notes. The supplemental indenture will become effective when executed by us and the
trustee but will become operative only on the closing of the exchange offer.
Consequences of Failure to Participate in the Consent Solicitation
If you do not participate in the exchange offer and the proposed amendments become effective,
you will be bound by the amendments even if you do not consent to them.
THE EXCHANGE AGREEMENT
We have entered into an exchange agreement with holders of 73.5% of our Old Notes. In the
exchange agreement, we agree to make the exchange offer and the holders of Old Notes agreed to
tender their Old Notes in the exchange offer and consent to the amendments to the indenture for the
Old Notes in the consent solicitation.
The parties to the exchange agreement have agreed that for a period of six (6) months from the
date of issuance of Common Shares pursuant to the exchange offer, they will not, without our prior
written consent, sell Common Shares in an amount that is more than 25,000 Common Shares per week.
DESCRIPTION OF THE EXCHANGE NOTES
We will issue the Exchange Notes under an Indenture as of a date promptly after the closing of
the exchange offer (the Indenture) among us, the Subsidiary Guarantors and American Stock
Transfer & Trust Company, as trustee (the Trustee). The terms of the Exchange Notes include
those expressly set forth in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the Trust Indenture Act). The Indenture is limited in
aggregate principal amount to up to $150.0 million. We will issue a maximum principal amount of up
to $150,000,000 of Exchange Notes in exchange for the Old Notes in the Exchange Offer.
This Description of the Exchange Notes is intended to be a useful overview of the material
provisions of the Exchange Notes and the Indenture. Since this description is only a summary, you
should refer to the Indenture for a complete description of our obligations and your rights.
You will find the definitions of capitalized terms used in this description under the heading
Certain Definitions.
For purposes of this description, references to the Company, we, our, and us refer
only to Callon Petroleum Company and not to its subsidiaries. References in this section to the
Securities include the Exchange Notes only.
General
The Exchange Notes. The Securities:
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are general senior obligations of the Company, initially secured by second priority
liens on substantially all of the assets of the Company and the Subsidiary Guarantors ; |
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are limited to an aggregate principal amount of $150.0 million; |
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|
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mature on September 15, 2016; |
- 41 -
|
|
|
will be issued in denominations of $750 and integral multiples of $750; |
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|
will be represented by one or more registered notes in global form, but in certain
circumstances may be represented by notes in definitive form. See Book-Entry,
Delivery and Form; |
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|
rank equally in right of payment to all existing and future Senior Indebtedness of
the Company; |
|
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|
rank senior in right of payment to all existing and any future Subordinated Debt of
the Company; |
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|
are unconditionally guaranteed on a senior basis by Callon Petroleum Operating
Company, Callon Offshore Production, Inc., and Mississippi Marketing, Inc.,
representing each Restricted Subsidiary of the Company. See Subsidiary Guarantees;
and |
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|
|
|
are secured by second priority liens on substantially all assets of the Company and
the Subsidiary Guarantors until the aggregate outstanding principal amount of the Old
Notes is less than $10 million. |
Interest. Interest on the Securities will compound semi-annually and:
|
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accrue at the rate of 13.00% per annum; |
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|
accrue from the date of issuance or the most recent interest payment date; |
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|
|
be payable in cash quarterly in arrears on March 31, June 30, September 30 and
December 31, commencing on December 31, 2009; |
|
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|
be payable to the Holders of record on the March 15th, June
15th, September 15th, or December 15th immediately
preceding the related interest payment dates; and |
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|
|
|
be computed on the basis of a 360-day year comprised of twelve 30-day months. |
Payments on the Notes; Paying Agent and Registrar
Payments of principal on, premium if any, and interest on Securities represented by a Global
Security will be made by the transfer of immediately available funds to the accounts specified by
The Depository Trust Company. The Company will make all payments in respect of a Definitive
Security by mailing a check to the registered address of each Holder thereof; provided, however,
that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000
aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by
the payee with a bank in the United States if such Holder elects payment by wire transfer by giving
written notice to the Trustee or the Paying Agent to such effect designating such account no later
than 15 days immediately preceding the relevant due date for payment, or such other date as the
Trustee may accept in its discretion.
The Company will maintain in The City of New York, an office or agency where the Securities
may be presented or surrendered for payment (Paying Agent), where, if applicable, the Securities
may be surrendered for registration of transfer or exchange (Registrar) and where notices and
demands to or upon the Company in respect of the Securities and the Indenture may be served. The
principal corporate trust office of the Trustee, or if the Trustees principal corporate trust
office is not located in The City of New York, any other office or agency maintained by the Trustee
in The City of New York (the Corporate Trust Office), shall be such office or agency of the
Company, unless the Company shall designate and maintain some other office or agency for one or
more of such purposes. The Company will give prompt written notice to the Trustee of any change in
the location of any such office or agency.
- 42 -
Transfer and Exchange
A Holder of Securities may transfer or Exchange Notes at the office of the Registrar in
accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents. No service charge will be
imposed by the Company, the Trustee or the Registrar for any registration of transfer or exchange
of Securities, but the Company may require a Holder to pay a sum sufficient to cover any transfer
tax or other similar governmental charge required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any note selected for redemption. Also, the
Company is not required to transfer or exchange any note for a period of 15 days before a selection
of notes to be redeemed.
The registered Holder of a Security will be treated as the owner of it for all purposes.
Optional Redemption
The Securities will not be redeemable at the option of the Company prior to September 15,
2012. On and after such date, the Securities will be redeemable, at the Companys option, in whole
or in part, at any time upon not less than 30 nor more than 60 days prior notice mailed by first
class mail to each Holders registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest to the redemption date (subject
to the right of Holders of record on the relevant record date to receive interest due on the
relevant interest payment date):
If redeemed during the 12 month period commencing on September 15 of the years set forth
below:
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Redemption |
Period |
|
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Price |
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2012 |
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106.500 |
% |
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2013 |
|
|
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|
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103.250 |
% |
|
2014 |
|
|
|
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101.625 |
% |
|
2015 |
|
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|
|
100.000 |
% |
At any time prior to September 15, 2012, the Company may on any one or more occasions redeem
up to 35% of the aggregate principal amount of Securities issued under the Indenture at a
redemption price of 113% of the aggregate principal amount, plus accrued and unpaid interest to the
redemption date, subject to the rights of Holders on the relevant record date to receive interest
on the relevant interest payment date, with the Net Cash Proceeds of a sale of capital stock (other
than Disqualified Stock) of the Company or any disposition of Entrada Assets by the Company or any
of its Subsidiaries (or amounts received from any judgments or settlement of claims, disputes and
causes of action related to such Entrada Assets); provided that (i) at least 65% of the aggregate
principal amount of Securities originally issued under the Indenture (excluding Securities held by
the Company and its Subsidiaries) remains outstanding immediately after the occurrence of such
redemption, and (ii) notice of the redemption is given within 30 days of the date of receipt of
such Net Cash Proceeds.
In the case of any partial redemption, selection of the Securities for redemption will be made
by the Trustee in compliance with the requirements of the principal national securities exchange,
if any, on which the Securities are listed or, if the Securities are not listed, then on a pro rata
basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate, although no Securities of $750 in original principal amount or less will be
redeemed in part. If any Security is to be redeemed in part only, the notice of redemption
relating to such Security shall state the portion of the principal amount thereof to be redeemed.
A new Security in principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Security. On and after the redemption
date, interest will cease to accrue on Securities or portions thereof called for redemption as long
as the Company has deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
Ranking
The Securities will be senior, second lien secured obligations of the Company until the
outstanding principal amount of Old Notes is less than $10 million. As such, the Securities will
effectively rank senior to any
- 43 -
senior unsecured obligations and subordinated obligations of the Company and its Subsidiary
Guarantors (to the extent of the assets securing the Securities) but effectively junior to all
existing and future first lien secured Debt of the Company and its Subsidiary Guarantors. Once the
Securities become unsecured, they will rank (i) senior in right of payments to all existing and
future Debt that is expressly subordinated in right of payment to the Securities, (ii) equally in
right of payment with all existing and future liabilities of the Company that are not so
subordinated, and (iii) effectively junior to any secured Debt of the Company or its Subsidiary
Guarantors, to the extent of the assets securing such Debt. In the event of bankruptcy,
liquidation, reorganization or other winding up of the Company while the Securities are secured,
the assets of the Company will be available to pay obligations on the Securities only after all
Debt secured by first liens on such assets has been repaid in full. In the event of bankruptcy,
liquidation, reorganization or other winding up of the Company while the Securities are unsecured,
the assets of the Company will be available to pay obligations on the Securities only on a pro rata
basis with other general unsecured creditors of the Company and after all Debt secured by such
assets has been repaid in full We advise you that there may not be sufficient assets remaining to
pay amounts due on any or all of the Securities then outstanding. The Subsidiary Guarantees of the
Securities will have a similar ranking with respect to secured and unsecured senior Debt of the
Subsidiary Guarantors as the Securities do with respect to secured and unsecured senior Debt of the
Company as well as with respect to any unsecured obligations expressly subordinated in right of
payment to the Subsidiary Guarantees.
Subsidiary Guarantees
The Subsidiary Guarantors will, jointly and severally, unconditionally guarantee, on a senior
unsecured basis, the Companys obligations under the Securities and all obligations under the
Indenture. Each Subsidiary Guarantee will rank equally with all other senior Debt of that
Subsidiary Guarantor. Until the outstanding principal amount of Old Notes is less than $10
million, the Securities will be secured by second priority liens on substantially all assets of the
Subsidiary Guarantors and will effectively rank senior to any senior unsecured obligations and
subordinated obligations of the Subsidiary Guarantors (to the extent of the assets securing the
Securities) but effectively junior to all existing and future first lien secured Debt of the
Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will be limited as
necessary to prevent that Subsidiary Guarantee from constituting a fraudulent conveyance or
fraudulent transfer under applicable law.
In the event a Subsidiary Guarantor is sold or disposed of (whether by merger, consolidation,
the sale of its Capital Stock or the sale of its capital stock or the sale of all or substantially
all of its assets (other than by lease)) and whether or not the Subsidiary Guarantor is the
surviving corporation in such transaction to a Person which is not the Company or a Restricted
Subsidiary of the Company, such Subsidiary Guarantor will be released from its obligations under
its Subsidiary Guarantee if:
|
(1) |
|
the sale or other disposition is in compliance with the Indenture, including
the covenants Sales of Property and Issuance and Sale of Capital Stock; and |
|
|
(2) |
|
all the obligations of such Subsidiary Guarantor under the First Lien Secured
Credit Facility and related documentation and any other agreements relating to any
other indebtedness of the Company or its Restricted Subsidiaries terminate upon
consummation of such transaction. |
In addition, a Subsidiary Guarantor will be released from its obligations under the Indenture
and the Subsidiary Guarantee if the Company designates such Subsidiary as an Unrestricted
Subsidiary and such designation complies with the other applicable provisions of the Indenture.
Change in Control
If a Change in Control occurs, each registered Holder of Securities will have the right to
require the Company to repurchase all or any part (equal to $750 or an integral multiple thereof)
of such Holders Securities at a purchase price in cash equal to 101% of the principal amount of
the Securities plus accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on the relevant record date to receive interest due on the relevant
interest payment date).
- 44 -
Within 30 days following any Change in Control, the Company will mail a notice (the Change in
Control Offer) to each registered Holder with a copy to the Trustee stating:
|
(1) |
|
that a Change in Control has occurred and that such Holder has the right to
require the Company to purchase such Holders Securities at a purchase price in cash
equal to 101% of the principal amount of such Securities plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of Holders of record on
a record date to receive interest on the relevant interest payment date) (the Change
in Control Payment); |
|
|
(2) |
|
the repurchase date (which shall be no earlier than 30 days nor later than 60
days from the date such notice is mailed) (the Change in Control Payment Date); and |
|
|
(3) |
|
the procedures determined by the Company, consistent with the Indenture, that a
Holder must follow in order to have its Securities repurchased. |
On the Change in Control Payment Date, the Company will, to the extent lawful:
|
(1) |
|
accept for payment all Securities or portions of Securities (in integral
multiples of $750) properly tendered under the Change in Control Offer; |
|
|
(2) |
|
deposit with the Paying Agent an amount equal to the Change in Control Payment
in respect of all Securities or portions of Securities so tendered; and |
|
|
(3) |
|
deliver or cause to be delivered to the Trustee the Securities so accepted
together with an Officers Certificate stating the aggregate principal amount of
Securities or portions of Securities being purchased by the Company. |
The paying agent will promptly mail to each Holder of Securities so tendered the Change in
Control Payment for such Securities, and the Trustee will promptly authenticate and mail (or cause
to be transferred by book entry) to each Holder a new Security equal in principal amount to any
unpurchased portion of the Securities surrendered, if any; provided that each such new Security
will be in a principal amount of $750 or an integral multiple of $750.
If the Change in Control Payment Date is on or after an interest record date and on or before
the related interest payment date, any accrued and unpaid interest, if any, will be paid to the
Person in whose name a Security is registered at the close of business on such record date, and no
additional interest will be payable to Holders who tender pursuant to the Change in Control Offer.
The Change in Control provisions described above will be applicable whether or not any other
provisions of the Indenture are applicable. Except as described above with respect to a Change in
Control, the Indenture does not contain provisions that permit the Holders to require that the
Company repurchase or redeem the Securities in the event of a takeover, recapitalization or similar
transaction.
The Company will not be required to make a Change in Control Offer upon a Change in Control if
a third party makes the Change in Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture applicable to a Change in Control Offer
made by the Company and purchases all Securities validly tendered and not withdrawn under such
Change in Control Offer.
The Company will comply, to the extent applicable, with the requirements of Section 14(e) of
the Exchange Act and any other securities laws or regulations in connection with the repurchase of
Securities pursuant to this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its obligations described
in the Indenture by virtue of the conflict.
The Companys ability to repurchase Securities pursuant to a Change in Control Offer may be
limited by a number of factors. The occurrence of certain of the events that constitute a Change
in Control would constitute a
- 45 -
default under the First Lien Secured Credit Facility. In addition, certain events that may
constitute a Change in Control under the First Lien Secured Credit Facility and cause a default
thereunder may not constitute a Change in Control under the Indenture. Future Debt of the Company
and its Subsidiaries may also contain prohibitions of certain events that would constitute a Change
in Control or require such Debt to be repurchased upon a Change in Control. Moreover, the exercise
by the Holders of their right to require the Company to repurchase the Securities could cause a
default under such Debt, even if the Change in Control itself does not, due to the financial effect
of such repurchase on the Company. Finally, the Companys ability to pay cash to the Holders upon
a repurchase may be limited by the Companys then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any required repurchases.
Even if sufficient funds were otherwise available, the terms of the First Lien Secured Credit
Facility (and other Debt) may prohibits the Companys prepayment of Securities before their
scheduled maturity. Consequently, if the Company is not able to prepay the Debt under the First
Lien Secured Credit Facility and any such other Debt containing similar restrictions or obtain
requisite consents, as described above, the Company will be unable to fulfill its repurchase
obligations if Holders of Securities exercise their repurchase rights following a Change in
Control, resulting in a default under the Indenture. A default under the Indenture may result in a
cross-default under the First Lien Secured Credit Facility.
The Change in Control provisions described above may deter certain mergers, tender offers and
other takeover attempts involving the Company by increasing the capital required to effectuate such
transactions.
Certain Covenants
Debt Incurrence:
The Company will not, and will not permit any Restricted Subsidiary to, incur, create or
assume any Debt, other than Permitted Indebtedness, if:
|
(1) |
|
the Interest Coverage Ratio after giving effect to the incurrence, creation or
assumption of such Debt is less than 2.5 to 1.0, or |
|
|
(2) |
|
the Debt Coverage Ratio after giving effect to the incurrence, creation or
assumption of such Debt is more than 4.0 to 1.0. |
In addition, the Company will not, and will not permit any Restricted Subsidiary to, incur,
create or assume more than $175,000,000 in aggregate principal amount of Senior Secured Debt unless
the ratio of the Companys Adjusted Consolidated Net Tangible Assets to Senior Secured Debt is
equal to, or greater than, 2.5 to 1.0.
Liens:
Unless the Securities are secured equally and ratably, the Company will not, and will not
permit any Restricted Subsidiary to, create, incur or assume any Lien securing pari passu or
Subordinated Debt on any of its Properties (now owned or hereafter acquired), except:
|
(1) |
|
Liens securing the payment of the Securities; |
|
|
(2) |
|
Permitted Liens; |
|
|
(c) |
|
Liens securing leases allowed under clause (d) in the definition of Permitted
Indebtedness, but only on the Property under lease; |
|
|
(d) |
|
Liens existing on September 30, 2009; |
|
|
(e) |
|
Liens on cash or securities of the Company securing Debt described in clause
(e) of the definition of Permitted Indebtedness; and |
- 46 -
|
(f) |
|
any Lien on any Property acquired after the date hereof existing prior to the
acquisition thereof by the Company or any Restricted Subsidiary or existing on any
Property of any Person that becomes a Restricted Subsidiary after the date hereof prior
to the time such Person becomes a Restricted Subsidiary; provided that (i) such Lien is
not created in contemplation of or in connection with such acquisition or such Person
becoming a Restricted Subsidiary, as the case may be, (ii) such Lien shall not apply to
any other Property of the Company or any Restricted Subsidiary and (iii) such Lien
shall secure only those obligations which it secures on the date of such acquisition or
the date such Person becomes a Restricted Subsidiary, as the case may be and
extensions, renewals and replacements thereof that do not increase the outstanding
principal amount thereof. |
Restricted Investments; Restrictive Agreements:
The Company will not, and will not permit any of its Restricted Subsidiaries, directly or
indirectly, to:
|
(1) |
|
declare or pay any dividend or make any distribution on or in respect of its
capital stock (including any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) except: |
|
(a) |
|
dividends or distributions payable in capital stock of the
Company (other than Disqualified Stock) or in options, warrants or other rights
to purchase such capital stock; and |
|
|
(b) |
|
dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company (and if such Restricted Subsidiary is not
a Wholly-Owned Subsidiary, to its other Holders of common capital stock on a
pro rata basis); and |
|
|
(c) |
|
dividends on the Companys convertible preferred stock issued
on the date of the Indenture or as part of the Exchange Offer. |
|
(2) |
|
purchase, redeem, retire or otherwise acquire for value any capital stock of
the Company or any direct or indirect parent of the Company held by Persons other than
the Company or a Restricted Subsidiary of the Company (other than in exchange for
capital stock of the Company (other than Disqualified Stock)); |
|
|
(3) |
|
purchase, repurchase, redeem, defease or otherwise acquire or retire for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Debt (other than the purchase, repurchase or other acquisition of
Subordinated Debt purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the date
of purchase, repurchase or acquisition); or |
|
|
(4) |
|
make any Restricted Investment in any Person (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition, retirement or
Restricted Investment referred to in clauses (1) through (4) shall be referred to
herein as a Restricted Payment); |
If at the time the Company or such Restricted Subsidiary makes such Restricted Payment:
|
(a) |
|
a Default shall have occurred and be continuing (or would
result therefrom); or |
|
|
(b) |
|
the Company is not able to Incur an additional $1.00 of Debt
pursuant to the first paragraph under the Debt Incurrence covenant after
giving effect, on a pro forma basis, to such Restricted Payment; or |
|
|
(c) |
|
the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the date of the Indenture
would exceed the sum of: |
|
(i) |
|
50% of Consolidated Net Income for the period
(treated as one accounting period) from the beginning of the first
calendar quarter commencing after June |
- 47 -
|
|
|
30, 2009 to the end of the most recent calendar quarter ending prior
to the date of such Restricted Payment for which financial statements
are in existence (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit); |
|
|
(ii) |
|
the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its capital stock (other than
Disqualified Stock) or other capital contributions subsequent to the
date of the Indenture (other than Net Cash Proceeds received from an
issuance or sale of such capital stock to a Subsidiary of the Company
or an employee stock ownership plan, option plan or similar trust to
the extent such sale to an employee stock ownership plan, option plan
or similar trust is financed by loans from or guaranteed by the Company
or any Restricted Subsidiary unless such loans have been repaid with
cash on or prior to the date of determination); |
|
|
(iii) |
|
the amount by which Debt of the Company is
reduced on the Companys balance sheet upon the conversion or exchange
(other than by a Subsidiary of the Company) subsequent to the date of
the Indenture of any Debt of the Company convertible or exchangeable
for capital stock (other than Disqualified Stock) of the Company (less
the amount of any cash, or other property, distributed by the Company
upon such conversion or exchange); and |
|
|
(iv) |
|
the amount equal to the net reduction in
Restricted Investments made by the Company or any of its Restricted
Subsidiaries in any Person resulting from: |
|
(a) |
|
repurchases or redemptions of
such Restricted Investments by such Person, proceeds realized
upon the sale of such Restricted Investment to an unaffiliated
purchaser, repayments of loans or advances or other transfers of
assets (including by way of dividend or distribution) by such
Person to the Company or any Restricted Subsidiary of the
Company; or |
|
|
(b) |
|
the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of Investment) not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary in
such Unrestricted Subsidiary, |
|
|
|
which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; provided, however,
that no amount will be included under this clause (iv) to the extent
it is already included in Consolidated Net Income. |
The provisions of the preceding paragraph will not prohibit:
|
(1) |
|
any purchase or redemption of capital stock or Subordinated Debt of the Company
made by exchange for, or out of the proceeds of the substantially concurrent sale of,
capital stock of the Company or Subordinated Debt with a maturity after September 30,
2016; provided, however, that (a) such purchase or redemption will be excluded in
subsequent calculations of the amount of Restricted Payments and (b) the Net Cash
Proceeds from such sale will be excluded from clause (c)(ii) of the preceding
paragraph; |
|
|
(2) |
|
any purchase or redemption of Subordinated Debt of the Company made by exchange
for, or out of the proceeds of the substantially concurrent sale of, Subordinated Debt
of the Company that is refinanced in compliance with the Indenture; provided, however,
that such purchase or redemption will be excluded in subsequent calculations of the
amount of Restricted Payments; |
- 48 -
|
(3) |
|
so long as no Default or Event of Default has occurred and is continuing, any
purchase or redemption of Subordinated Debt from Net Available Cash to the extent
permitted under Sale of Property below; provided, however, that such purchase or
redemption will be excluded in subsequent calculations of the amount of Restricted
Payments; |
|
|
(4) |
|
dividends paid within 60 days after the date of declaration if at such date of
declaration such dividend would have complied with this provision; provided, however,
that such dividends will be included in subsequent calculations of the amount of
Restricted Payments; |
|
|
(5) |
|
so long as no Default or Event of Default has occurred and is continuing, |
|
(a) |
|
the purchase, redemption or other acquisition, cancellation or
retirement for value of capital stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire capital stock of the
Company or any Restricted Subsidiary of the Company or any parent of the
Company held by any existing or former employees or management of the Company
or any Subsidiary of the Company or their assigns, estates or heirs, in each
case in connection with the repurchase provisions under employee or director
stock option or stock purchase agreements or other agreements to compensate
management employees or directors; provided that such redemptions or
repurchases pursuant to this clause will not exceed $2.0 million in the
aggregate during any calendar year and $10.0 million in the aggregate for all
such redemptions and repurchases; provided, however, that the amount of any
such repurchase or redemption will be included in subsequent calculations of
the amount of Restricted Payments; and |
|
|
(b) |
|
loans or advances to employees or directors of the Company or
any Subsidiary of the Company the proceeds of which are used to purchase
capital stock of the Company, in an aggregate amount not in excess of $2.0
million at any one time outstanding; provided, however, that the amount of such
loans and advances will be included in subsequent calculations of the amount of
Restricted Payments; |
|
(6) |
|
repurchases of capital stock deemed to occur upon the exercise of stock options
if such capital stock represents a portion of the exercise price thereof; provided,
however, that such repurchases will be excluded from subsequent calculations of the
amount of Restricted Payments; and |
|
|
(7) |
|
Restricted Payments in an amount not to exceed $10.0 million; provided that the
amount of such Restricted Payments will be included in the calculation of the amount of
Restricted Payments. |
The amount of all Restricted Payments (other than cash) shall be the fair market value on the
date of such Restricted Payment of Property or securities proposed to be paid, transferred or
issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to such
Restricted Payment. The fair market value of any cash Restricted Payment shall be its face amount
and any non-cash Restricted Payment shall be determined conclusively by the Board of Directors
acting in good faith.
The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise
cause or permit to exist or become effective any consensual encumbrance or consensual restriction
on the ability of any Restricted Subsidiary to:
|
(1) |
|
pay dividends or make any other distributions on its capital stock or pay any
Debt or other obligations owed to the Company or any Restricted Subsidiary; |
|
|
(2) |
|
make any loans or advances to the Company or any Restricted Subsidiary; or |
|
|
(3) |
|
transfer any of its Property to the Company or any Restricted Subsidiary. |
The preceding provisions will not prohibit:
- 49 -
|
(a) |
|
any encumbrance or restriction pursuant to the Indenture,
Collateral Agreements, the First Lien Secured Credit Facility, the 2010 Senior
Notes Indenture or an agreement in effect on the date hereof; |
|
|
(b) |
|
any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Debt incurred by a
Restricted Subsidiary on or before the date on which such Restricted Subsidiary
was acquired by the Company (other than Debt incurred as consideration in, or
to provide all or any portion of the funds utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company or in
contemplation of the transaction) and outstanding on such date; |
|
|
(c) |
|
any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding, replacement or
refinancing of Debt incurred pursuant to an agreement referred to in clause (a)
or (b) of this paragraph or this clause (c) or contained in any amendment to an
agreement referred to in clause (a) or (b) of this paragraph or this clause
(c); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such agreement are no less
favorable in any material respect to the Holders of the Securities than the
encumbrances and restrictions contained in such agreements referred to in
clauses (a) or (b) of this paragraph on the date hereof or the date such
Restricted Subsidiary became a Restricted Subsidiary, whichever is applicable; |
|
|
(d) |
|
in the case of clause (3) of this covenant, any encumbrance or
restriction; |
|
(i) |
|
that restricts in a customary manner the
subletting, assignment or transfer of any Property that is subject to a
lease, license or similar contract, or the assignment or transfer of
any such lease, license or other contract; |
|
|
(ii) |
|
contained in mortgages, pledges or other
security agreements permitted under the Indenture securing Debt of the
Company or a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of the Property subject to such
mortgages, pledges or other security agreements; or |
|
|
(iii) |
|
pursuant to customary provisions regarding
preferential rights or rights of first refusal or restricting
dispositions of real property interests set forth in any reciprocal
easement agreements of the Company or any Restricted Subsidiary; |
|
(e) |
|
purchase money obligations for Property acquired in the
ordinary course of business that impose encumbrances or restrictions of the
nature described in clause (3) of this covenant on the Property so acquired; |
|
|
(f) |
|
any restriction with respect to a Restricted Subsidiary (or any
of its Property) imposed pursuant to an agreement entered into for the direct
or indirect sale or disposition of all or substantially all the capital stock
or Property of such Restricted Subsidiary (or the Property that is subject to
such restriction) pending the closing of such sale or disposition; |
|
|
(g) |
|
encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order; |
|
|
(h) |
|
any encumbrance or restriction arising out of any Permitted
Lien; and |
|
|
(i) |
|
customary provisions with respect to the distribution of assets
or property in joint venture agreements. |
- 50 -
Sales and Leasebacks:
Other than in connection with Permitted Equipment Financings, neither the Company nor any
Restricted Subsidiary will enter into any arrangement, directly or indirectly, with any Person
whereby the Company or any Restricted Subsidiary shall sell or transfer any of its Property,
whether now owned or hereafter acquired, and whereby the Company or any Restricted Subsidiary shall
then or thereafter rent or lease as lessee such Property or any part thereof or other Property
which the Company or any Restricted Subsidiary intends to use for substantially the same purpose or
purposes as the Property sold or transferred.
Limitation on Leases:
Other than in connection with Permitted Equipment Financings, neither the Company nor any
Restricted Subsidiary will create, incur, assume or permit to exist any obligation for the payment
of rent or hire of Property of any kind whatsoever (real or personal including capital leases, but
excluding leases of Hydrocarbon Interests), under leases or lease agreements for terms in excess
of, or that are non-cancelable by the Company or such Subsidiary within, twelve months which would
cause all payments made by the Company and its Restricted Subsidiaries pursuant to all such leases
or lease agreements to exceed (i) $4,000,000 per annum during calendar years 2009 and 2010, and
(ii) $6,000,000 per annum during any calendar year thereafter.
Sale or Discount of Receivables:
Neither the Company nor any Restricted Subsidiary will discount or sell (with or without
recourse) any of its Securities receivable or accounts receivable other than settlement of any past
due accounts in the ordinary course of business and in accordance with prudent commercial
practices.
Sale of Property:
The Company shall not, and shall not permit any Restricted Subsidiary to, sell, assign, convey
or otherwise transfer any Property unless (i) consideration equal to the fair market value of the
Property sold is received, (ii) the sale is an arms length transaction; (iii) all of the
consideration received consists of cash, Cash Equivalents, liquid securities or Exchanged
Properties (Permitted Consideration); provided, however, that the Company and its Restricted
Subsidiaries may receive Property that does not constitute Permitted Consideration, so long as the
aggregate fair market value of all Property received pursuant to this proviso shall not exceed
10.0% of Adjusted Consolidated Net Tangible Assets, as determined by the Companys Board of
Directors.
Within 365 days following the receipt of Net Available Cash, an amount equal to 100% of the
Net Available Cash from such Asset Disposition shall be applied by the Company or such Restricted
Subsidiary, as the case may be:
|
(1) |
|
to apply all or any of the Net Available Cash therefrom to repay indebtedness
under the First Lien Secured Credit Facility, or |
|
|
(2) |
|
invest all or any part of the Net Available Cash in Property that will be used
in the oil and gas business of the Company or its Restricted Subsidiaries. |
Any Net Available Cash from Asset Dispositions that are not applied or invested as provided in
the preceding paragraph will be deemed to constitute Excess Proceeds. On the 366th day after an
Asset Disposition, if the aggregate amount of Excess Proceeds exceeds $5,000,000.00, the Company
will be required to make an offer (Asset Disposition Offer) to all Holders of Securities and to
the extent required by the terms of other Senior Indebtedness, to all Holders of other Senior
Indebtedness outstanding with similar provisions requiring the Company to make an offer to purchase
such Senior Indebtedness with the proceeds from any Asset Disposition (Pari Passu Notes), to
purchase the maximum principal amount of Securities and any such Pari Passu Notes to which the
Asset Disposition Offer applies that may be purchased out of the Excess Proceeds, at an offer price
in cash in an amount equal to 100% of the principal amount of the Securities and Pari Passu Notes
plus accrued and unpaid interest to the date of purchase, in accordance with the procedures set
forth herein or in the agreements governing the Pari Passu Notes, as applicable. To the extent
that the aggregate amount of Securities and Pari Passu Notes so validly tendered and not properly
withdrawn pursuant to an Asset Disposition Offer is less than the Excess Proceeds, the Company may
use any remaining Excess Proceeds for general corporate purposes, subject to the other covenants
contained herein. If the aggregate principal amount of Securities surrendered by Holders thereof
and other Pari Passu Notes
- 51 -
surrendered by Holders or lenders, collectively, exceeds the amount of Excess Proceeds, the Company
shall select the Securities and Pari Passu Notes to be purchased on a pro rata basis on the basis
of the aggregate principal amount of tendered Securities and Pari Passu Notes. Upon completion of
such Asset Disposition Offer, the amount of Excess Proceeds shall be reset at zero.
The Asset Disposition Offer will remain open for a period of twenty (20) Business Days
following its commencement, except to the extent that a longer period is required by applicable law
(the Asset Disposition Offer Period). No later than five (5) Business Days after the termination
of the Asset Disposition Offer Period (the Asset Disposition Purchase Date), the Company will
purchase the principal amount of Securities and Pari Passu Notes required to be purchased pursuant
to this covenant (the Asset Disposition Offer Amount) or, if less than the Asset Disposition
Offer Amount has been so validly tendered, all Securities and Pari Passu Notes validly tendered in
response to the Asset Disposition Offer.
Any accrued and unpaid interest will be paid to the Person in whose name a Security is
registered at the close of business on such date, and no additional interest will be payable to
Holders of the Securities who tender Securities pursuant to the Asset Disposition Offer.
On or before the Asset Disposition Purchase Date, the Company will, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Asset Disposition Offer Amount
of Securities and Pari Passu Notes or portions of Securities and Pari Passu Notes so validly
tendered and not properly withdrawn pursuant to the Asset Disposition Offer, or if less than the
Asset Disposition Offer Amount has been validly tendered and not properly withdrawn, all Securities
and Pari Passu Notes so validly tendered and not properly withdrawn. The Company will deliver all
certificates and Securities required, if any, by the Indenture or the agreements governing the Pari
Passu Notes. The Company will promptly (but in any case not later than the Asset Disposition
Purchase Date) mail or deliver to each tendering Holder of Securities or Holder or lender of Pari
Passu Notes, as the case may be, an amount equal to the purchase price of the Securities or Pari
Passu Notes so validly tendered and not properly withdrawn by such Holder or lender, as the case
may be, and accepted by the Company for purchase, and the Company will promptly issue a new
Security and will deliver such new Security to such Holder, in a principal amount equal to any
unpurchased portion of the Security surrendered. In addition, the Company will take any and all
other actions required by the agreements governing the Pari Passu Notes. Any Security not so
accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company
will publicly announce the results of the Asset Disposition Offer on the Asset Disposition Purchase
Date.
For the purposes of this covenant, the following will be deemed to be cash:
|
(1) |
|
the assumption by the transferee of Debt (other than Subordinated Debt or
Disqualified Stock) of the Company or Debt (other than Preferred Stock) of any
Restricted Subsidiary of the Company and the release of the Company or such Restricted
Subsidiary from all liability on such Debt in connection with such Asset Disposition
(in which case the Company will, without further action, be deemed to have applied such
deemed cash to Debt in accordance with the second paragraph of this covenant above);
and |
|
|
(2) |
|
securities, notes or other obligations received by the Company or any
Restricted Subsidiary of the Company from the transferee that are promptly converted by
the Company or such Restricted Subsidiary into cash or Cash Equivalents. |
The Company will comply, to the extent applicable, with the requirements of securities laws or
regulations in connection with the repurchase of Securities pursuant to this Agreement. To the
extent that the provisions of any securities laws or regulations conflict with provisions of this
covenant, the Company will comply with the applicable securities laws and regulations and will not
be deemed to have breached its obligations under the Indenture by virtue of complying with such
securities laws and regulations.
Transactions with Affiliates:
Neither the Company nor any Restricted Subsidiary will enter into any transaction, including,
without limitation, any purchase, sale, lease or exchange of Property or the rendering of any
service, with any Affiliate unless such transaction is otherwise permitted under the Indenture, is
in the ordinary course of its business and is
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upon fair and reasonable terms no less favorable to it than it would obtain in a comparable arms
length transaction with a Person not an Affiliate; provided, however, that notwithstanding the
provisions of this covenant, the Company may engage in the Permitted Medusa Transaction or
Permitted Entrada Transaction.
Issuance and Sale of Capital Stock:
The Company (a) shall not permit any Restricted Subsidiary to issue any capital stock (other
than to the Company or a Wholly-Owned Subsidiary of the Company) and (b) shall not permit any
Person (other than the Company or a wholly-owned Restricted Subsidiary of the Company) to own any
capital stock of any Restricted Subsidiary, except, in each case, for:
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(1) |
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directors qualifying shares; |
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(2) |
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capital stock of a Restricted Subsidiary organized in a foreign jurisdiction
required to be issued to, or owned by, the government of such foreign jurisdiction or
individual or corporate citizens of such foreign jurisdiction in order for such
Restricted Subsidiary to transact business in such foreign jurisdiction; |
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(3) |
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a sale of all or substantially all the capital stock of a Restricted Subsidiary
effected in connection with a Property sale in accordance with the Sale of Property
covenant above; and |
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(4) |
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the capital stock of a Restricted Subsidiary owned by a Person at the time such
Restricted Subsidiary became a Restricted Subsidiary or acquired by such Person in
connection with the formation of the Restricted Subsidiary; provided, however, that any
capital stock retained by the Company or a Restricted Subsidiary shall be treated as an
Investment for purposes of the Restricted Investments; Restrictive Agreements
covenant above, if the amount of such capital stock represents less than a majority of
the voting stock of such Restricted Subsidiary. |
SEC Reports:
Notwithstanding that the Company may not be subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, to the extent permitted by the Exchange Act, the Company will file
with the Commission, and provide the Trustee and the Holders of the Securities with, the annual
reports and the information, documents and other reports (or copies of such portions of any of the
foregoing as the Commission may by rules and regulations prescribe) that are specified in Sections
13 and 15(d) of the Exchange Act within the time periods specified therein. In the event that the
Company is not permitted to file such reports, documents and information with the Commission
pursuant to the Exchange Act, the Company will nevertheless provide such Exchange Act information
to the Trustee and the Holders of the Securities as if the Company were subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act within the time periods specified therein.
Merger and Consolidation:
The Company shall not merge into or consolidate with or sell all or substantially all of its
Property to any Person or group of affiliated Persons unless:
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(1) |
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either (a) the Company survives, or (b) the survivor (Successor Company) is
an entity organized under United States law or any state thereof or the District of
Columbia and assumes, by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company under
the Securities and the Indenture; |
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(2) |
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no Default or Event of Default shall have occurred and be continuing; |
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(3) |
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except in the case of the consolidation or merger of any Restricted Subsidiary
with or into the Company, the consolidated net worth of the Company (or the surviving
entity) does not decrease; |
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(4) |
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immediately after giving effect to the transaction the Successor Company could
incur $1.00 of additional Debt (excluding Permitted Indebtedness) under Section the
first paragraph of the Debt Incurrence covenant; and |
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(5) |
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if any of the Companys assets become subject to any Lien, the imposition of
such Lien shall have been in compliance with the Liens covenant above. |
Notwithstanding the preceding clause (4), (a) any Restricted Subsidiary of the Company may
consolidate with, merge into or transfer all or part of its properties and assets to the Company,
(b) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating
the Company in another jurisdiction to realize tax or other benefits and (c) any Wholly-Owned
Subsidiary can consolidate with or merge into any other Wholly-Owned Subsidiary, except Restricted
Subsidiaries cannot merge with Unrestricted Subsidiaries.
The Successor Company will succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture.
Future Subsidiary Guarantors:
After the Issue Date, the Company will cause each Restricted Subsidiary, other than a Foreign
Subsidiary, created or acquired by the Company or one or more of its Restricted Subsidiaries to
execute and deliver to (i) the Trustee a Subsidiary Guarantee pursuant to which such Subsidiary
Guarantor will unconditionally Guarantee, on a joint and several basis, the full and prompt payment
of the principal of, premium, if any, and interest on the Securities on a senior basis, and (ii)
the Collateral Agent, amendments to the Collateral Agreements and take such other actions as the
Collateral Agent deems reasonably necessary in order to grant to the Collateral Agent, for the
benefit of the Holders, a perfected Lien in the assets, including the filing of UCC financing
statements in such jurisdictions as may be required by the Collateral Agreements, by law or as may
be reasonably requested by the Collateral Agent.
Limitation on Lines of Business:
Neither the Company nor any Restricted Subsidiary will allow any material change to be made in
the character of its business.
Events of Default
One or more of the following events shall constitute an Event of Default:
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(1) |
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the Company shall default in the payment or prepayment when due of any
principal of or interest on any Security and such default, other than a default of a
payment or prepayment of principal (which shall have no cure period), shall continue
unremedied for a period of thirty (30) days; or |
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(2) |
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the Company or any Restricted Subsidiary shall default in the payment when due
of any principal of or interest on any of its other Debt (other than Debt owed to the
Company or any Restricted Subsidiary) aggregating $10,000,000 or more ($15,000,000 in
the case of non-recourse Debt), or any event specified in any Security, agreement,
indenture or other document evidencing or relating to any such Debt shall occur if the
effect of such event is to cause, or (with the giving of any notice or the lapse of
time or both) to permit the Holder or Holders of such Debt (or a trustee or
administrative agent on behalf of such Holder or Holders) to cause, such Debt to become
due prior to its stated maturity; or |
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(3) |
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(a) the Company shall default in the performance of any of its obligations
under the provisions described under Merger and Consolidation above; (b) the Company
shall default in the performance of any of the covenants described under Change in
Control or Certain Covenants above (other than the payment of amounts due which
shall be governed by clause (1) or defaults under the provisions described under
Merger and Consolidation above which shall be governed by clause (3)(a)) and such
default shall continue unremedied for a period of thirty (30) days after notice thereof
specified below or (c) the Company shall default in the performance |
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of any of its other obligations under the Indenture and such default shall continue
unremedied for a period of sixty (60) days after notice thereof as provided below;
or |
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(4) |
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the Company or any Restricted Subsidiary shall admit in writing its inability
to, or be generally unable to, pay its debts as such debts become due; or |
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(5) |
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the Company or any Restricted Subsidiary shall (a) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its Property, (b) make a
general assignment for the benefit of its creditors, (c) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (d) file a petition
seeking to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, liquidation or composition or readjustment of debts, (e)
fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any
petition filed against it in an involuntary case under the Federal Bankruptcy Code, or
(f) take any corporate action for the purpose of effecting any of the foregoing; or |
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(6) |
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a proceeding or case shall be commenced, without the application or consent of
the Company or any Restricted Subsidiary, in any court of competent jurisdiction,
seeking (a) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (b) the appointment of a trustee, receiver,
custodian, liquidator or the like of such Person of all or any substantial part of its
assets, or (c) similar relief in respect of such Person under any law relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of
debts, and such proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect, for a period of sixty (60) days; or (d) an order for relief
against such Person shall be entered in an involuntary case under the Federal
Bankruptcy Code; |
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(7) |
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a judgment or judgments for the payment of money in excess of $10,000,000 in
the aggregate (net of any amounts that a reputable and creditworthy insurance company
has acknowledged liability for in writing) shall be rendered by a court against the
Company or any Restricted Subsidiary and the same shall not be discharged (or provision
shall not be made for such discharge), or a stay of execution thereof shall not be
procured, within sixty (60) days from the date of entry thereof and the Company or such
Subsidiary shall not, within said period of sixty (60) days, or such longer period
during which execution of the same shall have been stayed, appeal therefrom and cause
the execution thereof to be stayed during such appeal; |
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(8) |
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any Subsidiary takes, suffers or permits to exist any of the events or
conditions referred to in clauses (4), (5), (6) or (7), and such event or condition has
a Material Adverse Effect; or |
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(9) |
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any Collateral Agreement at any time for any reason shall cease to be in full
force and effect in all material respects, or any Collateral Agreement ceases to give
the Collateral Agent the Liens (other than Liens securing Collateral, individually or
in the aggregate, having a Fair Market Value of less than $5,000,000), rights, powers
and privileges purported to be created thereby, superior to and prior to the rights of
all third Persons other than the holders of Permitted Liens and such Collateral being
subject to no other Liens except as expressly permitted by any Collateral Agreement, or
this Indenture or the Company or any of its Restricted Subsidiaries contest in any
manner the effectiveness, validity, binding nature or enforceability of any Collateral
Agreement. |
Notwithstanding the foregoing, a Default under clause (3) above will not constitute an Event
of Default until the Trustee or the Holders of at least 25% in principal amount of the outstanding
Securities notify the Company of the Default and the Company does not cure such Default within the
time specified in said clause (3) after receipt of such notice. Such notice must specify the
Default, demand that it be remedied and state that such notice is a Notice of Default.
If an Event of Default (other than an Event of Default specified in clause (5) or (6) above)
occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in
principal amount of the
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outstanding Securities by notice to the Company and the Trustee, may, and the Trustee at the
request of such Holders shall, declare the principal of, premium, if any, and accrued and unpaid
interest, on all the Securities to be due and payable. Upon such a declaration, such principal,
premium, if any, and accrued and unpaid interest will be due and payable immediately. In the event
of a declaration of acceleration because an Event of Default set forth clause (2) above has
occurred and is continuing, the declaration of acceleration shall be automatically annulled if the
event of default or payment default triggering such Event of Default pursuant to clause (2) shall
be remedied or cured by the Company or a Restricted Subsidiary of the Company or waived by the
Holders of the relevant Debt within 20 days after the declaration of acceleration with respect
thereto and if (a) the annulment of the acceleration of the Securities would not conflict with any
judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default,
except nonpayment of principal, premium or interest on the Securities that became due solely
because of such acceleration, have been cured or waived. No such rescission shall affect any
subsequent Default or Event of Default or impair any right consequent thereto. If an Event of
Default described in clause (5) or (6) above occurs and is continuing, the principal of, premium,
if any, and accrued and unpaid interest on all the Securities will become and be immediately due
and payable without any declaration or other act on the part of the Trustee or any Holders.
The Holders of a majority in principal amount of the outstanding Securities by notice to the
Trustee may:
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(1) |
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waive, by their consent (including, without limitation consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Securities), an
existing Default or Event of Default and its consequences, except (a) a Default or
Event of Default in the payment of the principal of, or premium, if any, or interest on
a Security or (b) a Default or Event of Default in respect of a provisions described
under Amendment and Waiver cannot be amended without the consent of each
Securityholder affected; and |
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(2) |
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rescind any such acceleration with respect to the Securities and its
consequences if (a) rescission would not conflict with any judgment or decree of a
court of competent jurisdiction and (b) all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the Securities that
have become due solely by such declaration of acceleration, have been cured or waived. |
When a Default or Event of Default is waived, it is deemed cured, but no such waiver shall extend
to any subsequent or other Default or Event of Default or impair any consequent right.
Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event
of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any of the Holders unless such
Holders have offered to the Trustee reasonable indemnity or security against any loss, liability or
expense. Except to enforce the right to receive payment of principal, premium, if any, or interest
when due, no Holder may pursue any remedy with respect to the Indenture or the Securities unless:
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(1) |
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such Holder has previously given the Trustee notice that an Event of Default is
continuing; |
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(2) |
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Holders of at least 25% in principal amount of the outstanding Securities have
requested the Trustee to pursue the remedy; |
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(3) |
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such Holder or Holders offer the Trustee reasonable security or indemnity
against any loss, liability or expense; |
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(4) |
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the Trustee does not comply with such request within 60 days after the receipt
of the request and the offer of security or indemnity; and |
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(5) |
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the Holders of a majority in principal amount of the outstanding Securities
have not given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. |
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Subject to certain restrictions, the Holders of a majority in principal amount of the
outstanding Securities are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on
the Trustee. The Indenture provides that in the event an Event of Default has occurred and is
continuing, the Trustee will be required in the exercise of its powers to use the degree of care
that a prudent person would use in the conduct of its own affairs. The Trustee, however, may
refuse to follow any direction that conflicts with law, the Indenture, the Collateral Agreements or
that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would
involve the Trustee in personal liability, but may take any other action deemed proper by the
Trustee that is not inconsistent with such direction. Prior to taking any action under the
Indenture, the Trustee will be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is known to the Trustee,
the Trustee must mail to each Holder notice of the Default or Event of Default within 45 days after
it occurs. Except in the case of a Default or Event of Default in the payment of principal of,
premium, if any, or interest on any Security, the Trustee may withhold notice if and so long as a
committee of trust officers of the Trustee in good faith determines that withholding notice is in
the interests of the Holders. In addition, the Company is required to deliver to the Trustee,
promptly after the end of each Fiscal Year, a certificate indicating whether the signers thereof
know of any Default or Event of Default that occurred during the previous year. The Company also
is required to deliver to the Trustee, promptly after the occurrence thereof, written notice of any
Default or Event of Default, their status and what action the Company is taking or proposes to take
in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture and any Collateral Agreement may be amended with
the consent of the Holders of at least 75% in principal amount of the Securities then outstanding
(including without limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Securities). However, without the consent of each Holder of an outstanding
Security affected, no amendment may, among other things:
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(1) |
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reduce the amount of Securities whose Holders must consent to an amendment; |
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(2) |
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reduce the stated rate of or extend the stated time for payment of interest on any
Security; |
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(3) |
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reduce the principal of or extend the maturity of any Security; |
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(4) |
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reduce the premium payable upon the redemption or repurchase of any Security or
change the time at which any Security may be redeemed or repurchased as described above
under Optional Redemption, Change in Control, or Certain CovenantsSale of
Property, or any similar provision, whether through an amendment or waiver of
provisions in the covenants, definitions or otherwise; |
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(5) |
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make any Security payable in money other than that stated in the Security; |
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(6) |
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impair the right of any Holder to receive payment of, premium, if any,
principal of and interest on such Holders Securities on or after the due dates thereof
or to institute suit for the enforcement of any payment on or with respect to such
Holders Securities; or |
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(7) |
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make any change in the amendment provisions which require each Holders consent
or in the waiver provisions. |
Without the consent of any Holder, the Company and the Trustee may amend the Indenture or any
Collateral Agreement to:
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(1) |
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cure any ambiguity, omission, defect or inconsistency; |
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(2) |
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provide for the assumption by a successor corporation, partnership, trust or
limited liability company of the obligations of the Company under the Indenture; |
- 57 -
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(3) |
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provide for uncertificated Securities in addition to or in place of
certificated Securities (provided that the uncertificated Securities are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner such that
the uncertificated Securities are described in Section 163(f)(2)(B) of the Code); |
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(4) |
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add Subsidiary Guarantees with respect to the Securities or release a
Subsidiary Guarantor upon its sale or disposition, or designation as an Unrestricted
Subsidiary; provided, however, that the designation, or sale or disposition is in
accord with the applicable provisions of the Indenture; |
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(5) |
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secure the Securities; |
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(6) |
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add to the covenants of the Company for the benefit of the Holders or surrender
any right or power conferred upon the Company; |
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(7) |
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make any change that does not adversely affect the rights of any Holder; or |
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(8) |
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comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act. |
The consent of the Holders is not necessary under the Indenture to approve the particular form
of any proposed amendment. It is sufficient if such consent approves the substance of the proposed
amendment. After an amendment under the Indenture becomes effective, the Company is required to
mail to the Holders a notice briefly describing such amendment. However, the failure to give such
notice to all the Holders, or any defect in the notice, will not impair or affect the validity of
the amendment.
Defeasance
The Company at any time may terminate all its obligations under the Securities and the
Indenture (legal defeasance), except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the Securities, to replace
mutilated, destroyed, lost or stolen Securities and to maintain a registrar and paying agent in
respect of the Securities. If the Company exercises its legal defeasance option, the Subsidiary
Guarantees in effect at such time will terminate.
The Company at any time may terminate its obligations described under Merger and
Consolidation, the covenants described under Certain Covenants, and the operation of the
cross-default upon a payment default, cross acceleration provisions, the bankruptcy provisions and
the judgment default provisions with respect to Subsidiaries described under Events of Default
above (covenant defeasance).
The Company may exercise its legal defeasance option notwithstanding its prior exercise of its
covenant defeasance option. If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default with respect to the Securities.
If the Company exercises its covenant defeasance option, payment of the Securities may not be
accelerated because of an Event of Default specified in clause (2), (3), or (8), or (with respect
only to Subsidiaries), (4), (5) or (6) under Events of Default above.
In order to exercise either defeasance option, the Company must irrevocably deposit in trust
(the defeasance trust) with the Trustee money or U.S. Government Obligations for the payment of
principal, premium, if any, and interest on the Securities to redemption or maturity, as the case
may be, and must comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the effect that Holders of
the Securities will not recognize income, gain or loss for Federal income tax purposes as a result
of such deposit and defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such deposit and defeasance
had not occurred. In the case of legal defeasance only, such Opinion of Counsel must be based on a
ruling of the Internal Revenue Service or other change in applicable Federal income tax law.
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No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Securities, the Indenture, the
Collateral Agreements, or the Subsidiary Guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability. The waiver and release are part of the consideration for issuance of
the Securities. Such waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public policy.
Concerning the Trustee
American Stock Transfer & Trust Company, LLC is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Securities.
Governing Law
The Indenture provides that it and the Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
Book-Entry, Delivery and Form
The Exchange Notes will be issued in the form of one or more fully registered global
certificates. Each global certificate will be deposited with the trustee who will hold the global
certificate for The Depository Trust Company (DTC). Each global certificate will be registered
in the name of DTC or its nominee.
Except as set forth below, a global certificate may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
The descriptions of the operations and procedures of DTC set forth below are provided solely
as a matter of convenience. These operations and procedures are solely within the control of these
settlement systems and are subject to change by them from time to time. We do not take any
responsibility for these operations or procedures, and lenders under the credit agreement acquiring
notes issued in repayment of their loans are urged to contact the relevant system or its
participants directly to discuss these matters.
DTC has advised us that it is:
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a limited purpose trust company organized under the laws of the State of New York; |
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a banking organization within the meaning of the New York Banking Law; |
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a member of the Federal Reserve System; |
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a clearing corporation within the meaning of the New York Uniform Commercial Code,
as amended; and |
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a clearing agency registered under Section 17A of the Securities Exchange Act of
1934. |
DTC was created to hold securities for its participants and facilitates the clearance and
settlement of securities transactions between its participants through electronic book-entry
changes to the accounts of its participants, which eliminates the need for physical transfer and
delivery of certificates. DTCs participants include securities brokers and dealers, including
banks and trust companies; clearing corporations and some other organizations. Indirect access to
DTCs system is also available to other entities such as banks, brokers, dealers and trust
companies; these indirect participants clear through or maintain a custodial relationship with a
participant in DTC, either directly or indirectly. Holders of existing notes that are exchanging
existing notes for Exchange Notes who are not DTC participants may beneficially own securities held
by or on behalf of DTC only through participants or indirect participants in DTC.
We expect that pursuant to procedures established by DTC:
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upon our issuance of the Exchange Notes, DTC will credit the accounts of participants
designated by the Exchange Agent with the principal amount of the Exchange Notes
exchanged for Old Notes, and |
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ownership of beneficial interests in any global note will be shown on, and the
transfer of that ownership will be effected only through, records maintained by DTC,
with respect to the interests of participants in |
- 59 -
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DTC, and the records of participants and indirect participants, with respect to the
interests of persons other than participants in DTC. |
The laws of some jurisdictions may require that some purchasers of securities take physical
delivery of the securities in definitive form. Accordingly, the ability to transfer interests in
the Exchange Notes represented by a global note to these persons may be limited. In addition,
because DTC can act only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest in Exchanges Notes
represented by a global note to pledge or transfer that interest to persons or entities that do not
participate in DTCs system, or to otherwise take actions in respect of that interest, may be
affected by the lack of a physical definitive security in respect of the interest.
So long as DTC or its nominee is the registered owner of a global note, DTC or the nominee, as
the case may be, will be considered the sole owner or Holder of the Exchange Notes represented by
the global note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a global note:
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will not be entitled to have notes represented by the global note registered in
their names; |
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will not receive or be entitled to receive physical delivery of certificated notes;
and |
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will not be considered the owners or Holders of the notes under the Indenture for
any purpose, including with respect to the giving of any direction, instruction or
approval to the trustee under the Indenture. |
Accordingly, each Holder owning a beneficial interest in a global note must rely on the
procedures of DTC and, if the Holder is not a participant or an indirect participant in DTC, on the
procedures of the DTC participant through which the Holder owns its interest, to exercise any
rights of a Holder of notes under the indenture or the global note. We understand that under
existing industry practice, if we request any action of Holders of notes, or a Holder that is an
owner of a beneficial interest in a global note desires to take any action that DTC, as the Holder
of the global note, is entitled to take, then DTC would authorize its participants to take the
action and the participants would authorize Holders owning through participants to take the action
or would otherwise act upon the instruction of such Holders. Neither we nor the trustee will have
any responsibility or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in global notes held by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to the notes.
As long as the Exchange Notes are represented by a global note, DTCs nominee will be the
holder of the Exchange Notes and therefore will be the only entity that can exercise a right to
repayment or repurchase of the Exchange Notes. See Repurchase at the Option of HoldersChange
of Control and Asset Sales. Notice by participants or indirect participants or by owners of
beneficial interests in a global certificate held through such participants or indirect
participants of the exercise of the option to elect repayment of beneficial interests in Exchange
Notes represented by a global note must be transmitted to DTC in accordance with its procedures on
a form required by DTC and provided to participants. In order to ensure that DTCs nominee will
timely exercise a right to repayment with respect to a particular Exchange Note, the beneficial
owner of such Exchange Note must instruct the broker or other participant or indirect participant
through which it holds an interest in such Exchange Note to notify DTC of its desire to exercise a
right to repayment. Different firms have different cut-off times for accepting instructions from
their customers and, accordingly, each beneficial owner should consult the broker or other
participant or indirect participant through which it holds an interest in a Exchange Note in order
to ascertain the cutoff time by which such an instruction must be given in order for timely notice
to be delivered to DTC.
We will not be liable for any delay in delivery of notices of the exercise of the option to
elect repayment. Payments with respect to the principal of, and premium, if any, liquidated
damages, if any, and interest on, any notes represented by a global note registered in the name of
DTC or its nominee on the applicable record date will be payable by the trustee to or at the
direction of DTC or its nominee in its capacity as the registered Holder of the global note
representing those notes under the Indenture. Under the terms of the Indenture, we and the trustee
may treat the persons in whose names the notes, including the global notes, are registered as the
owners of the notes for the purpose of receiving payment on the notes and for any and all other
purposes whatsoever. Accordingly, neither we nor the trustee has or will have any responsibility
or liability for the payment of amounts to owners of beneficial
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interests in a global note, including principal, premium, if any, liquidated damages, if any,
and interest. Payments by the participants and the indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing instructions and customary
industry practice and will be the responsibility of the participants or the indirect participants
and DTC.
Certificated Notes
If:
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DTC notifies us that it is at any time unwilling or unable to continue as a
depositary or DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depositary is not appointed within 90 days of such
notice or cessation; |
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we, at our option, notify the trustee in writing that we elect to cause the issuance
of notes in definitive form under the Indenture; or |
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upon the occurrence of some other events as provided in the Indenture, |
then, upon surrender by DTC of the global notes, certificated notes will be issued to each person
that DTC identifies as the beneficial owner of the notes represented by the global notes. Upon the
issuance of certificated notes, the trustee is required to register the certificated notes in the
name of that person or persons, or their nominee, and cause the certificated notes to be delivered
thereto.
Neither we nor the trustee will be liable for any delay by DTC or any participant or indirect
participant in DTC in identifying the beneficial owners of the related notes and each of those
persons may conclusively rely on, and will be protected in relying on, instructions from DTC for
all purposes, including with respect to the registration and delivery, and the respective principal
amounts, of the notes to be issued.
Certain Definitions
2010 Senior Notes means the 9.75% Senior Notes due December 5, 2010, issued by the Company
under the 2010 Senior Notes Indenture, as modified, renewed or supplemented from time to time.
2010 Senior Notes Indenture means the Indenture dated March 15, 2004, between the Company
and American Stock Transfer & Trust Company, as trustee, as modified and supplemented by the First
Supplemental Indenture thereto dated as of April 4, 2008, the Second Supplemental Indenture as of a
date promptly after the closing of the exchange offer, and as the same may be further modified,
renewed or supplemented from time to time.
Adjusted Consolidated Net Tangible Assets shall mean (without duplication), as of the date
of determination, the remainder of:
(a) the sum of:
(1) discounted future net revenue from proved oil and gas reserves of the Company and
its Restricted Subsidiaries calculated in accordance with SEC guidelines but (x) using
average prices received by the Company and its Restricted Subsidiaries during the preceding
year (or for purposes of clause (2) under of the Debt Incurrence covenant described above,
the NYMEX Strip Price on the date of such calculation) and (y) before any state, federal or
foreign income taxes, as estimated by the Company in a reserve report prepared as of the end
of the Companys most recently completed fiscal year for which audited financial statements
are available, and any other Oil and Gas Property in which the Company or any Restricted
Subsidiary maintains an interest in oil and gas reserves, as increased by, as of the date of
determination, the estimated discounted future net revenues from
(A) estimated proved oil and gas reserves of the Company, its Restricted
Subsidiaries and the Companys and its Restricted Subsidiaries share of Oil and Gas
Properties acquired since such year end (including for purposes of any calculation
made pursuant to clause (2) under of the Debt Incurrence covenant described above,
any Oil and Gas Properties to be acquired in connection with such incurrence of
Debt), which reserves were not reflected in such year end reserve report, and
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(B) estimated oil and gas reserves of the Company, its Restricted Subsidiaries
and the Companys and its Restricted Subsidiaries share of Oil and Gas Properties
attributable to extensions, discoveries and other additions and upward revisions of
estimates of proved oil and gas reserves since such year end due to exploration,
development, exploitation or production activities, in each case calculated in
accordance with SEC guidelines (utilizing the prices utilized in such year end
reserve report), and decreased by, as of the date of determination, the estimated
discounted future net revenues from:
(C) estimated proved oil and gas reserves of the Company, its Restricted
Subsidiaries and the Companys and its Restricted Subsidiaries share of Oil and Gas
Properties produced or disposed of since such year end, and
(D) estimated oil and gas reserves of the Company, its Restricted Subsidiaries
and the Companys and its Restricted Subsidiaries share of Oil and Gas Properties
attributable to downward revisions of estimates of proved oil and gas reserves since
such year end due to changes in geological conditions or other factors which would,
in accordance with standard industry practice, cause such revisions, in each case
calculated on a pre-tax basis and substantially in accordance with SEC guidelines
(utilizing the prices utilized in such year end reserve report), in each case as
estimated by the Companys petroleum engineers or any independent petroleum
engineers engaged by the Company for that purpose;
(2) the capitalized costs that are attributable to Oil and Gas Properties of the
Company, its Restricted Subsidiaries and the Companys and its Restricted Subsidiaries
share of Oil and Gas Properties to which no proved oil and gas reserves are attributable,
based on the Companys books and records as of a date no earlier than the date of the
Companys latest available annual or quarterly financial statements;
(3) the consolidated net working capital of the Company and its Restricted Subsidiaries
on a date no earlier than the date of the Companys latest annual or quarterly financial
statements; and
(4) the greater of:
(A) the net book value of other tangible assets of the Company and its
Restricted Subsidiaries, as of a date no earlier than the date of the Companys
latest annual or quarterly financial statements, and
(B) the appraised value, as estimated by independent appraisers, of other
tangible assets of the Company and its Restricted Subsidiaries, as of a date no
earlier than the date of the Companys latest audited financial statements; minus
(b) the sum of:
(1) minority interests;
(2) to the extent included in (a)(1) above, any net gas balancing liabilities of the
Company and its Restricted Subsidiaries reflected in the Companys latest audited financial
statements;
(3) to the extent included in (a)(1) above, the discounted future net revenues,
calculated in accordance with SEC guidelines (utilizing the prices utilized in the Companys
most recent year end reserve report), attributable to reserves which are required to be
delivered to third parties to fully satisfy the obligations of the Company and its
Restricted Subsidiaries with respect to Volumetric Production Payments (determined, if
applicable, using the schedules specified with respect thereto); and
(4) the discounted future net revenues, calculated in accordance with SEC guidelines,
attributable to reserves subject to Dollar-Denominated Production Payments which, based on
the estimates of production and price assumptions included in determining the discounted
future net revenues specified in (a)(1) above, would be necessary to fully satisfy the
payment obligations of the Company and its Restricted Subsidiaries with respect to
Dollar-Denominated Production Payments (determined, if applicable, using the schedules
specified with respect thereto).
Affiliate of any Person shall mean (i) any Person, directly or indirectly, controlled by,
controlling or under common control with such first Person, (ii) any director or officer of such
first Person or of any Person referred to in clause (i) above and (iii) if any Person in clause (i)
above is an individual, any member of the immediate family (including parents, spouse and children)
of such individual and any trust whose principal beneficiary is such individual or one or more
members of such immediate family and any Person who is controlled by any such immediate family
member or trust. For purposes of this definition, any Person which owns, directly or indirectly,
15% or more of the securities having ordinary voting power for the election of directors or other
governing body of a corporation or 15% or more of the partnership or other ownership interests of
any other Person
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(other than as a limited partner of such other Person) will be deemed to control (including
with its correlative meanings, controlled by and under common control with) such corporation or
other Person.
Asset Disposition shall mean any direct or indirect sale, lease (other than an operating
lease entered into in the ordinary course of business), transfer, issuance or other disposition, or
a series of related sales, leases, transfers, issuances or dispositions that are part of a common
plan, of shares of capital stock of a Subsidiary (other than directors qualifying shares), or
other Property (each referred to for the purposes of this definition as a disposition) by the
Company or any of its Restricted Subsidiaries, including any disposition by means of a merger,
consolidation or similar transaction.
Notwithstanding the preceding, the following items shall not be deemed to be Asset
Dispositions:
(a) a disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Wholly-Owned Subsidiary;
(b)
the sale of Cash Equivalents in the ordinary course of
business;
(c) a disposition of Hydrocarbons in the ordinary course of business;
(d) a disposition or abandonment of obsolete or worn out equipment or equipment that is
no longer useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of business;
(e) transactions permitted under Merger and Consolidation;
(f) an issuance of capital stock by a Restricted Subsidiary of the Company to the
Company or to a Wholly-Owned Subsidiary;
(g) for purposes of this definition only, the making of a Permitted Investment or a
disposition subject to the Restricted Investments; Restrictive Agreements covenant
described above;
(h) dispositions of assets of the Company designated by the Company as not constituting
an Asset Disposition with an aggregate fair market value since the Issue Date of less than
$5,000,000;
(i) dispositions in connections with Liens permitted under the Liens covenant
described above;
(j) the licensing or sublicensing of intellectual property or other general intangibles
and licenses, leases or subleases of other property in the ordinary course of business which
do not materially interfere with the business of the Company and its Restricted
Subsidiaries;
(k) foreclosure on assets;
(l) sale, transfer or abandonment (whether or not in the ordinary course of business)
of Oil and Gas Properties or direct or indirect interests in Property; provided that at the
time of such sale or transfer such Properties do not have associated with them any material
proved reserves;
(m) the abandonment, farm-out, lease or sublease of developed or undeveloped Oil and
Gas Properties in the ordinary course of business;
(n) the trade or exchange by the Company or any Restricted Subsidiary of any Oil and
Gas Properties owned or held by the Company or such Restricted Subsidiary for Oil and Gas
Properties owned or held by another Person, including any cash or Cash Equivalents necessary
in order to achieve an exchange of equivalent value; provided that any such cash or Cash
Equivalents received by the Company or such Restricted Subsidiary will be subject to the
provisions described above under Certain CovenantsSale of Property, which the Board of
Directors of the Company determines in good faith by resolution to be of approximately
equivalent value.
Board of Directors shall mean, as to any Person, the board of directors of such Person or
any duly authorized committee thereof.
Business Day shall mean a day other than a day on which commercial banks are authorized or
required to close in Texas or New York.
Cash Equivalents shall mean:
(a) securities issued or directly and fully guaranteed or insured by the United States
of America or any agency or instrumentality of the United States of America (provided that
the full faith and credit of the United States of America is pledged in support thereof),
having maturities of not more than one year from the date of acquisition;
(b) marketable general obligations issued by any state of the United States of America
or any political subdivision of any such state or any public instrumentality thereof
maturing within one year from
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the date of acquisition and, at the time of acquisition, of the United States of
America (provided that the full faith and credit of the United States is pledged in support
thereof) having a credit rating of A or better from either Standard & Poors Ratings
Services or Moodys Investors Service, Inc.;
(c) certificates of deposit, time deposits, Eurodollar time deposits, overnight bank
deposits or bankers acceptances having maturities of not more than one year from the date
of acquisition thereof issued by any commercial bank, the long-term debt of which is rated
at the time of acquisition thereof at least A or the equivalent thereof by Standard &
Poors Ratings Services, or A or the equivalent thereof by Moodys Investors Service,
Inc., and having combined capital and surplus in excess of $500,000,000;
(d) repurchase obligations with a term of not more than seven (7) days for underlying
securities of the types described in clauses (a), (b) and (c) above entered into with any
bank meeting the qualifications specified in clause (c) above;
(e) commercial paper rated at the time of acquisition thereof at least A-2 or the
equivalent thereof by Standard & Poors Ratings Services or P-2 or the equivalent thereof
by Moodys Investors Service, Inc., or carrying an equivalent rating by a nationally
recognized rating agency, if both of the two named rating agencies cease publishing ratings
of investments, and in any case maturing within one year after the date of acquisition
thereof; and
(f) interests in any investment company or money market fund which invests solely in
instruments of the type specified in clauses (a) through (e) above.
Change in Control shall mean (a) the acquisition by any person or group of related
persons (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), of beneficial
ownership (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of
more than 35% of the aggregate ordinary voting power represented by the issued and outstanding
capital stock of the Company; or (b) occupation of a majority of the seats on the Board of
Directors of the Company by Persons who were neither (i) nominated by the Board of Directors of the
Company nor (ii) appointed by the Board of Directors so nominated.
Closing Date with respect to any Initial Securities, shall mean the date on which such
Initial Securities are originally issued.
Code shall mean the Internal Revenue Code of 1986, as amended from time to time or any
successor statute.
Collateral means all collateral of whatsoever nature purported to be subject to the Lien of
the Collateral Agreements.
Collateral Agency Agreement means the Collateral Agency Agreement of dated as of the Issue
Date between Trustee and Collateral Agent as amended, modified, restated or replaced, from time to
time in accordance with its terms.
Collateral Agent means Regions Bank, in its capacity as Collateral Agent under the
Collateral Agreements, together with its successors in such capacity.
Collateral Agreements means the Collateral Agency Agreement, the Intercreditor Agreement and
all security agreements, pledge agreements, collateral assignments, mortgages, deeds of trust,
collateral agency agreements, control agreements or other grants or transfers for security executed
and delivered by the Company or any Subsidiary Guarantor creating (or purporting to create) a Note
Lien upon Collateral in favor of the Collateral Agent, in each case, as amended, modified, renewed,
restated or replaced, in whole or in part, from time to time, in accordance with its terms.
Company shall mean Callon Petroleum Company or a successor.
Consolidated Net Income shall mean with respect to the Company and its Restricted
Subsidiaries, for any period, the aggregate of the net income (or loss) of the Company and its
Restricted Subsidiaries after allowances for taxes for such period, determined on a consolidated
basis in accordance with GAAP; provided, that there shall be excluded from the calculation of net
income (to the extent otherwise included in the calculation) the following (i) the net income of
any Person in which the Company or any Restricted Subsidiary has an interest (which interest does
not cause the net income of such other Person to be consolidated with the net income of the Company
and its
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Restricted Subsidiaries in accordance with GAAP), except to the extent of the amount of
dividends or distributions actually paid in such period by such other Person to the Company or to a
Restricted Subsidiary, as the case may be; (ii) the net income (but not loss) of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar distributions or
transfers or loans by that Restricted Subsidiary is not at the time permitted by operation of the
terms of its charter or any agreement, instrument or Governmental Requirement applicable to such
Restricted Subsidiary, or is otherwise restricted or prohibited in each case determined in
accordance with GAAP; (iii) any extraordinary gains or losses, including gains or losses
attributable to Property sales not in the ordinary course of business; (iv) the cumulative effect
of a change in accounting principles; and (v) any gains or losses attributable to write-up or write
downs of assets
Consolidated Subsidiaries shall mean each Subsidiary of the Company (whether or not existing
or hereafter created or acquired) the financial statements of which shall be (or should have been)
consolidated with the financial statements of the Company in accordance with GAAP.
Debt shall mean, for any Person the sum of the following (without duplication): (i) all
obligations of such Person for borrowed money or evidenced by bonds, debentures, notes or other
similar instruments (including principal, interest, fees and charges); (ii) all obligations of such
Person (whether contingent or otherwise) in respect of bankers acceptances, letters of credit,
surety or other bonds and similar instruments; (iii) all obligations of such Person to pay the
deferred purchase price of Property (except trade payables), which payment is due more than six
months after the date of placing such Property in service; (iv) all obligations under leases which
shall have been, or should have been, in accordance with GAAP, recorded as capital leases in
respect of which such Person is liable (whether contingent or otherwise); (v) all obligations under
operating leases which require such Person to make payments over the term of such lease based on
the purchase price or appraised value of the Property subject to such lease plus a marginal
interest rate, and used primarily as a financing vehicle for, or to monetize, such Property; (vi)
all Debt (as described in the other clauses of this definition) and other obligations of others
secured by a Lien on any Property of such Person, whether or not such Debt is assumed by such
Person; (vii) all Debt (as described in the other clauses of this definition) and other obligations
of others guaranteed by such Person or in which such Person otherwise assures a creditor against
loss of the debtor or obligations of others; (viii) all obligations or undertakings of such Person
to maintain or cause to be maintained the financial position or covenants of others or to purchase
the Debt or Property of others; (ix) obligations to deliver goods or services including
Hydrocarbons in consideration of advance payments; (x) obligations to pay for goods or services
whether or not such goods or services are actually received or utilized by such Person; (xi) any
capital stock of such Person in which such Person has a mandatory obligation to redeem such stock
prior to the maturity of the Securities; (xii) any Debt of a Special Entity for which such Person
is liable either by agreement or because of a Governmental Requirement; (xiii) the undischarged
balance of any production payment created by such Person or for the creation of which such Person
directly or indirectly received payment; and (xiv) all obligations of such Person under Hedging
Agreements; provided that Debt shall not include (y) any debt arising in connection with the
Permitted Medusa Transaction or Permitted Entrada Transaction, or (z) any asset retirement
obligations arising under Financial Accounting Standards Board Statement No. 143, Accounting for
Asset Retirement Obligations.
Debt Coverage Ratio shall mean as of any date of determination, with respect to the Company
and its Restricted Subsidiaries, the ratio of (x) the aggregate amount of Debt to (y) EBITDA for
such four calendar quarters; provided, however, that:
(a) for purposes of clause (x) of the introductory paragraph of this definition, Debt
shall only include the obligations listed in clauses (a) through (e), (g), and (i) through
(k) of the definition of Debt;
(b) if the Company or any Restricted Subsidiary:
(1) has incurred any Debt since the beginning of such period that remains
outstanding on such date of determination or if the transaction giving rise to the
need to calculate the Debt Coverage Ratio is an incurrence of Debt, EBITDA and
Interest Expense for such period will be calculated after giving effect on a pro
forma basis to such Debt as if such Debt has been incurred on the first day of such
period (except that in making such computation, the amount of Debt under any
revolving credit facility existing on the date of such calculation will be computed
based on the average daily balance of such Debt during such period; provided that,
for purposes of the Debt Incurrence covenant, the average daily balance deemed
outstanding during such period under a revolving credit facility being repaid in
whole or in part with the proceeds of such Debt shall be the lesser of (i) the
actual average daily balance of such revolving indebtedness
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outstanding during such period and (ii) the amount of such revolving
indebtedness outstanding immediately before the application of the proceeds of such
Debt to repay such revolving indebtedness) and the discharge of any other Debt
repaid, repurchased, defeased or otherwise discharged with the proceeds of such new
Debt as if such discharge had occurred on the first day of such period; or
(2) has repaid, repurchased, defeased or otherwise discharged any Debt since
the beginning of the period that is no longer outstanding on such date of
determination or if the transaction giving rise to the need to calculate the Debt
Coverage Ratio involves a discharge of Debt, EBITDA and Interest Expense for such
period will be calculated after giving effect on a pro forma basis to such discharge
of such Debt, including with the proceeds of such new Debt, as if such discharge had
occurred on the first day of such period;
(c) if since the beginning of such period the Company or any Restricted Subsidiary will
have sold or otherwise disposed of any material Property or other asset or if the
transaction giving rise to the need to calculate the Debt Coverage Ratio is such a sale or
disposition:
(1) the EBITDA for such period will be reduced by an amount equal to the EBITDA
(if positive) directly attributable to the assets which are the subject of such sale
or disposition for such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period; and
(2) Interest Expense for such period will be reduced by an amount equal to the
Interest Expense directly attributable to any Debt of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such sale or
disposition for such period (or, if the capital stock of any Restricted Subsidiary
is sold, the Interest Expense for such period directly attributable to the Debt of
such Restricted Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Debt after such sale);
(d) if since the beginning of such period the Company or any Restricted Subsidiary (by
merger or otherwise) will have made an investment in any Restricted Subsidiary (or any
Person which becomes a Restricted Subsidiary or is merged with or into the Company) or an
acquisition of material Properties or other assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made hereunder,
EBITDA and Interest Expense for such period will be calculated after giving pro forma effect
thereto (including the incurrence of any Debt) as if such investment or acquisition occurred
on the first day of such period; and
(e) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) will have sold or otherwise disposed of any material
property or other asset or any investment or acquisition of assets that would have required
an adjustment pursuant to clause (c) or (d) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Interest Expense for such period will be
calculated after giving pro forma effect thereto as if such asset disposition or investment
or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to any calculation
under this definition, the pro forma calculations will be determined in good faith by a responsible
financial or accounting officer of the Company (including pro forma expense and cost reductions
calculated in good faith by the Company). If any Debt bears a floating rate of interest and is
being given pro forma effect, the interest expense on such Debt will be calculated as if the rate
in effect on the date of determination has been the applicable rate for the entire period (taking
into account any interest rate agreement applicable to such Debt if such interest rate agreement
has a remaining term in excess of 12 months).
For the purposes of this definition an imputed interest rate for any outstanding or proposed
production payment, project financing and other non-recourse debt will be included in the
calculation of Interest Expense and the corresponding EBITDA, if any and to the extent lowered,
will be grossed up, in a corresponding manner.
Default shall mean an Event of Default or an event which with notice or lapse of time or
both would be, an Event of Default.
Disqualified Stock shall mean, with respect to any Person, any capital stock of such Person
which by its terms (or by the terms of any security into which it is convertible or for which it is
exchangeable) or upon the happening of any event:
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(a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or
otherwise;
(b) is convertible or exchangeable for Debt or Disqualified Stock (excluding capital
stock which is convertible or exchangeable solely at the option of the Company or a
Restricted Subsidiary); or
(c) is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to the date that is ninety-one (91) days after the date (i) on which the
Securities mature or (ii) on which there are no Securities outstanding, provided that only the
portion of capital stock which so matures or is mandatorily redeemable, is so convertible or
exchangeable or is so redeemable at the option of the holder thereof prior to such date will be
deemed to be Disqualified Stock; provided, further that any capital stock that would constitute
Disqualified Stock solely because the holders thereof have the right to require the Company to
repurchase such capital stock upon the occurrence of a change in control or asset disposition (each
defined in a substantially identical manner to the corresponding definitions in the Indenture)
shall not constitute Disqualified Stock if the terms of such capital stock (and all such securities
into which it is convertible or for which it is ratable or exchangeable) provide that the Company
may not repurchase or redeem any such capital stock (and all such securities into which it is
convertible or for which it is ratable or exchangeable) pursuant to such provision prior to
compliance by the Company with the provisions described under Change in Control and Certain
CovenantsRestricted Investments; Restricted Agreements and such repurchase or redemption
complies with the Sale of Property covenant.
Dollar and $ shall mean lawful money of the United States of America.
Dollar-Denominated Production Payments shall mean production payment obligations recorded as
liabilities in accordance with GAAP, together with all undertakings and obligations in connection
therewith.
DTC shall mean The Depository Trust Company, its nominees and their respective successors
and assigns, or such other depository institution hereinafter appointed by the Company.
EBITDA shall mean, for the period of the most recent four consecutive calendar quarters
ending prior to the date of determination for which financial statements are available, the sum of
Consolidated Net Income for such period plus the following expenses or charges to the extent
deducted from Consolidated Net Income in such period: Interest Expense, taxes, depreciation,
depletion, amortization and non cash compensation expense for purposes of this definition (when
used in the calculation of the Interest Coverage Ratio and the Debt Coverage Ratio) EBITDA, if any
and to the extent lowered, relating to any production payment, project financing and other
non-recourse debt and in which an imputed interest rate has been calculated and used in the
definition of Interest Expense, will be grossed up by a corresponding amount.
Entrada Assets means all Oil and Gas Properties owned by the Company or any of its
Subsidiaries and located on, under or related to Garden Banks Blocks 738, 782, 785, 826, and 827 in
the federal offshore waters of the Gulf of Mexico, subject to certain depth limits, and any and all
related equipment, accounts receivable, general intangibles and other assets related thereto and
any proceeds therefrom.
Equipment Financing Subsidiary shall mean a Subsidiary of the Company formed for the sole
purpose of owning equipment purchased in a Permitted Equipment Financing and related assets and
that has no substantial operations and conducts no substantial activities other than those related
to the ownership of such equipment.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
Exchanged Properties shall mean Properties used or useful in the oil and gas business and
received by the Company or a Consolidated Subsidiary in exchange for other Properties owned by it,
whether directly or indirectly through the acquisition of the capital stock of a Person holding
such Properties so that such Person becomes a Wholly-Owned and Consolidated Subsidiary of the
Company, in trade or as a portion of the total consideration for such other Properties.
Exchange Offer shall mean the offer by the Company to exchange the Securities and certain
capital stock of the Company in repayment of indebtedness owed under the 2010 Senior Notes.
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First Lien Collateral Agent means at any time, the Person serving at such time as the
Administrative Agent or Collateral Agent under the First Lien Credit Facility or any other
representative then most recently designated to hold the First Lien Credit Facility Liens in
accordance with the applicable provisions of the First Lien Credit Facility, together with its
successors in such capacity.
First Lien Secured Credit Facility shall mean the Companys primary senior secured revolving
credit facility or facilities as constituted, amended, modified or restated from time to time which
allow the Company to borrow and reborrow amounts up to a borrowing base determined by the lenders
thereunder, which is currently the $250,000,000 Second Amended and Restated Credit Agreement among
the Company, Union Bank, N.A., as Administrative Agent and the other lenders thereto.
First Lien Credit Facility Lien means a Lien granted by a First Lien Credit Facility
Security Document to the First Lien Credit Facility Collateral Agent (or any First Lien Lender or
other representative of the First Lien Lenders), at any time, upon any assets of the Company, any
Subsidiary Guarantor or any guarantor under the First Lien Credit Facility to secure First Lien
Credit Facility Obligations.
First Lien Credit Facility Debt means:
(1) Debt of the Company, the Subsidiary Guarantors and the guarantors under the First Lien
Credit Facility that was permitted to be incurred under this Indenture; and
(2) Debt arising under Hedging Agreements incurred to hedge or manage interest rate risk with
respect to First Lien Credit Facility Indebtedness; provided, that:
A. such Debt is secured by a First Lien Credit Facility Lien on all of the assets that
secure Debt under the First Lien Credit Facility; and
B. such First Lien Credit Facility Lien is senior to or on a parity with the First Lien
Credit Facility Liens securing Debt under the First Lien Credit Facility.
First Lien Credit Facility Security Documents means the Intercreditor Agreement and all
security agreements, pledge agreements, collateral assignments, mortgages, deeds of trust,
collateral agency agreements, control agreements or other grants or transfers for security executed
and delivered by the Company or any Subsidiary Guarantor creating (or purporting to create) a First
Lien Credit Facility Lien upon collateral in favor of the First Lien Credit Facility Collateral
Agent, in each case, as amended, modified, renewed, restated or replaced, in whole or in part, from
time to time, in accordance with its terms.
First Lien Lenders means the Persons holding First Lien Credit Facility Debt.
Fiscal Year shall mean the fiscal year of the Company ending on December 31 of each year.
Foreign Subsidiary shall mean any Restricted Subsidiary that is not organized under the laws
of the United States of America or any state thereof or the District of Columbia.
GAAP shall mean generally accepted accounting principles in the United States of America (i)
as in effect on the date hereof with regard to the Debt Incurrence and Restricted Investments;
Restrictive Agreements covenants described above and (ii) otherwise as in effect from time to
time.
Governmental Requirement shall mean any law, statute, code, ordinance, order, determination,
rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license,
authorization or other directive or requirement (whether or not having the force of law),
including, without limitation, environmental laws, energy regulations and occupational, safety and
health standards or controls of any governmental authority.
Hedging Agreements shall mean any commodity, interest rate or currency swap, cap, floor,
collar, forward agreement or other exchange or protection agreements or any option with respect to
any such transaction.
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Holder or Securityholder shall mean the Person in whose name a Security is registered in
the Note Register.
Hydrocarbon Interests shall mean all rights, titles, interests and estates now or hereafter
acquired in and to oil and gas leases, oil, gas and mineral leases, or other liquid or gaseous
hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit
interests and production payment interests, including any reserved or residual interests of
whatever nature.
Hydrocarbons shall mean oil, gas, casinghead gas, drip gasoline, natural gasoline,
condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined or
separated therefrom.
Indenture shall mean the Indenture as of a date promptly after the closing of the exchange
offer among us, the Subsidiary Guarantors and the Trustee, as amended or supplemented from time to
time.
Intercreditor Agreement means that certain Intercreditor Agreement, dated as of the Issue
Date, among the First Lien Collateral Agent, the Collateral Agent, the Company and the Subsidiary
Guarantors, as amended, restated, modified or renewed.
Interest Coverage Ratio shall mean as of any date of determination, with respect to the
Company and its Restricted Subsidiaries, the ratio of (x) the aggregate amount of EBITDA for the
period of the most recent four consecutive fiscal quarters ending prior to the date of such
determination for which financial statements are in existence to (y) Interest Expense for such four
fiscal quarters, provided, however, that:
(a) if the Company or any Restricted Subsidiary:
(1) has incurred any Debt since the beginning of such period that remains
outstanding on such date of determination or if the transaction giving rise to the
need to calculate the Interest Coverage Ratio is an incurrence of Debt, EBITDA and
Interest Expense for such period will be calculated after giving effect on a pro
forma basis to such Debt as if such Debt had been incurred on the first day of such
period (except that in making such computation, the amount of Debt under any
revolving credit facility existing on the date of such calculation will be computed
based on the average daily balance of such Debt during such period; provided that,
for purposes of the Debt Incurrence covenant described above, the average daily
balance deemed outstanding during such period under a revolving credit facility
being repaid in whole or in part with the proceeds of such Debt shall be the lesser
of (i) the actual average daily balance of such revolving indebtedness outstanding
during such period and (ii) the amount of such revolving indebtedness outstanding
immediately before the application of the proceeds of such Debt to repay such
revolving indebtedness) and the discharge of any other Debt repaid, repurchased,
defeased or otherwise discharged with the proceeds of such new Debt as if such
discharge had occurred on the first day of such period; or
(2) has repaid, repurchased, defeased or otherwise discharged any Debt since
the beginning of the period that is no longer outstanding on such date of
determination or if the transaction giving rise to the need to calculate the
Interest Coverage Ratio involves a discharge of Debt (in each case other than Debt
incurred under any revolving credit facility unless such Debt has been permanently
repaid and the related commitment terminated provided that for purposes of the Debt
Incurrence covenant described above, this parenthetical clause shall not apply),
EBITDA and Interest Expense for such period will be calculated after giving effect
on a pro forma basis to such discharge of such Debt, including with the proceeds of
such new Debt, as if such discharge had occurred on the first day of such period;
(b) if since the beginning of such period the Company or any Restricted Subsidiary will
have sold or otherwise disposed of any material Property or other asset or if the
transaction giving rise to the need to calculate the Interest Coverage Ratio is such a sale
or disposition:
(1) the EBITDA for such period will be reduced by an amount equal to the EBITDA
(if positive) directly attributable to the assets which are the subject of such sale
or disposition for such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period; and
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(2) Interest Expense for such period will be reduced by an amount equal to the
Interest Expense directly attributable to any Debt of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such sale or
disposition for such period (or, if the capital stock of any Restricted Subsidiary
is sold, the Interest Expense for such period directly attributable to the Debt of
such Restricted Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Debt after such sale);
(c) if since the beginning of such period the Company or any Restricted Subsidiary (by
merger or otherwise) will have made an investment in any Restricted Subsidiary (or any
Person which becomes a Restricted Subsidiary or is merged with or into the Company) or an
acquisition of material Properties or other assets, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made hereunder,
EBITDA and Interest Expense for such period will be calculated after giving pro forma effect
thereto (including the incurrence of any Debt) as if such investment or acquisition occurred
on the first day of such period; and
(d) if since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) will have sold or otherwise disposed of any material
property or other asset or any investment or acquisition of assets that would have required
an adjustment pursuant to clause (b) or (c) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Interest Expense for such period will be
calculated after giving pro forma effect thereto as if such asset disposition or investment
or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to any calculation
under this definition, the pro forma calculations will be determined in good faith by a responsible
financial or accounting officer of the Company (including pro forma expense and cost reductions
calculated in good faith by the Company). If any Debt bears a floating rate of interest and is
being given pro forma effect, the interest expense on such Debt will be calculated as if the rate
in effect on the date of determination had been the applicable rate for the entire period (taking
into account any interest rate agreement applicable to such Debt if such interest rate agreement
has a remaining term in excess of 12 months).
For the purposes of this definition an imputed interest rate for any outstanding or proposed
production payment, project financing and other non-recourse debt will be included in the
calculation of Interest Expense and the corresponding EBITDA, if any and to the extent lowered,
will be grossed up, in a corresponding manner.
Interest Expense shall mean, for the period of the most recent four consecutive calendar
quarters ending prior to the date of determination for which financial statements are available,
the total cash interest expense of the Company and its Restricted Subsidiaries determined in
accordance with GAAP plus, to the extent not included in such interest expense (without
duplication):
(a) interest expense attributable to capitalized lease obligations and the interest
portion of rent expense associated with Debt in respect of the relevant lease giving rise
thereto, determined as if such lease were a capitalized lease in accordance with GAAP and
the interest component of any deferred payment obligations to the extent not accrued in a
prior period;
(b) imputed interest expense attributable to any production payment, project financing
by vendors and other non-recourse debt, but not including any amounts arising out of the
Permitted Medusa Transaction or Permitted Entrada Transaction;
(c) interest actually paid by the Company or any Restricted Subsidiary under any
guarantee of Debt or other obligation of any other Person;
(d) net costs associated with Hedging Agreements for the purpose of ameliorating
interest rate fluctuation risk or any kind of interest rate agreement (excluding
amortization of fees);
(e) the consolidated cash interest expense of the Company and its Restricted
Subsidiaries that was capitalized during such period; and
(f) the cash contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company or its Restricted Subsidiaries) in connection with Debt
incurred by such plan or trust; provided, however, that there will be excluded therefrom any
such interest expense of any Unrestricted Subsidiary to the extent the related Debt is not
guaranteed or paid by the Company or any Restricted Subsidiary.
For purposes of the foregoing, total Interest Expense will be determined after giving effect
to any net payments made or received by the Company and its Restricted Subsidiaries with respect to
interest rate agreements;
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provided, however, that Interest Expense shall not include (a) to the extent included in total
Interest Expense, amortization or write-off of deferred financing costs or discount accretion of
such Person or (b) accretion of interest charges on future plugging and abandonment obligations,
future retirement benefits and other obligations that do not constitute Debt.
Investment shall mean, with respect to any Person, all investments by such Person in other
Persons (including Affiliates) in the form of any direct or indirect advance, loan (other than
advances to customers in the ordinary course of business) or other extension of credit (including
by way of guarantee or similar arrangement, but excluding any Debt or extension of credit
represented by a bank deposit other than a time deposit) or capital contribution to (by means of
any transfer of cash or other Property to others or any payment for Property or services for the
account or use of others), or any purchase or acquisition of capital stock, Debt or other similar
instruments issued by, such Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that none of the
following will be deemed to be an Investment:
(a) Hedging Agreements entered into in the ordinary course of business and in
compliance with the Indenture;
(b) endorsements of negotiable instruments and documents in the ordinary course of
business; and
(c) an acquisition of assets, capital stock or other securities by the Company or a
Subsidiary for consideration to the extent such consideration consists exclusively of common
equity securities of the Company.
For purposes of this definition,
(i) Investment shall mean the portion (proportionate to the Companys equity interest
in a Restricted Subsidiary to be designated as an Unrestricted Subsidiary) of the fair
market value of the net assets of such Restricted Subsidiary of the Company at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company will be
deemed to continue to have a permanent Investment in an Unrestricted Subsidiary in an
amount (if positive) equal to (a) the Companys Investment in such Subsidiary at the time
of such redesignation less (b) the portion (proportionate to the Companys equity interest
in such Subsidiary) of the fair market value of the net assets (as conclusively determined
by the Board of Directors of the Company in good faith) of such Subsidiary at the time that
such Subsidiary is so redesignated a Restricted Subsidiary; and
(ii) any Property transferred to or from an Unrestricted Subsidiary will be valued at
its fair market value at the time of such transfer, in each case as determined in good faith
by the board of directors of the Company.
Issue Date shall mean the date on which the Securities are originally issued.
Lien shall mean any interest in Property securing an obligation owed to, or a claim by, a
Person other than the owner of the Property, whether such interest is based on the common law,
statute or contract, and whether such obligation or claim is fixed or contingent, and including but
not limited to (i) the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or bailment for
security purposes or (ii) production payments and the like payable out of Oil and Gas Properties.
The term Lien shall also mean reservations, exceptions, encroachments, easements, rights of way,
covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purposes of the Indenture, the Company or any Subsidiary shall be deemed to be
the owner of any Property which it has acquired or holds subject to a conditional sale agreement,
or leases under a financing lease or other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person in a transaction intended to create a financing.
Material Adverse Effect shall mean any material and adverse effect on (i) the assets,
liabilities, financial condition, business, operations or affairs of the Company and its
Subsidiaries taken as a whole, or (ii) the ability of the Company and its Subsidiaries taken as a
whole to carry out their business or meet their obligations under the Indenture on a timely basis.
Net Available Cash from an Asset Disposition shall mean cash payments received (including
any cash payments received by way of deferred payment of principal pursuant to a note or
installment receivable or
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otherwise, but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring person of Debt or other obligations relating to the
Properties that are the subject of such Asset Disposition or received in any other noncash form)
therefrom, in each case net of:
(a) all legal, accounting, investment banking, title and recording tax expenses,
commissions and other fees and expenses incurred, and all federal, state, provincial,
foreign and local taxes required to be paid or accrued as a liability under GAAP (after
taking into account any available tax credits or deductions and any tax sharing agreements),
as a consequence of such Asset Disposition;
(b) all payments made on any Debt which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable
law be repaid out of the proceeds from such Asset Disposition;
(c) all distributions and other payments required to be made to minority interest
holders in Subsidiaries or joint ventures as a result of such Asset Disposition; and
(d) the deduction of appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the assets disposed of in such
Asset Disposition and retained by the Company or any Consolidated Subsidiary after such
Asset Disposition.
Net Cash Proceeds, with respect to any issuance or sale of capital stock, shall mean the
cash proceeds of such issuance or sale net of attorneys fees, accountants fees, underwriters or
placement agents fees, listing fees, discounts or commissions and brokerage, consultant and other
fees and charges actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result of such issuance or sale (after taking into account any available tax credit
or deductions and any tax sharing arrangements).
Non-U.S. Person means a person who is not a U.S. person, as defined in Regulation S.
Note Lien means a Lien granted by a Collateral Agreement to the Collateral Agent (or any
other holder, or representative of holders, of Note Obligations), at any time, upon any assets of
the Company or any Guarantor to secure Note Obligations.
Note Obligations means Debt of the Company and the Subsidiary Guarantors arising under or
related to the Securities, including, without limitation, any principal, premium, if any, accrued
and unpaid interest, including monetary penalty, or damages, costs and expenses payable by the
Company or any Subsidiary Guarantor under the terms of the Securities or the Indenture.
NYMEX Strip Price shall mean the average closing price of contracts for future delivery for
the next occurring 24 months as of the close of trading on the New York Mercantile Exchange
(NYMEX) on the date of any calculation. For crude oil, the reference contract will be light
sweet crude oil, the NYMEX symbol for which is currently CL. For natural gas, the reference
contract will be natural gas delivered at the Henry Hub in Louisiana, the NYMEX symbol for which is
currently NG. To the extent that reference prices are not available for the entire 24 month
period, prices will be determined on the average of the contracts which are available during such
24 month period.
Officer shall mean the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Treasurer or the Secretary of the Company.
Officers Certificate shall mean a certificate signed by two Officers or by an Officer and
either an Assistant Treasurer or an Assistant Secretary of the Company.
Oil and Gas Properties shall mean Hydrocarbon Interests; the Properties now or hereafter
pooled or unitized with Hydrocarbon Interests; all presently existing or future unitization,
pooling agreements and declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and rules of any governmental
authority) which may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the Hydrocarbon Interests or the
production, sale, purchase, exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced and saved or
attributable to the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds, products,
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revenues and other incomes from or attributable to the Hydrocarbon Interests; all tenements,
hereditaments, appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights, titles, interests and estates
described or referred to above, including any and all Property, real or personal, now owned or
hereinafter acquired and situated upon, used, held for use or useful in connection with the
operating, working or development of any of such Hydrocarbon Interests or Property (excluding
drilling rigs, automotive equipment or other personal property which may be on such premises for
the purpose of drilling a well or for other similar temporary uses) and including any and all oil
wells, gas wells, injection wells or other wells, buildings, structures, fuel separators, liquid
extraction plants, plant compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus,
equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface
leases, rights-of-way, easements and servitudes together with all additions, substitutions,
replacements, accessions and attachments to any and all of the foregoing. Unless otherwise
indicated, Oil and Gas Properties shall mean such Property of the Company and its Restricted
Subsidiaries.
Opinion of Counsel shall mean a written opinion from legal counsel who is acceptable to the
Trustee. The counsel may be an employee of or counsel to the Company or the Trustee.
Permitted Business Investment shall mean any Investment made in the ordinary course of, and
of a nature that is or shall have become customary in, the Related Business including investments
or expenditures for exploiting, exploring for, acquiring, developing, producing, processing,
gathering, marketing or transporting oil and gas through agreements, transactions, interests or
arrangements which permit one to share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives customarily achieved through the conduct of
the Related Business jointly with third parties, including (i) ownership interests in oil and gas
properties, processing facilities, gathering systems, pipelines or ancillary real property
interests and (ii) Investments in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual
interest agreements, unitization agreements, pooling agreements, joint bidding agreements, service
contracts, joint venture agreements, partnership agreements (whether general or limited),
subscription agreements, stock purchase agreements and other similar agreements (including for
limited liability companies) with third parties, excluding, however, Investments in corporations
other than Restricted Subsidiaries.
Permitted Entrada Transaction means (i) the sale, conveyance and assignment by the Company
or any of its Subsidiaries of a portion of the Entrada Assets to a third party in a transaction
which otherwise complies with the requirements of the Sale of Property covenant described above,
(ii) the contribution by the Company or any of its Restricted Subsidiaries of all or any portion of
its ownership interests in the Entrada Assets, to a newly formed Unrestricted Subsidiary, Callon
Entrada Company, which contribution may occur either prior to, contemporaneously with or after the
sale, conveyance and assignment contemplated in the immediately preceding clause (i), which
Unrestricted Subsidiary and/or its assets may be managed under one or more management services
agreements, contract operating agreements or similar agreements with the Company or any of its
Restricted Subsidiaries, (iii) the incurrence by Callon Entrada Company of Debt, the proceeds of
which are to be used to fund the costs and expenses incurred to develop and/or produce its
interests in the Entrada Assets, such Debt to be non-recourse to the Company and its Restricted
Subsidiaries except to the extent of the indemnities and/or performance guaranties described in
clause (vi) below, (iv) the granting of Liens on (w) the Entrada Assets, (x) all other assets of
Callon Entrada Company, (y) the equity interests of Callon Entrada Company, and/or (z) any deposit
accounts established and maintained to hold any loan proceeds of such Debt pending disbursement
and/or any revenues and proceeds of production or other amounts attributable to the Entrada Assets,
in each case to secure such Debt, and (v) the contribution or advance by the Company or any of its
Restricted Subsidiaries of additional cash or other assets to Callon Entrada Company from time to
time not to exceed, in the aggregate at any time outstanding, the sum of (A) $ 10,000,000, plus (B)
other contributions or advances arising from or deemed to exist as a result of the payment and
performance by the Company or any of its Restricted Subsidiaries of any of their respective
obligations under clause (vi) of this definition, and (vi) the indemnification of any Person
against loss from the failure of Callon Entrada Company to comply with, or the guarantee by the
Company or any Restricted Subsidiary of performance by Callon Entrada Company of, its obligations
arising under or related to the documents and agreements evidencing or governing its Debt or
relating to the development and operations of its assets (other than the obligation of Callon
Entrada Company to repay the principal and interest of the Debt described in clause (iii) of this
definition) by the Company or any of its Restricted Subsidiaries.
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Permitted Equipment Financing shall mean any Debt incurred by the Company or any Subsidiary
to finance or refinance the acquisition, after the Closing Date, from a third party that is not an
Affiliate of the Company of any equipment and related assets to be used in a Related Business;
provided that (i) the aggregate amount of all such Debt shall not exceed 50% of the cumulative
amount of capital expenditures made by the Company and its Restricted Subsidiaries after December
8, 2003 for capital equipment to be used in a Related Business, together with any taxes, duties,
installation costs or similar costs related thereto, and (ii) such Debt shall be non-recourse to
the Company and each Subsidiary of the Company other than an Equipment Financing Subsidiary related
to such acquired equipment.
Permitted Indebtedness shall mean:
(a) the Securities or any guaranty of or suretyship arrangement for the Securities;
(b) Debt (other than that associated with the First Lien Secured Credit Facility and
the 2010 Senior Notes) of the Company existing on September 30, 2009;
(c) accounts payable (for the deferred purchase price of Property or services) from
time to time incurred in the ordinary course of business which, if greater than ninety (90)
days past the invoice or billing date, are being contested in good faith by appropriate
proceedings if reserves adequate under GAAP shall have been established therefor;
(d) Debt under capital leases (as required to be reported on the financial statements
of the Company pursuant to GAAP) in addition to any obligations that are Debt as permitted
under the Limitation on Leases covenant described above;
(e) Debt associated with bonds or surety obligations required by Governmental
Requirements in connection with the operation of the Oil and Gas Properties;
(f) Hedging Agreements covering (a) oil and gas production of proved developed
producing Oil and Gas Properties of the Company or any Consolidated Subsidiary; provided,
however, that such Hedging Agreements related to oil or gas production shall not, either
individually or in the aggregate, cover more than 80% of estimated production on the date
such hedges are entered into of oil or gas of the Company and the Consolidated Subsidiaries
for each individual period covered by the Hedging Agreements, (b) fluctuations in interest
rates for notional principal amounts not to exceed at any time outstanding 80% of the Debt
for borrowed money of the Company and its Consolidated Subsidiaries, and (c) foreign
exchange risk;
(g) Debt arising out of any deferred compensation plan to the extent such Debt can be
satisfied out of the investments held by such plan and the proceeds thereof;
(h) Debt arising under the First Lien Secured Credit Facility in a total principal
amount outstanding not greater than $125,000,000;
(i) Debt arising under the 2010 Senior Notes in a total principal amount outstanding
(after giving effect to the exchange offer) not greater than $40,000,000;
(j) Debt of a Restricted Subsidiary incurred and outstanding on the date on which such
Restricted Subsidiary is acquired by the Company (other than Debt incurred (i) to provide
all or any portion of the funds utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was otherwise acquired by the Company or (ii) otherwise in connection with, or in
contemplation of, such acquisition); provided, however, that at the time such Restricted
Subsidiary is acquired by the Company, the Company would have been able to incur $1.00 of
additional Debt pursuant to clause (1) of the Debt Incurrence covenant described above
after giving effect to the incurrence of such Debt pursuant to this clause (j);
(k) Debt incurred in respect of workers compensation claims, self-insurance
obligations, performance, bid, surety and similar bonds, letters of credit and guarantees
supporting such performance, bid, surety and similar bonds and completion guarantees
provided by the Company or a Restricted Subsidiary in the ordinary course of business;
(l) Debt arising from agreements of the Company or a Restricted Subsidiary providing
for indemnification, adjustment of purchase price or similar obligations, in each case,
incurred or assumed in connection with the disposition of any business, assets or capital
stock of a Restricted Subsidiary, provided that the maximum aggregate liability in respect
of all such Debt other than Debt related to environmental liabilities to governmental
agencies shall at no time exceed the gross proceeds actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;
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(m) Debt arising from the honoring by a bank or other financial institution of a check,
draft of similar instrument (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided, however, that such Debt is
extinguished within five (5) Business Days of incurrence;
(n) obligations relating to net gas balancing positions arising in the ordinary course
of business and consistent with past practice;
(o) non-recourse debt not to exceed $10,000,000 in the aggregate at any one time
outstanding;
(p) Permitted Equipment Financing;
(q) in addition to the items referred to in clauses (a) through (p) above, Debt of the
Company and its Restricted Subsidiaries in an aggregate outstanding principal amount which,
when taken together with the principal amount of all other indebtedness incurred pursuant to
this clause (q) and then outstanding, will not exceed $10,000,000; and
(r) renewals or extensions of any Debt referred to in clauses (a) through (f) above.
Permitted Investment shall mean an Investment by the Company or any Restricted
Subsidiary in:
(a) a Restricted Subsidiary or a Person which will, upon the making of such Investment,
become a Restricted Subsidiary; provided, however, that the primary business of such
Restricted Subsidiary is a Related Business;
(b) another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its assets to,
the Company or a Restricted Subsidiary; provided, however, that such Persons primary
business is a Related Business;
(c) cash and Cash Equivalents;
(d) receivables owing to the Company or any Restricted Subsidiary created or acquired
in the ordinary course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(e) payroll, travel and similar advances to cover matters that are expected at the time
of such advances ultimately to be treated as expenses for accounting purposes and that are
made in the ordinary course of business;
(f) loans or advances to employees made in the ordinary course of business consistent
with past practices of the Company or such Restricted Subsidiary;
(g) stock, obligations or securities received in settlement of Debts created in the
ordinary course of business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments or pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of a debtor;
(h) Investments made as a result of the receipt of non-cash consideration from an Asset
Disposition that was made pursuant to and in compliance with the Sale of Property covenant
described above;
(i) Investments in existence on September 30, 2009;
(j) Hedging Agreements, which transactions or obligations are incurred in compliance
with the Indenture;
(k) Investments by the Company or any of its Restricted Subsidiaries, together with all
other Investments pursuant to this clause (k), in an aggregate amount at the time of such
Investment not to exceed $10,000,000 outstanding at any one time;
(l) guarantees of Debt incurred in compliance with the Debt Incurrence covenant
described above;
(m) Investments representing deferred compensation of employees and earnings thereon
under the Companys KEYSOP plan;
(n) any Investment arising out of the Permitted Medusa Transaction or a Permitted
Entrada Transaction; and
(o) Permitted Business Investments.
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Permitted Lien shall mean, with respect to any Person:
(a) Liens securing the obligations of the Company and/or any of its Restricted
Subsidiaries under the First Lien Secured Credit Facility, any other Senior Secured Debt
permitted under clause (2) of the Debt Incurrence covenant described above) and
related Hedging Agreements;
(b) pledges or deposits by such Person under workmens compensation laws, unemployment
insurance laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts or leases to which such Person is a party, or deposits to secure public
or statutory obligations of such Person or deposits or cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import or customs duties or for the payment of rent, in each
case incurred in the ordinary course of business;
(c) Liens imposed by law, including carriers, warehousemens, mechanics,
materialmens and operators Liens, (including Liens arising pursuant to Article 9.319 of
the Texas Uniform Commercial Code or other similar statutory provisions of other states with
respect to production purchased from others) in each case for sums not yet due or being
contested in good faith by appropriate proceedings if a reserve or other appropriate
provisions, if any, as shall be required by GAAP shall have been made in respect thereof;
(d) Liens for taxes, assessments or other governmental charges not yet subject to
penalties for non-payment or which are being contested in good faith by appropriate
proceedings provided appropriate reserves required pursuant to GAAP have been made in
respect thereof;
(e) Liens in favor of issuers of surety or performance bonds or letters of credit or
bankers acceptances issued pursuant to the request of and for the account of such Person in
the ordinary course of its business; provided, however, that such letters of credit do not
constitute Debt;
(f) encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines, pipelines and other
similar purposes, or zoning or other restrictions as to the use of real properties or liens
incidental to the conduct of the business of such Person or to the ownership of its
properties which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business of such Person;
(g) Liens securing Hedging Agreements so long as the related Debt is, and is permitted
to be under the Indenture, secured by a Lien on the same property securing such Hedging
Agreements;
(h) leases and subleases of real property which do not materially interfere with the
ordinary conduct of the business of the Company or any of its Restricted Subsidiaries;
(i) judgment Liens not giving rise to an Event of Default so long as such Lien is
adequately bonded and any appropriate legal proceedings which may have been duly initiated
for the review of such judgment have not been finally terminated or the period within which
such proceedings may be initiated has not expired;
(j) Liens for the purpose of securing the payment of all or a part of the purchase
price of, or capitalized lease obligations with respect to, assets or property acquired or
constructed in the ordinary course of business provided that:
(1) the aggregate principal amount of Debt secured by such Liens is otherwise
permitted to be incurred under the Indenture and does not exceed the cost of the
assets or property so acquired or constructed; and
(2) such Liens are created within one hundred eighty (180) days of construction
or acquisition of such Property and do not encumber any other Property of the
Company or any Restricted Subsidiary other than such Property affixed or appurtenant
thereto;
(k) Liens arising solely by virtue of any statutory or common law provisions relating
to bankers Liens, rights of set-off or similar rights and remedies as to deposit accounts
or other funds maintained with a depositary institution; provided that:
(1) such deposit account is not a dedicated cash collateral account and is not
subject to restrictions against access by the Company in excess of those set forth
by regulations promulgated by the Federal Reserve Board; and
(2) such deposit account is not intended by the Company or any Restricted
Subsidiary to provide collateral to the depository institution;
(l) Liens arising from UCC financing statement filings regarding operating leases
entered into by the Company and its Restricted Subsidiaries in the ordinary course of
business;
(m) Liens existing on September 30, 2009;
(n) Liens on property or shares of stock of a Person at the time such Person becomes a
Restricted Subsidiary; provided, however, that such Liens are not created, incurred or
assumed in
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connection with, or in contemplation of, such other Person becoming a Restricted
Subsidiary; provided further, however, that any such Lien may not extend to any other
property owned by the Company or any Restricted Subsidiary;
(o) Liens on property at the time the Company or a Restricted Subsidiary acquired the
property, including any acquisition by means of a merger or consolidation with or into the
Company or any Restricted Subsidiary; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such acquisition; provided
further, however, that such Liens may not extend to any other property owned by the Company
or any Restricted Subsidiary;
(p) Liens securing Debt or other obligations of a Restricted Subsidiary owing to the
Company or a Wholly-Owned Subsidiary;
(q) Note Liens securing the Note Obligations;
(r) Liens securing refinancing indebtedness incurred to refinance Debt that was
previously so secured, provided that any such Lien is limited to all or part of the same
Property (plus improvements, future interests and additional acquired interests in the
Property apportionment thereto, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or, under the written arrangements under which the original
Lien arose, could secure) the Debt being refinanced or is in respect of Property that is the
security for a Permitted Lien hereunder;
(s) Liens upon specific Properties of the Company or any of its Subsidiaries securing
Debt incurred in the ordinary course of business to provide all or part of the funds for the
exploration, drilling, production or development of those Properties;
(t) Liens in respect of Volumetric Production Payments, Dollar Denominated Production
Payments and other similar reserve sales;
(u) farm-out, farm-in, seismic, carried working interests, areas of mutual interests,
joint operating, joint exploration, unitization, gas balancing, royalty, overriding royalty,
bonus, rental, sales and similar agreements relating to the exploration or development of,
or production from, oil and gas properties and related facilities (production and
transportation) entered into in the ordinary course of business.
(v) Liens on the capital stock or other equity interests of any Equipment Financing
Subsidiary to secure Debt of such Equipment Financing Subsidiary incurred in connection with
a Permitted Equipment Financing; and
(w) Liens with respect to Permitted Indebtedness on the capital stock or other equity
interests of any Unrestricted Subsidiary to secure Debt of such Unrestricted Subsidiary
which is non-recourse to the Company or any Restricted Subsidiary.
Permitted Medusa Transaction shall have the meaning ascribed to such term in the credit
agreement for the First Lien Secured Credit Facility in effect on the date hereof.
Person shall mean any individual, corporation, company, association, partnership, joint
venture, trust, unincorporated organization or government or any agency, instrumentality or
political subdivision thereof, or any other form of entity.
Preferred Stock, as applied to the capital stock of any Person, shall mean capital stock of
any class or classes (however designated) which is preferred as to the payment of dividends, or as
to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of capital stock of any other class of such Person.
Property shall mean any interest in any kind of property or asset, whether real, personal or
mixed, or tangible or intangible.
Redemption Date shall mean, with respect to any redemption of Securities, the date of
redemption with respect thereto.
Related Business shall mean any business which is the same as or related, ancillary or
complementary to any of the businesses of the Company and its Restricted Subsidiaries on the date
hereof.
Restricted Investment shall mean any Investment other than a Permitted Investment.
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Restricted Subsidiary shall mean any Subsidiary of the Company other than an Unrestricted
Subsidiary.
SEC shall mean the Securities and Exchange Commission.
Securities shall mean the Exchange Notes.
Securities Act shall mean the Securities Act of 1933, as amended.
Senior Indebtedness shall mean, whether outstanding on the date hereof or thereafter issued,
created, incurred or assumed, the First Lien Secured Credit Facility Debt, the 2010 Senior Notes,
the Securities and all other Debt of the Company, including accrued and unpaid interest (including
interest accruing on or after the filing of any petition in bankruptcy or for reorganization
relating to the Company at the rate specified in the documentation with respect thereto whether or
not a claim for post filing interest is allowed in such proceeding) and fees relating thereto;
provided, however, that Senior Indebtedness will not include:
(a) any Debt which, in the instrument creating or evidencing the same or pursuant to
which the same is outstanding, it is provided that the obligations in respect of such Debt
are subordinate to payment of the Securities;
(b) any obligation of the Company to any Subsidiary;
(c) any liability for federal, state, foreign, local or other taxes owed or owing by
the Company;
(d) any accounts payable or other liability to trade creditors arising in the ordinary
course of business (including guarantees thereof or instruments evidencing such
liabilities);
(e) any Debt, guarantee or obligation of the Company that is expressly subordinate or
junior in right of payment to any other Debt, guarantee or obligation of the Company,
including, without limitation, any Subordinated Debt; or
(f) any capital stock.
Senior Secured Debt shall mean, whether outstanding on the date hereof or thereafter issued,
created, incurred or assumed, any Senior Indebtedness of the Company or any Restricted Subsidiary
(other than the Securities and the 2010 Senior Notes) secured by a Lien, including, but not limited
to the First Lien Secured Credit Facility Debt.
Special Entity shall mean, with regard to a Person, any joint venture, limited liability
company or partnership, general or limited partnership or any other type of partnership or company
other than a corporation in which such first Person or one or more of its other Subsidiaries is a
member, owner, partner or joint venturer and owns, directly or indirectly, at least a majority of
the equity of such entity or controls such entity, but excluding any tax partnerships that are not
classified as partnerships under state law.
Subordinated Debt shall mean any Debt of the Company expressly subordinated to the
Securities, on terms including, without limitation, that payments on such Debt shall be prohibited
if a Default exists or would result from such payment, and other terms and conditions substantially
similar to prevailing market terms.
Subsidiary shall mean, with regard to a Person, (i) any corporation of which at least a
majority of the outstanding shares of stock having by the terms thereof ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of whether or not at
the time stock of any other class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time directly or indirectly owned or
controlled by such Person or one or more of its Subsidiaries and (ii) any Special Entity of which
at least a majority of the equity interests are owned directly or indirectly or controlled by such
Person. Unless otherwise indicated herein, each reference to the term Subsidiary shall mean a
Subsidiary of the Company.
Subsidiary Guarantee shall mean, individually, any Guarantee of payment of the Securities by
a Subsidiary Guarantor pursuant to the terms of the Indenture and any supplemental indenture
thereto, and, collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the
form prescribed by the Indenture.
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Subsidiary Guarantor shall mean each Subsidiary of the Company in existence on the Issue
Date and any Restricted Subsidiary created or acquired by the Company after the Issue Date other
than a Foreign Subsidiary.
TIA or Trust Indenture Act shall mean the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa
77bbbb), as in effect on the date of the Indenture.
Trustee shall mean the party named as such in the Indenture until a successor replaces it
and, thereafter, means the successor.
Trust Officer shall mean, when used with respect to the Trustee, any officer within the
corporate trust department of the Trustee, including any vice president, assistant vice president,
assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who
customarily performs functions similar to those performed by the Persons who at the time shall be
such officers, respectively, or to whom any corporate trust matter is referred because of such
persons knowledge of and familiarity with the particular subject and who shall have direct
responsibility for the administration of the Indenture.
UCC means the Uniform Commercial Code as in effect in the State of New York or any other
applicable jurisdiction.
Unrestricted Subsidiary shall mean:
(a) Callon Entrada Company and any Subsidiary of the Company that at the time of
determination shall be designated an Unrestricted Subsidiary by the Board of Directors of
the Company in the manner provided below; and
(b) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary or a Person becoming a Subsidiary
through merger or consolidation or Investment therein) to be an Unrestricted Subsidiary only
if:
(a) such Subsidiary or any of its Subsidiaries does not own any capital stock or Debt
of or have any Investment in, or own or hold any Lien on any property of, any other
Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so designated or
otherwise an Unrestricted Subsidiary;
(b) all the Debt of such Subsidiary and its Subsidiaries shall, at the date of
designation, and will at all times thereafter, consist of non-recourse Debt;
(c) such designation and the Investment of the Company in such Subsidiary complies with
the Restricted Investments; Restrictive Agreements covenant described above;
(d) such Subsidiary, either alone or in the aggregate with all other Unrestricted
Subsidiaries, does not operate, directly or indirectly, all or substantially all of the
business of the Company and its Subsidiaries;
(e) such Subsidiary is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation:
(1) to subscribe for additional capital stock of such Person; or
(2) to maintain or preserve such Persons financial condition or to cause such
Person to achieve any specified levels of operating results; and
(f) on the date such Subsidiary is designated an Unrestricted Subsidiary, such
Subsidiary is not a party to any agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary with terms substantially less favorable to the Company
than those that might have been obtained from Persons who are not Affiliates of the Company.
Any such designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a resolution of the Board of Directors of the Company giving
effect to such designation and an Officers Certificate certifying that such designation complies
with the foregoing conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Debt such Subsidiary shall be deemed
to be incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that immediately after giving effect to such designation, no
Default or Event of Default shall
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have occurred and be continuing or would occur as a consequence thereof and the Company could
incur at least $1.00 of additional Debt under clause (1) of the Debt Incurrence covenant
described above on a pro forma basis taking into account such designation.
Volumetric Production Payments shall mean production payment obligations recorded as defined
revenue in accordance with GAAP, together with all undertakings and obligations in connection
therewith.
Wholly-Owned Subsidiary shall mean a Restricted Subsidiary of the Company, all of the
capital stock of which (other than directors qualifying shares) is owned by the Company or one or
more other Wholly-Owned Subsidiaries.
DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is qualified in its entirety by
reference to our certificate of incorporation and bylaws, each of which is incorporated by
reference in this prospectus. In addition, you should be aware that the summary below does not give
full effect to the terms of the provisions of statutory or common law.
Common Stock
We are currently authorized to issue up to 30,000,000 shares of common stock, par value $0.01
per share. As of September 30, 2009, there were 21,805,311 shares of common stock outstanding.
Holders of our common stock are entitled to cast one vote for each share held of record on each
matter submitted to a vote of stockholders. There is no cumulative voting for election of
directors. Subject to the prior rights of any series of preferred stock which may from time to time
be outstanding, if any, holders of our common stock are entitled to receive ratably dividends when,
as and if declared by the board of directors out of funds legally available for such purpose and,
upon the liquidation, dissolution or winding up of the company, are entitled to share ratably in
all assets remaining after payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. There are no redemption or sinking fund provisions that
are applicable to our common stock. Subject only to the requirements of the Delaware General
Corporation Law, or DGCL, the board of directors may issue shares of our common stock without
stockholder approval, at any time and from time to time, to such persons and for such consideration
as the board of directors deems appropriate. Holders of our common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The outstanding common
stock is validly authorized and issued, fully paid and nonassessable.
Preferred Stock
We are authorized to issue up to 2,500,000 shares of preferred stock, par value $0.01 per
share. As of September 30, 2009, there were no shares of preferred stock outstanding. Shares of
preferred stock may be issued from time to time in one or more series as the board of directors may
from time to time determine, each of said series to be distinctively designated. The voting powers,
preferences and relative, participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, if any, of each such series of preferred stock may differ from
those of any and all other series of preferred stock at any time outstanding, and, subject to
certain limitations of our certificate of incorporation and the DGCL, the board of directors may
fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and
relative, participating, optional and other special rights, and qualifications, limitations and
restrictions thereof, of each such series of preferred stock.
The issuance of any such preferred stock could adversely affect the rights of the holders of
our common stock and therefore, reduce the value of the common stock. The ability of the board of
directors to issue preferred stock could discourage, delay, or prevent a takeover of us.
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The Preferred Shares
Amount. The number of shares constituting the Preferred Shares is 337,500, which may be
increased or decreased by resolution of the board of directors.
Ranking. The Preferred Shares will, with respect to dividend rights and rights on liquidation,
winding up and dissolution of the Company, rank senior to the common stock and all other classes
and series of capital stock of the Company.
Dividends. Commencing on March 15, 2010, the holders of Preferred Shares shall be entitled to
receive, whether or not declared or paid, a cumulative dividend computed like interest at the per
annum rate of eighteen percent of the stated value on each outstanding Preferred Share, which rate
increases one percent on each March 15 and September 15 beginning September 15, 2010, up to a
maximum rate per annum of twenty-five percent. Accrued dividends do not bear interest. No
dividends shall be declared or paid, or funds set apart for the payment of dividends on, any junior
securities for any period unless all accrued dividends have been, or contemporaneously are, paid in
full. No junior securities may be repurchased, redeemed or otherwise acquired or retired for value
by the Company, and no monies paid into or set apart or made available for a sinking or other like
fund for the repurchase, redemption or other acquisition or retirement for value of any junior
securities by the Company, unless, in any such case, all accrued dividends on all outstanding
Preferred Shares have been, or contemporaneously are, paid in full.
Voting Rights. Except as may be otherwise expressly provided in our certificate of
incorporation or as expressly required by the DGCL, the Preferred Shares have no voting rights. So
long as any Preferred Shares are outstanding, and unless the consent or approval of a greater
number of shares shall then be required by law, without first obtaining the consent or approval of
the holders of at least two-thirds of the Preferred Shares then outstanding, the Company will not:
(i) amend, alter, or repeal the certificate of incorporation or the bylaws, or waive any provisions
thereof, in a manner that would materially and adversely affect the rights, preferences,
privileges, or powers of the Preferred Shares; (ii) purchase, redeem or otherwise acquire or retire
for value any junior securities, or any securities exercisable or exchangeable for junior
securities, other than in connection with the surrender by employees of the Company of portions of
equity awards to satisfy tax withholding obligations; (iii) authorize, create, increase the
authorized amount of, or issue any class or series, or any shares of any class or series, of
capital stock of the Company ranking senior in priority to, or in parity with, the Preferred Shares
with respect to the right to dividends or preference on liquidation; or (iv) declare, pay, or set
apart for payment, any dividends or any other distributions of any sort by the Company in respect
of any other capital stock of the Company other than the Preferred Shares, including the common
stock.
Liquidation, Dissolution, or Winding Up. In the event of any liquidation, dissolution, or
winding up of the Company (a Liquidation Event), whether voluntary or involuntary, no holders of
junior securities shall receive, by reason of their ownership thereof, any payment or distribution
of any of the assets of the Company until the holders of the Preferred Shares then outstanding, by
reason of their ownership thereof, shall have first received an amount in cash per share equal to
100% of the stated value thereof, plus an amount in cash equal to all accrued dividends through the
date of the effectiveness of the Liquidation Event (accrued dividends together with the
stated value being referred to as the Liquidation Preference). If, upon the occurrence of any
Liquidation Event, the assets and funds of the Company available to be distributed among the
holders of the Preferred Shares shall be insufficient to permit the payment to such holders of the
full Liquidation Preference, then the holders of junior securities shall not receive, by reason of
their ownership thereof, any payment or distribution of any of the assets of the Company, and the
holders of all such Preferred Shares shall share ratably in any distribution of assets of the
Company in accordance with the amounts that would be payable on any such distribution if the
Liquidation Preference were to be paid in full. None of the voluntary sale, conveyance, exchange
and transfer (for cash, shares of stock, other securities or other consideration) of all or
substantially all of the property or assets of the Company, and no consolidation or merger of the
Company with any one or more other corporations, shall be deemed to be a Liquidation Event unless
such voluntary sale, conveyance, exchange or transfer shall be in connection with a plan of
liquidation, dissolution or winding up of the Company.
Automatic Conversion. Immediately upon the later to occur of (i) effectiveness of an
amendment to the certificate of incorporation increasing the number of authorized shares of common
stock (the Amendment) and (ii) the receipt of any required approval for listing of the shares of
common stock to be issued upon conversion of the
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Preferred Shares on the New York Stock Exchange, each Preferred Share shall automatically
convert into a number of fully paid and non-assessable shares of common stock (the Conversion
Rate) equal to the quotient obtained by dividing the stated value plus the amount of accrued
dividends by the Conversion Price. The initial Conversion Price for Preferred Shares shall be
$66.67, as such price may be adjusted. The initial Conversion Rate shall be ten shares of common
stock for one Preferred Share.
Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and Our Bylaws
Some provisions of our certificate of incorporation and our bylaws contain provisions that
could make it more difficult to acquire us by means of a merger, tender offer, proxy contest or
otherwise, or to remove our incumbent officers and directors. These provisions, summarized below,
are expected to discourage coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire or restructure us outweigh the disadvantages of discouraging such proposals because
negotiation of such proposals could result in an improvement of their terms.
Preferred stock. Our certificate of incorporation permits our board of directors to authorize
and issue one or more series of preferred stock, which may render more difficult or discourage an
attempt to change control of us by means of a merger, tender offer, proxy contest or otherwise. For
example, if in the due exercise of its fiduciary obligations, the board of directors were to
determine that a takeover proposal is not in our best interest, the board of directors could cause
shares of preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of the proposed
acquirer or insurgent stockholder or stockholder group.
Staggered board of directors. Our certificate of incorporation and bylaws divide our board of
directors into three classes, as nearly equal in number as possible, serving staggered three-year
terms. The certificate of incorporation and bylaws also provide that the classified board provision
may not be amended without the affirmative vote of the holders of 80% or more of the voting power
of our capital stock. The classification of the board of directors has the effect of requiring at
least two annual stockholder meetings, instead of one, to effect a change in control of the board
of directors, unless the articles of incorporation are amended.
Limitation on directors liability. Delaware has adopted a law that allows corporations to
limit or eliminate the personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors fiduciary duty of care. The duty of care requires that,
when acting on behalf of the corporation, directors must exercise an informed business judgment
based on all material information reasonably available to them. Absent the limitations allowed by
the law, directors are accountable to corporations and their stockholders for monetary damages for
acts of gross negligence. Although the Delaware law does not change directors duty of care, it
allows corporations to limit available relief to equitable remedies such as injunction or
rescission. Our certificate of incorporation limits the liability of our directors to the fullest
extent permitted by this law. Specifically, our directors will not be personally liable for
monetary damages for any breach of their fiduciary duty as a director, except for liability:
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for any breach of their duty of loyalty to the company or our stockholders; |
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for acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law |
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under provisions relating to unlawful payments of dividends or unlawful stock
repurchases or redemptions; or |
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for any transaction from which the director derived an improper personal benefit. |
This limitation may have the effect of reducing the likelihood of derivative litigation
against directors, and may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action, if successful,
might otherwise have benefited our stockholders.
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Stockholder meetings. Our bylaws provide that a special meeting of stockholders may be called
only by the Chairman of the Board, the Chief Executive Officer or the President or by the Board of
Directors or at the request of stockholders owning 80% or more of the entire capital stock issued
and outstanding and entitled to vote.
Requirements for advance notification of stockholder nominations. Our bylaws and certificate
of incorporation establish advance notice procedures with respect to stockholder nomination of
candidates for election as directors, other than nominations made by or at the direction of the
board of directors.
Stockholder Action By Written Consent. Our certificate of incorporation and bylaws provide
that, except as may otherwise be provided with respect to the rights of the holders of preferred
stock, no action that is required or permitted to be taken by our stockholders at any annual or
special meeting may be effected by written consent of stockholders in lieu of a meeting of
stockholders, unless the action to be effected is approved by the written consent of all of the
stockholders entitled to vote thereon. This provision, which may not be amended except by the
affirmative vote of holders of at least 80% of the voting power of all then outstanding shares of
capital stock entitled to vote generally in the election of directors, voting together as a single
class, makes it difficult for stockholders to initiate or effect an action by written consent that
is opposed by our board of directors.
Amendment of the bylaws. Under Delaware law, the power to make, alter or repeal bylaws is
conferred upon the stockholders. A corporation may, however, in its certificate of incorporation
also confer upon the board of directors the power to make, alter or repeal its bylaws. Our
certificate of incorporation and bylaws grant our board of directors the power to make, alter or
repeal our bylaws at any regular or special meeting of the board of directors. By majority vote,
our stockholders may make, alter or repeal our bylaws but provisions of the bylaws relating to
shareholder meetings, directors, and amendment of the bylaws may only be amended by holders of at
least 80% of the voting power of all then outstanding shares of capital stock entitled to vote
generally in the election of directors, voting together as a single class.
The provisions of our certificate of incorporation and bylaws could have the effect of
discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit
temporary fluctuations in the market price of our common stock that often result from actual or
rumored hostile takeover attempts. These provisions may also have the effect of preventing changes
in our management. It is possible that these provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best interests.
Delaware Anti-Takeover Statute
We are a Delaware corporation and are subject to Section 203 of the Delaware General
Corporation Law. In general, Section 203 prevents us from engaging in a business combination with
an interested stockholder (generally, a person owning 15% or more of our outstanding voting
stock) for three years following the time that person becomes a 15% stockholder unless either:
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before that person became a 15% stockholder, our board of directors approved the
transaction in which the stockholder became a 15%stockholder or approved the business
combination; |
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upon completion of the transaction that resulted in the stockholders becoming a 15%
stockholder, the stockholder owns at least 85% of our voting stock outstanding at the
time the transaction began (excluding stock held by directors who are also officers and
by employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a tender or
exchange offer); or |
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after the transaction in which that person became a 15% stockholder, the business
combination is approved by our board of directors and authorized at a stockholder
meeting by at least two-thirds of the outstanding voting stock not owned by the 15%
stockholder. |
Under the Section 203, these restrictions also do not apply to certain business combinations
proposed by a 15% stockholder following the disclosure of an extraordinary transaction with a
person who was not a 15% stockholder during the previous three years or who became a 15%
stockholder with the approval of a majority of our directors. This exception applies only if the
extraordinary transaction is approved or not opposed by a majority of
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our directors who were directors before any person became a 15% stockholder in the previous
three years, of the successors of these directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust
Company.
COMPARISON OF RIGHTS OF HOLDERS OF OLD NOTES
AND HOLDERS OF COMMON AND PREFERRED SHARES
The following is a description of the material differences between the rights of holders of
Old Notes and holders of Common and Preferred Shares. This summary may not contain all of the
information that is important to you. You should carefully read this entire memorandum, including
the documents incorporated by reference, for a more complete understanding of the differences
between being a holder of Old Notes and a holder of Common and Preferred Shares.
Ranking
In any liquidation or bankruptcy of Callon, the Common and Preferred Shares would rank below
all claims against us or holders of any of our indebtedness, including the Old Notes. Upon a
voluntary or involuntary liquidation or bankruptcy of Callon, all holders of the Old Notes would be
entitled to receive payment in full of principal and interest before any holders of our Common and
Preferred Shares receive any payments or distributions. Therefore, holders of our Common and
Preferred Shares will not be entitled to receive any payment or other distribution of assets upon
the liquidation or bankruptcy of Callon until after our obligations to creditors, including the
holders of the Old Notes, have been satisfied in full.
Dividends/Distributions
Our Board of Directors has not declared cash dividends on our common stock and it is unlikely
that we will pay any dividends on our common stock in the foreseeable future. In any event, the
declaration and payment of future dividends by our Board of Directors will be dependent upon our
earnings and financial condition, economic and market conditions and other factors deemed relevant
by the Board of Directors. Therefore, no assurance can be given as to the amount or timing of the
declaration and payment of future dividends.
Holders of Preferred Shares are entitled to receive payments at an annual rate of 18%, which
interest rate shall escalate by 1% each semi-annual dividend period if not converted into common
stock, subject to a cap of 25%;
Holders of the Old Notes are entitled to receive interest payments at an annual rate of 9.75%
of their principal amount.
Listing
The Common Shares to be issued in the exchange offer and the common stock to be issued upon
conversion of the Preferred Shares are expected to be approved for listing on the New York Stock
Exchange.
The Old Notes are not listed on any exchange.
Voting Rights
Holders of shares of our common stock, including the Common Shares, are entitled to one vote
for each share held of record on all matters submitted to a vote of stockholders.
Holders of the Old Notes and Preferred Shares do not have voting rights.
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Repurchase
Holders of our Common and Preferred Shares do not have the right to require us to repurchase
their shares.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of material U.S. federal income tax considerations
associated with the exchange offer and the ownership and disposition of the Exchange Notes, Common
Shares and Preferred Shares offered herein. This summary is based upon laws, regulations, rulings
and decisions currently in effect, all of which are subject to change or differing interpretations
at any time, possibly with retroactive effect. We have not obtained an opinion of counsel with
regard to the exchange offer and the ownership and disposition of the Exchange Notes, Common Shares
or Preferred Shares, and there can be no assurance that the Internal Revenue Service (IRS) will
not challenge one or more of the conclusions described herein. This summary deals only with
holders who hold the Old Notes and the Exchange Notes, Common Shares and Preferred Shares received
in the exchange offer as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the Code). Moreover, this summary does not purport to deal
with persons in unique tax situations, such as financial institutions, insurance companies,
regulated investment companies, tax-exempt investors, dealers in securities and currencies, certain
former U.S. citizens or residents, persons who hold the Old Notes or Exchange Notes, Common Shares
or Preferred Shares as a position in a straddle, hedge, conversion transaction, constructive
sale or other integrated transaction for tax purposes, or persons whose Old Notes were acquired
other than upon original issue and as a result have market discount or bond premium. Further, this
discussion does not address the consequences under U.S. alternative minimum tax rules, U.S. federal
estate or gift tax laws, the laws of any state or locality, or any foreign tax laws.
As used herein, the term U.S. Holder means a holder of Old Notes or Exchange Notes, Common
Shares and Preferred Shares received in the exchange offer that is, for U.S. federal income tax
purposes, (i) an individual who is a citizen or resident alien of the United States, (ii) a
corporation or entity treated as a corporation for U.S. federal income tax purposes that is created
or organized in or under the laws of the United States or of any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income taxation regardless of its
source, or (iv) a trust if (A) a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust or (B) the trust was in existence on August 20, 1996, was
treated as a U.S. person prior to that date, and elected to continue to be treated as a U.S.
person. For purposes of this discussion, the term non-U.S. Holder means a holder of Old Notes or
Exchange Notes, Common Shares and Preferred Shares received in the exchange offer that is not a
U.S. Holder or a partnership or an entity treated as a partnership for U.S. federal income tax
purposes.
If a partnership or an entity treated as a partnership for U.S. federal income tax purposes
holds Old Notes or Exchange Notes, Common Shares and Preferred Shares received in the exchange
offer, the tax treatment of a partner generally will depend on the status of the partner and the
activities of the partnership or other entity treated as a partnership. Each such partner should
consult a tax advisor as to the tax consequences of the exchange offer and the ownership and
disposition of the Exchange Notes, Common Shares and Preferred Shares.
Each U.S. Holder and non-U.S. Holder should consult its tax advisor regarding the particular
tax consequences to such holder of the exchange offer, the ownership and disposition of the
Exchange Notes, Common Shares and Preferred Shares, as well as any tax consequences that may arise
under the laws of any other relevant foreign, state, local, or other taxing jurisdiction.
Qualification as a Tax-Free Recapitalization
The tax consequences of the exchange offer and the ownership and disposition of the Exchange
Notes, Common Shares and Preferred Shares will depend upon whether the Old Notes and the Exchange
Notes constitute securities for U.S. federal income tax purposes. The determination of whether a
particular debt instrument constitutes a security is not clearly defined under U.S. federal income
tax law. The status of a debt instrument as a security typically is determined based upon an
overall evaluation of the nature of the instrument, including, the term of the instrument, the
extent of a holders proprietary interest in the issuer of the instrument and certain other
factors.
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The test of whether a debt instrument is a security is not a mechanical determination based on
the term of the instruments. However, the term of a debt instrument is usually the most
significant factor in determining whether it qualifies as a security. Generally, a debt instrument
with a term of ten years or more is treated as a security. Debt instruments with maturities
ranging between five and ten years often are treated as securities, while debt instruments with
maturities less than five years usually are not treated as securities. While this matter is not
free from doubt, we believe and intend to take the position that both the Old Notes and the
Exchange Notes will be considered securities for U.S. federal income tax purposes and that the
exchange of Old Notes for Exchange Notes, Common Shares and Preferred Shares pursuant to the
exchange offer will qualify as a tax-free recapitalization.
U.S. Holders
Exchange Offer
If both the Old Notes and the Exchange Notes are treated as securities and the exchange offer
qualifies as a tax-free recapitalization, a U.S. Holder will not recognize any gain or loss as a
result of such exchange (except to the extent of accrued but unpaid interest on the Old Notes,
which will be treated as ordinary interest income). A U.S. Holder will take an aggregate tax basis
in the Exchange Notes, Common Shares and Preferred Shares received equal to its tax basis in the
Old Notes immediately prior to the exchange. This tax basis will be allocated among the Exchange
Notes, Common Shares and Preferred Shares received based on the fair market values of such Exchange
Notes, Common Shares and Preferred Shares, respectively, immediately following the exchange offer.
A U.S. Holders holding period for the Exchange Notes, Common Shares and Preferred Shares will
include the period during which the Old Notes surrendered in the exchange offer were held.
If the exchange offer does not constitute a recapitalization, a U.S. Holder generally will
recognize capital gain or loss as a result of the exchange in an amount equal to the difference
between the fair market value of the Exchange Notes, Common Shares and Preferred Shares received
and the U.S. Holders tax basis in the Old Notes. Any capital gain or loss recognized by a U.S.
Holder pursuant to the exchange offer will be long-term or short-term capital gain or loss
depending on whether the U.S. Holder has held the Old Notes for more than one (1) year. Long-term
capital gains are subject to tax at a rate of 15% through December 31, 2010. Notwithstanding the
foregoing, if gain is recognized on the exchange, a U.S. Holder may qualify for installment sale
treatment on the exchange. If the U.S. Holder recognizes a capital loss pursuant to the exchange,
the deductibility of such capital loss will be subject to certain limitations.
Payment of Interest on Exchange Notes
Stated interest payable on the Exchange Notes generally will be included in the gross income
of a U.S. Holder as ordinary interest income at the time such interest is accrued or received, in
accordance with such U.S. Holders method of accounting for U.S. federal income tax purposes.
Original Issue Discount on Exchange Notes
In addition to the foregoing, if the issue price of the Exchange Notes as of the date of the
exchange offer is less than the stated redemption price at maturity (the sum of all payments to be
made on the Exchange Notes other than payments of qualified stated interest), and the discount is
equal to or more than a statutorily defined de minimis amount, the excess of the stated redemption
price at maturity over the issue price of the Exchange Notes will constitute original issue
discount (OID), which will be required to be taken into account by U.S. Holders as it accrues.
In addition, certain debt instruments involving contingencies are subject to special OID rules, as
described in the contingent payment debt instrument rules under Treasury Regulation Section
1.1275-4 (CPDI Regulations).
We believe and remainder of this discussion assumes that the Exchange Notes will not be
subject to the general OID rules or the CPDI Regulations. However, it is possible that the Exchange
Notes could be subject to these rules. Consequently, each U.S. Holder should consult its tax
advisor regarding the potential application and impact of these rules.
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Amortizable Bond Premium
If, following the exchange offer, a U.S. Holders tax basis in Exchange Notes exceeds the sum
of all amounts payable to such U.S. Holder on the Exchange Notes, other than qualified stated
interest, such U.S. Holder will be considered to have purchased such Exchange Notes with
amortizable bond premium in amount equal to such excess. A U.S. Holder may elect to amortize any
such premium as an offset to interest income over the remaining term of the Exchange Notes.
Sale, Exchange and Retirement of Exchange Notes
Upon the sale, exchange, retirement, or other taxable disposition of the Exchange Notes, a
U.S. Holder generally will recognize long-term or short-term capital gain or loss (depending on
whether the Exchange Notes are considered to be held for more than one (1) year) equal to the
difference between the amount of cash and the fair market value of any property received by such
U.S. Holder upon the sale, exchange or retirement (less an amount equal to any accrued and unpaid
interest not previously included in income, which will be treated as ordinary interest income) and
such U.S. Holders tax basis in the Exchange Notes. Long-term capital gains are subject to tax at
a rate of 15% through December 31, 2010. The deductibility of capital losses, if any, will be
subject to limitations.
Distributions on Common Shares and Preferred Shares
Distributions, if any, that we make on the Common Shares or Preferred Shares, generally will
be treated as dividend income to a U.S. Holder of our Common Shares or Preferred Shares, as the
case may be, to the extent allocable to our current and/or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Any excess amount will first be treated as a
tax-free return of capital to the extent of the U.S. Holders tax basis in the Common Shares or
Preferred Shares, upon which such distribution is made, and thereafter as gain from the sale or
exchange of that stock. Dividends received prior to January 1, 2011 may constitute qualified
dividend income that is subject to tax at a maximum rate of 15%. Moreover, dividends received by a
corporate U.S. Holder may be eligible for a dividends received deduction, subject to certain
limitations and other requirements.
Conversion of Preferred Shares
A U.S. Holder generally will not recognize gain or loss by reason of receiving Common Shares
upon the conversion of Preferred Shares, except that the receipt of Common Shares attributable to
dividends in arrears may be treated as a constructive distribution on the Preferred Shares, but not
in an amount greater than the dividend arrearages. Such constructive distribution will be taxable
to the U.S. Holder, as described above under U.S. Holders Distributions on Common Shares and
Preferred Shares. Except as noted below, the tax basis of the Common Shares acquired in exchange
for Preferred Shares (including any fractional share deemed to be received and subsequently
exchanged for cash) will be equal to the tax basis of the Preferred Shares exchanged therefor, and
the U.S. holders holding period in the Common Shares received will include the holding period of
the Preferred Shares exchanged therefor. A U.S. Holders tax basis in any Common Shares treated as
received in a constructive distribution on the Preferred Shares will be equal to their fair market
value on the date of the conversion, and the U.S. Holders holding period in such Common Shares
will commence upon receipt. Cash received in lieu a fractional Common Share in connection with the
conversion should be treated as a payment in a taxable exchange, and the U.S. Holder should
recognize gain or loss on the receipt of such cash in an amount equal to the difference between the
amount of cash received and the tax basis allocable to the fractional share.
A U.S. Holder could, in certain circumstances, be deemed to have received constructive
distributions of stock if the conversion price for the Preferred Shares is adjusted, and in such
circumstances, would be subject to tax in the manner similar to that specified above under U.S.
Holders Distributions on Common Shares and Preferred Shares. On the other hand, adjustments to
the conversion price made pursuant to a bona fide reasonable adjustment formula, which has the
effect of preventing the dilution of the interest of the holders of the Preferred Shares, generally
will not be considered to result in a constructive distribution of stock. Certain possible
adjustments provided in the anti-dilution provisions of the Preferred Shares, including, without
limitation, adjustments in respect of stock dividends or other distributions payable in additional
Common Shares, or stock splits or other changes in
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capital structure, should qualify as being pursuant to a bona fide reasonable adjustment
formula and should not result in a constructive distribution.
Sale or Exchange of Common Shares or Preferred Shares
Upon the sale or other disposition of Common Shares or Preferred Shares, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received upon such sale or exchange and (ii) the
U.S. Holders tax basis in the Common Shares or Preferred Shares, as the case may be. That capital
gain or loss will be long-term if the U.S. Holders holding period in respect of such Common Shares
or Preferred Shares, as the case may be, is more than one (1) year. Long-term capital gains are
subject to tax at a rate of 15% through December 31, 2010. The deductibility of capital losses is
subject to limitations.
Redemption of Common Shares or Preferred Shares
Pursuant to the rules of Section 302 of the Code, to the extent that any Common Shares or
Preferred Shares held by a U.S. Holder are repurchased by us, then one of the four tests under
Section 302(b) must be satisfied in order for the redemption to be treated as a sale, generally
resulting in capital gain or capital loss. If none of the tests under Section 302(b) are
satisfied, the redemption will be treated as a distribution taxable as a dividend to the extent
made from our current and/or accumulated earnings and profits. In general, the applicable rules
permit sale treatment only where the redeemed holders interest in a corporation has been reduced
by an amount that is meaningful, or that satisfies certain other prescribed thresholds.
Consequences to Non-Tendering U.S. Holders
A significant modification to a debt instrument creates a deemed exchange (upon which gain or
loss may be recognized) of the original debt instrument for a new debt instrument. In general, the
determination of whether a significant modification has occurred is based on all the facts and
circumstances.
Although it is not free from doubt, we believe the proposed amendments to the indenture
governing the Old Notes should not cause the non-tendering U.S. Holders of the Old Notes (the
Non-Tendering U.S. Holders) to be deemed to have exchanged the Old Notes for deemed new notes.
Therefore, Non-Tendering U.S. Holders of the Old Notes should not realize any gain or loss with
respect to the adoption of the proposed amendments to the indenture, and such U.S. Holders should
have the same tax basis and holding period in the Old Notes as immediately before such amendments.
If, however, the amendments to the indenture result in a significant modification to the Old
Notes and therefore create a deemed exchange of the Old Notes for deemed new notes, the tax
consequences of such deemed exchange will depend upon whether the Old Notes and the deemed new
notes constitute securities for U.S. federal income tax law. See Qualification as a Tax-Free
Recapitalization above for a discussion of the status of a debt instrument as a security for U.S.
federal income tax purposes. If the Old Notes and the deemed new notes constitute securities, the
deemed exchange of Old Notes for deemed new notes will qualify as a tax-free recapitalization. See
U.S. Holders Exchange Offer above for a discussion of the tax consequences if the deemed
exchange qualifies as a tax-free recapitalization. If the Old Notes and the deemed new notes do
not constitute securities, the deemed exchange of Old Notes for deemed new notes will not qualify
as a tax-free recapitalization. See U.S. Holders Exchange Offer above for a discussion of the
tax consequences if the deemed exchange does not qualify as a tax-free recapitalization.
Each Non-Tendering U.S. Holder should consult its tax advisor regarding the particular tax
consequences to such holder of a failure to tender the Old Notes in the exchange offer, including
any possible deemed exchange of the Old Notes that may result from the amendments to the indenture.
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Backup Withholding and Information Reporting
Information reporting requirements may apply to payments with respect to the Exchange Notes,
Common Shares and Preferred Shares made to U.S. Holders other than certain payments to exempt
recipients (such as corporations). A backup withholding tax may also apply to such payments if the
U.S. Holder fails to provide a taxpayer identification number on a Form W-9, furnishes an incorrect
taxpayer identification number, fails to certify its exempt status from backup withholding or
receives notification from the IRS that the holder is subject to backup withholding as a result of
a failure to report all interest or dividends.
Backup withholding is not an additional tax. Any amounts withheld from a payment to a U.S.
Holder under the backup withholding rules will be allowed as a credit against the holders U.S.
federal income tax liability and may entitle the holder to a refund, provided that the required
information is furnished to the IRS.
Non-U.S. Holders
Exchange Offer
If the Old Notes and Exchange Notes constitute securities and the exchange offer qualifies as
a tax-free recapitalization, a non-U.S. Holder will not recognize gain or loss as a result of the
exchange offer (except to the extent of accrued but unpaid interest on the Old Notes, which will
result in ordinary interest income). A non-U.S. Holder will take an aggregate tax basis in the
Exchange Notes, Common Shares and Preferred Shares received equal to its tax basis in the Old Notes
immediately prior to the exchange. This tax basis will be allocated among the Exchange Notes,
Common Shares and Preferred Shares received based on the fair market values of such Exchange Notes,
Common Shares and Preferred Shares, respectively, immediately following the exchange offer. A
non-U.S. Holder holding period for the Exchange Notes, Common Shares and Preferred Shares will
include the period during which the Old Notes surrendered in the exchange offer were held.
If the exchange offer does not qualify as a tax-free recapitalization, a non-U.S. Holder
generally will recognize gain (subject to the rules relating to installment sales) or loss on the
exchange of Old Notes for Exchange Notes, Common Shares and Preferred Shares, as described below
under Non-U.S. Holders Sale, Exchange or Retirement of Exchange Notes.
Payment of Interest on the Exchange Notes
Payments of interest (including OID, if any) on the Exchange Notes held by a non-U.S. Holder
will not be subject to U.S. federal income or withholding tax provided that (i) such non-U.S.
Holder is not a controlled foreign corporation that is related to us through stock ownership, (ii)
such non-U.S. Holder does not actually or constructively own 10% or more of our voting stock, (iii)
such non-U.S. Holder is not a bank whose receipt of interest on the Exchange Notes is described in
Section 881(c)(3)(A) of the Code and (iv) the statement requirements set forth in section 871(h) or
881(c) of the Code are satisfied, as discussed below. Notwithstanding the foregoing, a non-U.S.
Holder that is engaged in the conduct of a United States trade or business will be subject to (A)
U.S. federal income tax on a net income basis on interest that is effectively connected with the
conduct of such trade or business and (B) if the non-U.S. Holder is a corporation, a U.S. branch
profits tax equal to 30% of its effectively connected earnings and profits as adjusted for the
taxable year, unless the holder qualifies for an exemption from such tax or a lower tax rate under
an applicable treaty.
The statement requirement referred to in the preceding paragraph generally will be satisfied
if U.S. person and provides its name and address or otherwise satisfies applicable documentation
requirements.
Amortizable Bond Premium
If, following the exchange offer, a non-U.S. Holders tax basis in Exchange Notes exceeds the
sum of all amounts payable to such non-U.S. Holder on the Exchange Notes, other than qualified
stated interest, such non-U.S. Holder will be considered to have purchased such Exchange Notes with
amortizable bond premium in amount
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equal to such excess. A non-U.S. Holder may elect to amortize any such premium as an offset to
interest income over the remaining term of the Exchange Notes.
Sale, Exchange or Retirement of Exchange Notes
A non-U.S. Holder generally will not be subject to U.S. federal income tax on gain recognized
on a sale, exchange, or retirement of Exchange Notes (except to the extent attributable to accrued
and unpaid interest not previously included in income, which will be treated as ordinary interest
income) unless (i) the gain is effectively connected with the conduct of a trade or business within
the United States by the non-U.S. Holder or (ii) in the case of a non-U.S. Holder who is a
nonresident alien individual, such holder is present in the United States for 183 or more days
during the taxable year and certain other requirements are met.
Distributions on Common Shares and Preferred Shares
Distributions, if any, that we make on the Common Shares or Preferred Shares generally will be
treated as dividend income to a non-U.S. Holder of our Common Shares or Preferred Shares, as the
case may be, to the extent allocable to our current and/or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Dividends paid to a non-U.S. Holder generally
will be subject to U.S. federal withholding tax at a rate of 30% subject to reduction (i) by an
applicable treaty if the non-U.S. Holder provides an IRS Form W-8BEN certifying that it is entitled
to such treaty benefits or (ii) upon the receipt of an IRS Form W-8ECI from a non-U.S. Holder
claiming that the payments are effectively connected with the conduct of a United States trade or
business. Notwithstanding the forgoing, a non-U.S. Holder will be subject to (i) U.S. federal
income tax on a net income basis on the receipt of a dividend that is effectively connected with
the conduct of a U.S. trade or business and (ii) if the non-U.S. Holder is a corporation, a U.S.
branch profits tax as described above.
Conversion of Preferred Shares
A non-U.S. Holder generally will not recognize gain or loss by reason of receiving Common
Shares upon the conversion of Preferred Shares, except that the receipt of Common Shares
attributable to dividends in arrears may be treated as a constructive distribution, but not in an
amount greater than the dividend arrearages. Such constructive distribution will be taxable to the
non-U.S. Holder, as described under Non-U.S. Holders Distributions on Common Shares and
Preferred Shares above. Except as noted below, the tax basis of the Common Shares acquired in
exchange for Preferred Shares (including any fractional share deemed to be received and
subsequently exchanged for cash) will be equal to the tax basis of the Preferred Shares exchanged
therefor, and the non-U.S. Holders holding period in the Common Shares received will include the
holding period of the Preferred Shares exchanged therefor. A non-U.S. Holders tax basis in any
Common Shares treated as received in a constructive distribution will be equal to their fair market
value on the date of the conversion, and the non-U.S. Holders holding period in such Common Shares
will commence upon receipt. Cash received in lieu of fractional shares of Common Shares should be
treated as a payment in a taxable exchange, and the non-U.S. Holder should recognize gain or loss
on the receipt of such cash in an amount equal to the difference between the amount of cash
received and the tax basis allocable to the fractional shares.
A non-U.S. Holder may, in certain circumstances, be deemed to have received constructive
distributions of stock if the conversion price for the Preferred Shares is adjusted, and in such
circumstances, will be subject to tax in a manner similar to that specified above under Non-U.S.
Holders Distributions on Common Shares and Preferred Shares. On the other hand, adjustments to
the conversion price made pursuant to a bona fide reasonable adjustment formula, which has the
effect of preventing the dilution of the interest of the holders of the Preferred Shares, generally
will not be considered to result in a constructive distribution of stock. Certain possible
adjustments provided in the anti-dilution provisions of the Preferred Shares, including, without
limitation, adjustments in respect of stock dividends or other distributions payable in additional
Common Shares, or stock splits or other changes in capital structure, should qualify as being
pursuant to a bona fide reasonable adjustment formula and should not result in a constructive
distribution.
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Disposition of Common Shares or Preferred Shares
A non-U.S. Holder generally will not be subject to U.S. federal income tax on gain recognized
on a sale, exchange, redemption, or other disposition of Common Shares or Preferred Shares unless
(i) the gain is effectively connected with the conduct of a trade or business within the United
States by the non-U.S. Holder, (ii) in the case of a non-U.S. Holder who is a nonresident alien
individual, such holder is present in the United States for 183 or more days during the taxable
year and certain other requirements are met, (iii) in the case of a redemption, the transaction is
treated as a distribution taxable as a dividend (see U.S. Holders Redemption of Common Shares
or Preferred Shares and Non-U.S. Holders Distributions on Common Shares and Preferred Shares
above) or (iv) we have been a U.S. real property holding corporation (a USRPHC) at any time
within the shorter of the five-year period preceding such sale, exchange, retirement, or other
disposition or the non-U.S. Holders holding period in such Common Shares or Preferred Shares.
We believe that we may constitute a USRPHC. As a result, gain may be recognized (and subject
to U.S. federal income taxation at the regular U.S. income tax rates) by a non-U.S. Holder upon the
disposition of Common Shares or Preferred Shares, depending on the amount of stock deemed to be
held by such non-U.S. Holder. Non-U.S. Holders, particularly those holders that could be treated as
actually or constructively holding more than 5% of our stock, should consult their own tax advisors
with respect to the U.S. tax consequences of owning and disposing of Common Shares or Preferred
Shares.
Non-Tendering Holders
A non-tendering non-U.S. Holders tax consequences will depend on whether the amendments to
the indenture result in a significant modification of the Old Notes. See U.S. Holders
Consequences to Non-Tendering Holders above for a discussion of what constitutes a significant
modification.
We believe the proposed amendment to the indenture governing the Old Notes should not cause
the non-tendering non-U.S. Holders of the Old Notes (the Non-Tendering non-U.S. Holders) to be
deemed to have exchanged the Old Notes for deemed new notes. Therefore, Non-Tendering U.S. Holders
of the Old Notes should not realize any gain or loss with respect to the adoption of the amendments
to the indenture, and such non-U.S. Holder should have the same tax basis and holding period in the
Old Notes as immediately before the amendment.
If, however, the amendments to the indenture result in a significant modification to the Old
Notes creating a deemed exchange of the Old Notes for deemed new notes, the tax consequences of
such deemed exchange will depend upon whether the Old Notes and the deemed new notes constitute
securities for U.S. federal income tax law. See Qualification as a Tax-Free Recapitalization
above for a discussion of the status of a debt instrument as a security for U.S. federal income tax
purposes. If the Old Notes and the deemed new notes constitute securities, the deemed exchange of
Old Notes for deemed new notes will qualify as a tax-free recapitalization and such non-U.S. Holder
should have the same tax basis and holding period in the deemed new notes as it had in the Old
Notes immediately before the amendments. If the Old Notes or the deemed new notes do not
constitute securities, the deemed exchange of Old Notes for deemed new notes will not qualify as a
tax-free recapitalization. See Non-U.S. Holders Sale, Exchange or Retirement of Exchange Notes
above for a discussion of the tax consequences if the deemed exchange does not qualify as a
tax-free recapitalization.
Each Non-Tendering non-U.S. Holder should consult its tax advisor regarding the particular tax
consequences to such holder of a failure to tender the Old Notes in the exchange offer, including
any possible deemed exchange of the Old Notes that may result from the amendments to the indenture.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments made with respect to the
Exchange Notes, Common Shares and Preferred Shares received in the exchange offer. Copies of these
information returns also may be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the non-U.S. Holder resides. The Code
imposes a backup withholding obligation with respect to certain types of payments. Interest and
dividends paid to a non-U.S. Holder with respect to the Exchange Notes,
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Common Shares and Preferred Shares generally will be exempt from backup withholding if the
non-U.S. Holder provides a properly executed IRS Form W-8BEN or otherwise establishes an exemption.
Generally, information reporting and backup withholding requirements will apply to the gross
proceeds paid to a non-U.S. Holder on the disposition of the Exchange Notes, Common Shares or
Preferred Shares by or through a U.S. office of a U.S. or foreign broker, unless the non-U.S.
Holder provides the requisite certification or otherwise establishes an exemption. Information
reporting requirements (but generally not backup withholding) will also apply to payment of the
proceeds of a disposition of Exchange Notes, Common Shares or Preferred Shares by or through a
foreign office of a U.S. broker or foreign broker with certain types of relationships with the
United States unless the broker has documentary evidence in its files that the holder of the
Exchange Notes, Common Shares or Preferred otherwise establishes an exemption.
Any amount withheld under the backup withholding rules may be credited against the non-U.S.
Holders U.S. federal income tax liability and any excess may be refundable if the proper
information is timely provided to the IRS.
The U.S. federal income tax discussion set forth above is included for general information only and
may not be applicable depending upon a holders particular situation. Each holder should consult
its tax advisor with respect to the tax consequences to them of the exchange offer and the
ownership and disposition of the Exchange Notes, Common Shares and Preferred Shares, including the
tax consequences under state, local, foreign and other tax laws and the possible effects of changes
in U.S. federal or other tax laws.
TO ENSURE COMPLIANCE WITH INTERNAL REVENUE SERVICE CIRCULAR 230, HOLDERS ARE HEREBY NOTIFIED THAT:
(A) ANY DISCUSSION OF FEDERAL TAX ISSUES CONTAINED OR REFERRED TO HEREIN IS NOT INTENDED OR WRITTEN
TO BE USED, AND CANNOT BE USED BY YOU, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON
YOU UNDER THE INTERNAL REVENUE CODE, (B) SUCH DISCUSSION IS WRITTEN IN CONNECTION WITH THE
PROMOTION OR MARKETING BY US OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN AND (C) YOU SHOULD
SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
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EXCHANGE AGENT
American Stock Transfer & Trust Company, LLC has been appointed as the exchange agent for the
exchange offer. We have agreed to pay the exchange agent reasonable and customary fees for its
services.
INFORMATION AGENT
Global Bondholder Services has been appointed as the information agent for the exchange offer.
We have agreed to pay the information agent reasonable and customary fees for its services.
Any questions regarding procedures for tendering Old Notes or requests for additional copies
of this offer to exchange should be directed to the information agent at:
Global
Bondholder Services Corporation
65 Broadway Suite 723
New York, New York 10006
Attn: Corporate Actions
Banks and Brokers call: (212) 430-3774
Toll free (866)-952-2200
COMPANY CONTACT INFORMATION
Callon Petroleum Company may be contacted at:
Callon Petroleum Company
200 North Canal Street
Natchez, MS 39120
Toll free (800) 451-1294 ext. 700
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