-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOI1r9cLQJwNBmm5V7TEbvg32Io0ae3Tdqf4JXV7fIeLgPrbTOyGEPImphxqXhTT 9RVHgpPVtYZ9lR6y3xzwQw== 0000890566-97-002124.txt : 19970926 0000890566-97-002124.hdr.sgml : 19970926 ACCESSION NUMBER: 0000890566-97-002124 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALLON PETROLEUM CO CENTRAL INDEX KEY: 0000928022 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 640844345 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-36395 FILM NUMBER: 97685614 BUSINESS ADDRESS: STREET 1: 200 N CANAL ST CITY: NATCHEZ STATE: MS ZIP: 39120 BUSINESS PHONE: 6014421601 MAIL ADDRESS: STREET 1: 200 N CANAL ST CITY: NATCHEZ STATE: MS ZIP: 39120 FORMER COMPANY: FORMER CONFORMED NAME: CALLON PETROLEUM HOLDING CO DATE OF NAME CHANGE: 19940805 S-4 1 As filed with the Securities and Exchange Commission on September 25, 1997 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CALLON PETROLEUM COMPANY (Exact name of registrant as specified in its charter) DELAWARE 1311 64-0844345 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) 200 North Canal Street, Natchez, Mississippi 39120 Telephone: (601) 442-1601 (Address, including zip code, and telephone number including area code, of registrant's principal executive offices) John S. Weatherly 200 North Canal Street, Natchez, Mississippi 39120 Telephone: (601) 442-1601 (Name, address, including zip code, and telephone number including area code, of agent for service) COPY TO: BUTLER & BINION, L.L.P 1000 Louisiana, Suite 1600 Houston, Texas 77002 Attn: George G. Young III Telephone: (713) 237-3605 Telecopy : (713) 237-3202 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of the Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
Proposed Proposed maximum maximum Title of each class of Amount to be offering price aggregate Amount of securities to be registered registered per unit offering price registration fee - --------------------------------------------------------------------------------------------- 10.125% Senior Subordinated Notes due 2002 $36,000,000 $ 100% $ 36,000,000 $ 10,909.09(1) =============================================================================================
(1) Calculated in accordance with Rule 457(f)(2). The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ****************************************************************************** * * * INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A * * REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED * * WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT * * BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE * * REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT * * CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR * * SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH * * OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR * * QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. * * * ****************************************************************************** Subject to Completion, dated September 25, 1997 Preliminary Prospectus CALLON PETROLEUM COMPANY OFFER TO EXCHANGE ITS 10.125% SERIES B SENIOR SUBORDINATED NOTES DUE 2002 THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING 10.125% SERIES A SENIOR SUBORDINATED NOTES DUE 2002 The Exchange Offer and Withdrawal Rights will expire at 5:00 P.M., New York City time, on __________, 1997, unless extended (the "Expiration Date") Callon Petroleum Company, a Delaware corporation (the "Company" or "Callon"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, the "Prospectus") and in the accompanying Letter of Transmittal (which together constitute the "Exchange Offer"), to exchange up to $36,000,000 aggregate principal amount of its 10.125% Series B Senior Subordinated Notes due 2002 (the "Exchange Notes") that have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement (as defined) of which this Prospectus constitutes a part, for a like principal amount of its outstanding 10.125% Series A Senior Subordinated Notes due 2002 (the "Outstanding Notes" and, together with the Exchange Notes, the "Notes"), of which $36,000,000 aggregate principal amount is outstanding. The terms of the Exchange Notes are identical in all material respects to the terms of the Outstanding Notes, except that (i) the Exchange Notes have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Outstanding Notes and generally will not be entitled to registration rights, and (ii) the Exchange Notes will not provide for any increase in the interest rate thereon related to such registration rights. In that regard, the Outstanding Notes provide that if an (i) exchange offer registration statement or resale shelf registration statement is not filed by October 1, 1997 or (ii) exchange offer registration statement is not declared effective by November 15, 1997, Special Interest (as defined) will accrue and be payable semi-annually until such time as an exchange offer registration statement is filed or becomes effective, as the case may be. In addition, (i) if an exchange offer is not consummated or a resale shelf registration statement is not declared effective by December 31, 1997 or (ii) if either the exchange offer registration statement or the resale shelf registration statement has been declared effective and such registration statement ceases to be effective or usable (subject to certain exceptions), Special Interest will accrue and be payable quarterly until such time as an exchange offer is consummated or a resale shelf registration statement is declared effective, as the case may be. See "Description of the Exchange Notes" and "Description of the Outstanding Notes." The Exchange Notes are being offered for exchange in order to satisfy certain obligations of the Company under the Registration Agreement dated July 31, 1997 (the "Registration Agreement") between the Company and the Initial Purchaser (as defined) of the Outstanding Notes. The Exchange Notes will be issued under the same Indenture (as defined) as the Outstanding Notes. In the event that the Exchange Offer is consummated, any Outstanding Notes that remain outstanding after consummation of the Exchange Offer and the Exchange Notes issued in the Exchange Offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount of Notes have taken certain actions or exercised certain rights under the Indenture. The Exchange Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and any future Senior Indebtedness (as defined) of the Company. The Exchange Notes will rank pari passu with existing and any future senior subordinated indebtedness and senior to any future subordinated indebtedness of the Company. See "Description of the Exchange Notes -- Subordination of the Exchange Notes." The Indenture permits the Company and its Restricted Subsidiaries (as defined) to incur additional Indebtedness (as defined) under certain circumstances. See "Use of Proceeds," "Description of Outstanding Securities and Debt Instruments" and "Description of the Exchange Notes." Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined) and ending on the close of business on the forty-fifth day following the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1997. 2 The Company is making the Exchange Offer in reliance on the position of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the "Commission") as set forth in certain interpretive letters addressed to third parties in other transactions. However, the Company has not sought its own interpretive letter and there can be no assurance that the staff of the Division of Corporation Finance of the Commission would make a similar determination with respect to the Exchange Offer as it has in such interpretive letters to third parties. Based on these interpretations by the staff of the Division of Corporation Finance, and subject to the two immediately following sentences, the Company believes that the Exchange Notes issued pursuant to this Exchange Offer in exchange for the Outstanding Notes may be offered for resale, resold and otherwise transferred by a holder thereof (other than a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such Exchange Notes. However, any holder of the Outstanding Notes who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or who intends to participate in the Exchange Offer for the purpose of distributing Exchange Notes, or any broker-dealer who purchased Outstanding Notes from the Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the staff of the Division of Corporation Finance of the Commission set forth in the above mentioned interpretive letters, (b) will not be permitted or entitled to tender such Outstanding Notes in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Outstanding Notes unless such sale is made pursuant to an exemption from such requirements. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." In the event that applicable interpretations by the staff of the Division of Corporation Finance of the Commission change or otherwise do not permit resales of the Exchange Notes without compliance with the registration and prospectus delivery requirements of the Securities Act, holders of Exchange Notes who transfer Exchange Notes in violation of the prospectus delivery provisions of the Securities Act or without an exemption from registration thereunder may incur liability thereunder. Each holder of Outstanding Notes who wishes to exchange Outstanding Notes for Exchange Notes in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of the Company, (ii) any Exchange Notes to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such Exchange Notes, and (iv) if such holder is not a broker-dealer, such holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Outstanding Notes for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Company believes that broker-dealers who acquired Outstanding Notes for their own accounts as a result of market-making activities or other trading activities ("Participating Broker-Dealers") may fulfill the prospectus delivery requirements with respect to the Exchange Notes received upon exchange of such Outstanding Notes (other than Outstanding Notes that represent an unsold allotment from the original sale of the Outstanding Notes) with a prospectus meeting the requirements of the Securities Act, which may be the prospectus prepared for an exchange offer so long as it contains a 3 description of the plan of distribution with respect to the resale of such Exchange Notes. Accordingly, this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer during the period referred to below in connection with resales of Exchange Notes received in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such Participating Broker-Dealer for its own account as a result of market-making or other trading activities. Subject to certain provisions set forth in the Registration Agreement, the Company has agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such Exchange Notes for a period ending forty-five days after the consummation of the Exchange Offer or, if earlier, when all such Exchange Notes have been disposed of by such Participating Broker-Dealer. See "Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of the Company may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of Exchange Notes. See "The Exchange Offer -- Resales of Exchange Notes." In that regard, each Participating Broker-Dealer who surrenders Outstanding Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution of the Letter of Transmittal, that, upon receipt of notice from the Company of the occurrence of any event or the discovery of any fact which makes any statement contained in the Prospectus untrue in any material respect or which causes this Prospectus to omit to state a material fact necessary in order to make the statements contained herein, in light of the circumstances under which they were made, not misleading or of the occurrence of certain other events specified in the Registration Agreement, such Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to each such Participating Broker-Dealer or the Company has give notice that the sale of Exchange Notes may be resumed, as the case may be. If the Company gives such notice to suspend the sale of the Exchange Notes, it shall extend the forty-five day period referred to above during which Participating Broker-Dealers are entitled to use this Prospectus in connection with the resale of Exchange Notes by the number of days during the period from and including the date of the giving of such notice to and including the date when Participating Broker-Dealers shall have received copies of the amended or supplemented Prospectus necessary to permit resales of the Exchange Notes or to and including the date on which the Company has given notice that the sale of Exchange Notes may be resumed, as the case may be. Prior to the Exchange Offer, there has been only a limited secondary market and no public market for the Outstanding Notes. The Exchange Notes will be a new issue of securities for which there is currently no market. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. Although the Initial Purchaser has informed the Company that it currently intends to make a market in the Exchange Notes, it is not obligated to do so, and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. The Company currently does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through the National Association of Securities Dealers Automated Quotation System. Any Outstanding Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Indenture (except for those rights that terminate upon the consummation of the Exchange Offer). Following consummation of the Exchange Offer, the holders of Outstanding Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such holders (other than the Initial Purchaser or under certain limited circumstances relating to holders who are not eligible to participate in the Exchange Offer) to provide the registration under the Securities Act of the Outstanding Notes held by them. If Outstanding Notes are tendered and accepted in the 4 Exchange Offer, the market for untendered Outstanding Notes is likely to diminish; accordingly, holders who do not tender their Outstanding Notes may encounter difficulties in selling such notes following the Exchange Offer. See "Risk Factors -- Consequences of a Failure to Exchange Outstanding Notes." THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION. HOLDERS OF OUTSTANDING NOTES ARE URGED TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER. Outstanding Notes may be tendered for exchange on or prior to 5:00 p.m., New York City time, on ____________, 1997 ("Expiration Date"), unless the Exchange Offer is extended by the Company (in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended). Tenders of Outstanding Notes may be withdrawn at any time on or prior to the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Outstanding Notes being tendered for exchange. However, the Exchange Offer is subject to certain events and conditions and to the terms and provisions of the Registration Agreement. See "The Exchange Offer -- Conditions to the Exchange Offer." Outstanding Notes may be tendered in whole or in part in a principal amount of $1,000 and integral multiples thereof. The Company has agreed to pay all expenses of the Exchange Offer. Each Exchange Note will bear interest from the most recent date to which interest has been paid or duly provided for on the Outstanding Note surrendered in exchange for such Exchange Note or, if no such interest has been paid or duly provided for on such Outstanding Note, from July 31, 1997. Holders of the Outstanding Notes whose Outstanding Notes are accepted for exchange will not receive accrued interest on such Outstanding Notes for any period from and after the last interest payment date to which interest has been paid or duly provided for on such Outstanding Notes prior to the original issue date of the Exchange Notes or, if no such interest has been paid or duly provided for, will not receive any accrued interest on such Outstanding Notes, and will be deemed to have waived the right to receive any interest on such Outstanding Notes accrued from and after such interest payment date or, if no such interest has been paid or duly provided for, from and after July 31, 1997. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders of the Outstanding Notes as of ___________, 1997. The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby. See "Use of Proceeds." No dealer-manager is being used in connection with this Exchange Offer. See "Plan of Distribution." Solicitation of tenders of Outstanding Notes may be made in person or by mail, telephone or telegram, by directors, officers and regular employees of the Company. Such persons will receive no additional compensation for any solicitation activities. The Company may employ third-party agents to solicit tenders of Outstanding Notes, for which services such agents would be paid their usual and customary fee. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY OR ITS SUBSIDIARIES SINCE THE DATE HEREOF. 5 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports and other information may be inspected and copied at the public reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Commission by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a website at http://www.sec.gov that contains reports, proxy statements, and other information. Callon's common stock is listed on the Nasdaq Stock Market. Reports, proxy and information statements and other information relating to Callon can be inspected at the offices of the National Association of Securities Dealers, Inc. In addition, for so long as any of the Outstanding Notes remains outstanding, the Company has agreed to make available to any prospective purchaser of the Outstanding Notes or beneficial owner of the Outstanding Notes in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act. Any such request and requests for the agreements summarized herein should be directed to H. Michael Tatum, Secretary, Callon Petroleum Company, 200 North Canal Street, Natchez, Mississippi 39120. This Prospectus constitutes a part of a registration statement on Form S-4 (the "Registration Statement") filed by the Company with the Commission under the Securities Act. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and the Notes. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to a copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements, and the notes thereto appearing elsewhere in this Prospectus. Prospective purchasers should carefully consider the information set forth in "Risk Factors" in evaluating the Exchange Offer. Unless the context otherwise requires, all references in this Prospectus to "Callon" or the "Company" are to Callon Petroleum Company and its subsidiaries. Certain terms relating to the oil and gas industry are defined in "Glossary". THE COMPANY Callon Petroleum Company and its predecessors have been engaged in the acquisition, development, exploration and production of oil and gas since 1950. The Company's properties are geographically concentrated in Louisiana, Alabama and offshore Gulf of Mexico. Callon also manages properties for certain institutional investors. Callon was formed in 1994 through the consolidation of a publicly traded limited partnership, a joint venture with a consortium of European entities and an independent energy company owned by certain members of current management. As of December 31, 1996, the Company had estimated net proved reserves of 73.3 Bcfe with a PV-10 Value of $160.2 million, representing increases of 26% and 151% respectively, from December 31, 1995. The Company's objective is to enhance stockholder value through sustained growth in its reserve base, production levels and resulting cash flows from operations. Over the past two and one-half years, the Company has increasingly supplemented the acquisition of producing properties with the acquisition of acreage with development and exploratory drilling opportunities to further increase potential recoverable reserves. Since 1995, the Company has generated 47 prospects on 217,000 gross acres. In evaluating drilling opportunities, Callon performs extensive geological and geophysical studies using computer aided exploration techniques ("CAEX"), including, where appropriate, the acquisition of 3-D seismic or high-resolution 2-D seismic data to facilitate these efforts. EXPLORATION AND DEVELOPMENT OPERATIONS. The Company's exploratory and development operations are concentrated in three areas in the Gulf of Mexico: (i) the state waters of Alabama and the federal outer continental shelf ("OCS") in the Gulf of Mexico where the Company explores for shallow gas deposits ("Shallow Gas focus area"); (ii) the Breton Sound area located primarily in the shallow state waters of Louisiana, where the Company explores for hydrocarbon deposits at total well depths of between 8,000 to 14,000 feet ("Breton Sound focus area"); and (iii) other regions of the OCS, where the Company explores for hydrocarbon deposits at total well depths of between 9,000 and 18,000 feet ("Deep OCS focus area"). Wells drilled in the Shallow Gas focus area are characterized by relatively low exploration and development costs, high initial production rates and short reserve lives. Wells drilled in the Breton Sound focus area and Deep OCS focus area are more expensive to drill and complete and have greater risks, but seek larger oil and gas deposits with longer reserve lives. In 1995 and 1996, the Company acquired an extensive infrastructure of production platforms, gathering systems and pipelines in its Shallow Gas focus area and, during 1996, completed four proprietary high resolution 2-D seismic surveys over an eight block area. Based on these surveys, in October and November of 1996, the Company drilled two gross (1.52 net) successful development wells and one gross (1.0 net) successful exploratory well in this area. These wells were placed on production by the end of December 1996 and, coupled with the replacement of compression equipment at the related production facilities, the Company's average daily oil and gas production increased to 43.5 MMcfe/d during the first half of 1997, representing a 67% increase over 1996 average daily production rates. During the first six months of 1997, the Company drilled one additional successful development well (1.0 net), one unsuccessful development well for a net cost of $1.2 million, and performed one major recompletion in its Shallow Gas focus area. Production from the new well commenced in July 1997 and the recompletion is currently producing 6.3 MMcf/d (3.6 MMcf/d net to the Company). The Company's capital budget for the last six months of 1997 includes the drilling of five gross (2.7 net) exploratory wells in its Shallow Gas focus area, for an aggregate net cost to drill and complete of approximately $10.0 million. 7 In its Breton Sound focus area, the Company owns and operates several old prolific fields. In November 1996, the Company completed a 36 square-mile 3-D seismic survey on its Main Pass 35 Field and adjoining acreage which resulted in the identification of one development and seven exploratory drilling prospects. Based upon this new data, the Company acquired an additional 5,170 gross acres, which increased its holdings in the Breton Sound focus area to almost 10,000 gross acres. In July 1997, the Company entered into a joint venture agreement with Burlington Resources Oil & Gas Company to drill these prospects. The Company will operate these prospects and has retained an approximate 42.4% working interest. In addition, the Company acquired a 100% working interest in a development prospect on an adjacent block. The Company's capital budget for the last six months of 1997 in the Breton Sound focus area includes the drilling of two gross (1.45 net) development and one gross (0.45 net) exploratory wells for an aggregate net cost to Callon to drill and complete of approximately $8.2 million. In 1996, the Company joined with Murphy Exploration and Production, Inc. ("Murphy") to acquire 18 federal blocks in the Deep OCS focus area and in 1997 joined with Murphy and another oil company to acquire an additional 13 blocks, four of which are located in the Shallow Gas focus area. The Company owns a 25% working interest in 23 of these blocks and a 20% working interest in the remaining eight. Murphy operates these properties. To date Callon has participated with Murphy in the drilling of four gross (1.0 net) unsuccessful exploratory wells at a total cost of $6.1 million, net to the Company. The Company's capital budget for the last six months of 1997 includes the drilling of one gross (0.2 net) Deep OCS focus area exploratory prospect at a net cost to Callon to drill and complete of approximately $2.9 million. In total, the Company's current capital budget includes the drilling of two gross (1.5 net) development wells and seven gross (3.3 net) exploratory wells during the last six months of 1997 at an estimated net cost to the Company to drill and complete of approximately $21.2 million. These drilling operations will be financed from cash flows from operations, the net proceeds of the offering of the Outstanding Notes and borrowings under the Company's credit facility with a commercial bank ("Credit Facility"). See "Use of Proceeds." PRODUCING PROPERTY ACQUISITIONS. Over the past eight years, the Company has increased its reserves through the acquisition of producing properties that are geologically complex, have (or are analogous to fields with) an established production history from stacked pay zones and are candidates for additional exploitation. The Company focuses on reducing operating costs and implementing production enhancements through the application of technologically advanced production and recompletion techniques. Between 1989 and December 31, 1996, Callon acquired producing properties in 21 negotiated transactions, on behalf of itself and, in certain cases, its primary institutional investor, for an aggregate net purchase price of approximately $206 million and, during that period, the Company had an average Reserve Replacement Cost of $0.84 per Mcfe. ELF ACQUISITION. In June 1997, the Company purchased from Elf Exploration, Inc. ("Elf Exploration") an 18.8% working interest in the Mobile Area Block 864 Unit for approximately $11.8 million. The transaction also included Elf Exploration's 17.5% working interest in Mobile Area Blocks 863 and 907 and a 35% working interest in Mobile Area Block 908. The Mobile Area Block 864 Unit, operated by Chevron, is located in the Company's Shallow Gas focus area about 12 miles south-southwest of the Company's North Dauphin Island Field and is currently producing 26 MMcf/d through the unit's facilities from sub-sea depths of 2,400 feet and 2,700 feet. The Company believes exploratory drilling opportunities exist on the three blocks. See the Company's MAB 864 Acquisition Financial Statements for further information regarding the acquisition from Elf Exploration. 8 TECHNOLOGICAL EXPERTISE. Through its acquisition program, the Company has assembled an operational and technical database in certain geographical areas at a low cost to the Company. The relationship with its institutional investors has allowed the Company to pursue larger acquisitions, while the cost sharing arrangements and ongoing management fees have enabled the Company to enhance the rate of return on its properties and to maintain a larger, more experienced team of technical and operating personnel than otherwise would be feasible for a company of its size. SIGNIFICANT PRODUCING PROPERTIES. The following table shows the PV-10 Value and estimated net proved oil and gas reserves by major field for the Company's five largest producing fields and for all other properties combined at December 31, 1996. ESTIMATED NET PROVED PERCENT PV-10 TOTAL OIL GAS PRIMARY VALUE PV-10 RESERVES RESERVES FIELD NAME/LOCATION OPERATOR(S) ($000)(1) VALUE (MBBLS) (MMCF) - -------------------------- ------- -------- ------- ------ ------ Main Pass 163 Area Federal Waters .......... Callon $ 55,604 34.7% -- 20,196 Chandeleur Block 40 Federal Waters .......... Callon 48,000 30.0 -- 16,782 Big Escambia Creek Southeast Alabama ....... Exxon 14,492 9.1 991 2,673 Black Bay Complex Louisiana State Waters .. Callon 11,394 7.1 1,920 684 North Dauphin Island Field Alabama State Waters .... Callon 6,455 4.0 -- 2,685 Other properties ......... Various 24,226 15.1 908 7,404 -------- ------- ------ ------ Total ............... $160,171 100.0% 3,819 50,424 ======== ======= ====== ====== - ---------------- (1) Future net cash flows attributable to the Company's estimated proved reserves and the present value of such cash flows were based on an average gas price of $3.88 per Mcf and an average oil price of $23.58 per Bbl at December 31, 1996. The average price received for production in 1996 was $2.63 per Mcf for gas and $20.55 per Bbl for oil, without the effects of hedging. 9 THE EXCHANGE OFFER EXCHANGE OFFER...................... Up to $36,000,000 aggregate principal amount of Exchange Notes are being offered in exchange for a like principal amount of Outstanding Notes. Outstanding Notes may be tendered for exchange in whole or in part in a principal amount of $1,000 and multiples thereof. The Company is making the offer in order to satisfy its obligations under the Registration Agreement relating to the Outstanding Notes. The Company will issue the Exchange Notes to tendering holders of the Outstanding Notes promptly following the Expiration Date. REGISTRATION AGREEMENT.............. The Outstanding Notes were sold by the Company on July 31, 1997 to Morgan Keegan & Company, Inc. (the "Initial Purchaser"), who placed the Outstanding Notes with Qualified Institutional Buyers ("QIBs"). In connection therewith, the Company executed and delivered for the benefit of the holders of the Outstanding Notes the Registration Agreement providing for, among other things, the Exchange Offer. EXPIRATION DATE..................... 5:00 p.m., New York City time, on , 1997 unless the Exchange Offer is extended by the Company. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." CONDITIONS TO THE EXCHANGE OFFER.... The Exchange Offer is subject to certain conditions, which may be waived by the Company in its sole discretion. See "The Exchange Offer - Conditions to the Exchange Offer." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Outstanding Notes being tendered or accepted for exchange. The Company reserves the right (i) to delay the acceptance of the Outstanding Notes for exchange, (ii) to terminate the Exchange Offer at any time prior to the Expiration Date upon the occurrence of certain conditions, (iii) to extend the Expiration Date of the Exchange Offer and retain all of the Outstanding Notes tendered pursuant to the Exchange Offer, subject, however, to the right of holders of the Outstanding Notes to withdraw their tendered Outstanding Notes and (iv) to waive any condition or otherwise amend the terms of the Exchange Offer in any respect. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." PROCEDURES FOR TENDERING OUTSTANDING NOTES............................... Each holder of Outstanding Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with 10 the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Outstanding Notes and any other required documentation to the Exchange Agent (as defined) at the address set forth herein. By executing the Letter of Transmittal each holder will represent to the Company that, among other things, (i) the Exchange Notes acquired pursuant to the Exchange Offer by the holder and any beneficial owners of Outstanding Notes are being acquired in the ordinary course of business of the person receiving such Exchange Notes, (ii) neither the holder nor such beneficial owner is participating in, intends to participate in or has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and (iii) neither the holder nor such beneficial owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company, or, if it is an affiliate of the Company, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker-dealer as a result of market making activities or other trading activities, may participate in the Exchange Offer but may be deemed an "underwriter" under the Securities Act and, therefore, must acknowledge in the Letter of Transmittal that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Company has undertaken, for a period of forty-five days from the consummation of the Exchange Offer, to maintain the effectiveness of this Prospectus for use in satisfaction of such persons' obligations to deliver a prospectus. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange Offer -- Resales of Exchange Notes." SPECIAL PROCEDURES FOR BENEFICIAL OWNERS................... Any beneficial owner whose Outstanding Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such Outstanding Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Outstanding Notes, either make appropriate 11 arrangements to register ownership of the Outstanding Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. GUARANTEED DELIVERY PROCEDURES...... Holders of Outstanding Notes who wish to tender their Outstanding Notes and whose Outstanding Notes are not immediately available or who cannot deliver their Outstanding Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Outstanding Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery." WITHDRAWAL RIGHTS................... Tenders may be withdrawn at any time prior to the Expiration Date. See "The Exchange Offer -- Withdrawal Rights." CERTAIN FEDERAL INCOME TAX CONSEQUENCES........................ The exchange of the Outstanding Notes for Exchange Notes by tendering holders will not be a taxable exchange for federal income tax purposes, and such holders will not recognize any taxable gain or loss or any interest income for federal income tax purposes as a result of such exchange. Holders should review the information set forth under "Certain Federal Income Tax Consequences" for a discussion of certain U.S. tax considerations relating to the Exchange Notes prior to tendering the Outstanding Notes in the Exchange Offer. USE OF PROCEEDS..................... The Company will not receive any cash proceeds from the issuance of the Exchange Notes offered hereby. See "Use of Proceeds." EXCHANGE AGENT...................... American Stock Transfer & Trust Company, New York, is serving as Exchange Agent in connection with the Exchange Offer. See "The Exchange Offer -- Exchange Agent." THE EXCHANGE NOTES EXCHANGE NOTES...................... $36,000,000 in aggregate principal amount of 10.125% Series B Senior Subordinated Notes due 2002. The form and terms of the Exchange Notes are identical in all material respects to the terms of the respective Outstanding Notes for which they may be exchanged 12 pursuant to the Exchange Offer, except for certain transfer restrictions and registration rights relating to the Outstanding Notes and except for certain interest provisions relating to such registration rights. See "Description of the Exchange Notes." MATURITY............................ September 15, 2002 INTEREST ON THE EXCHANGE NOTES...... The Exchange Notes will bear interest at the rate of 10.125% per annum, payable quarterly on December 15, March 15, June 15, and September 15 commencing December 15, 1997. OPTIONAL REDEMPTION................. The Exchange Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after September 15, 2000, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of the Exchange Notes -- Redemption at Option of the Company." REDEMPTION AT THE OPTION OF HOLDERS UPON THE COMPANY EXCEEDING CERTAIN LEVELS OF INDEBTEDNESS...... If Senior Indebtedness of the Company and its Restricted Subsidiaries is not less than the greater of (i) $50 million and (ii) 45% of Total Consolidated Assets for at least 30 consecutive days during any consecutive 12 month period after August 1, 1997, each holder of Notes may require the Company to redeem the Notes, in whole or in part, for cash at the redemption prices set forth herein, plus accrued interest to the date of redemption. See "Description of the Exchange Notes -- Repurchase at Option of Holders in Certain Circumstances." SUBORDINATION OF EXCHANGE NOTES..... The Exchange Notes will be unsecured and subordinated in right of payment to all existing and future Senior Indebtedness of the Company and will rank pari passu with the Company's existing and future senior subordinated indebtedness, including the Company's 10% Senior Subordinated Notes due 2001 ("Existing Notes"). The Exchange Notes will also be structurally subordinated to all liabilities of the Company's subsidiaries. As of June 30, 1997, on a pro forma basis giving effect to the issuance of the Notes, the Company had outstanding $100,000 of Senior Indebtedness, $36.0 million of Notes and $24.2 million of Existing Notes. The total amount of liabilities of the Company's subsidiaries as of June 30, 1997 was $13.9 million, excluding guarantees of Senior Indebtedness. The Exchange Notes will rank senior to the Company's existing $2.125 Convertible Exchangeable Preferred Stock, Series A ("Series A Preferred Stock") and any 13 8.5% Convertible Subordinated Debentures due 2010 ("Convertible Debentures") that may be issued upon the exchange of such Series A Preferred Stock. The Indenture pursuant to which the Exchange Notes will be issued will prohibit the Company's Restricted Subsidiaries from incurring subordinated indebtedness. See "Description of Exchange Notes -- Subordination" and -- "Certain Covenants -- Limitation on Indebtedness for Money Borrowed" and "Description of Existing Securities and Debt Instruments." CERTAIN COVENANTS................... The Indenture pursuant to which the Exchange Notes will be issued contains certain covenants restricting the Company's ability to incur additional indebtedness if the ratio of the Company's consolidated Indebtedness for Money Borrowed (as defined) to Consolidated EBITDA (as defined) would exceed 10.0:1 or if the ratio of Consolidated EBITDA to Consolidated Interest Expense (as defined) would be less than 1.1:1. The Indenture will also prohibit restrictions on the payments of dividends by Restricted Subsidiaries and will place limitations on certain liens, restricted payments and transactions with Affiliates and the ranking of future subordinated indebtedness. See "Description of the Exchange Notes -- Certain Covenants." LISTING............................. None. See "Risk Factors -- Lack of Public Market." SINKING FUND........................ None. For additional information with respect to the Exchange Notes (including defined terms), see "Description of the Exchange Notes." 14 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------ -------------------------------------- 1997 1996 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) STATEMENT OF OPERATIONS DATA (1): Revenues: Oil and gas sales .............................. $ 20,844 $ 12,249 $ 25,764 $ 23,210 $ 13,948 Interest and other ............................. 695 278 946 627 171 ---------- ---------- ---------- ---------- ---------- Total revenues ............................... 21,539 12,527 26,710 23,837 14,119 ---------- ---------- ---------- ---------- ---------- Costs and Expenses: Lease operating expenses ....................... 4,164 3,686 7,562 6,732 4,042 Depreciation, depletion and amortization ....... 7,581 4,844 9,832 10,376 6,049 General and administrative ..................... 2,382 1,707 3,495 3,880 3,717 Interest ....................................... 210 48 313 1,794 624 ---------- ---------- ---------- ---------- ---------- Total costs and expenses ..................... 14,337 10,285 21,202 22,782 14,432 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations ..................... 7,202 2,242 5,508 1,055 (313) Provision (benefit) for income taxes .............. 2,311 -- 50 -- (200) ---------- ---------- ---------- ---------- ---------- Net income (loss) ................................. 4,891 2,242 5,458 1,055 (113) Preferred stock dividends ......................... 1,398 1,398 2,242 256 -- ---------- ---------- ---------- ---------- ---------- Net income (loss) available to common shares ...... $ 3,493 $ 844 $ 2,663 $ 799 $ (113) ========== ========== ========== ========== ========== Net income (loss) per common share: Primary ........................................ $ 0.55 $ 0.15 $ 0.45 $ 0.14 $ (0.03) ========== ========== ========== ========== ========== Assuming full dilution ......................... $ 0.52 $ 0.15 $ 0.43 $ 0.14 $ (0.03) ========== ========== ========== ========== ========== Shares used in computing earnings per common share: Primary ........................................ 6,307 5,755 5,952 5,755 4,346 ========== ========== ========== ========== ========== Assuming full dilution ......................... 9,318 5,755 6,135 5,755 4,346 ========== ========== ========== ========== ========== STATEMENT OF CASH FLOWS DATA (1): Net income (loss) ................................. $ 4,891 $ 2,242 $ 5,458 $ 1,055 $ (113) Depreciation, depletion and amortization .......... 7,791 4,982 10,131 10,600 6,328 Other non-cash items .............................. 2,499 65 164 133 (112) Net change in assets and liabilities .............. 1,981 3,462 (1,502) (2,336) (756) ========== ========== ========== ========== ========== Cash provided by operating activities ............. 17,162 10,751 14,251 9,452 5,347 ========== ========== ========== ========== ========== Cash provided by (used in) investing activities ... (33,690) (8,867) (32,717) (24,237) (6,423) ========== ========== ========== ========== ========== Cash provided by (used in) financing activities ... 17,799 (955) 21,870 11,765 3,916 ========== ========== ========== ========== ========== BALANCE SHEET DATA (1): Working capital ................................... 4,477 1,716 $ 4,878 $ 4,712 $ 1,896 Oil and gas properties, net ....................... 108,253 60,304 82,489 57,765 43,920 Total assets ...................................... 140,341 88,124 118,520 83,867 73,786 Total debt ........................................ 42,750 100 24,250 100 19,234 Total stockholders' equity ........................ 82,054 75,973 77,864 75,129 43,431 OTHER FINANCIAL DATA (1): Capital expenditures .............................. $ 33,690 $ 8,867 $ 32,717 $ 24,237 $ 10,412 EBITDA(2) ......................................... $ 15,391 $ 7,337 $ 16,066 $ 13,582 $ 6,727 Ratio of earnings to fixed charges (3) ............ 35.3 47.7 18.6 1.6 --
(FOOTNOTES ON NEXT PAGE) 15 - ---------- (1) The Company succeeded to the business and properties of Callon Petroleum Operating Company ("Callon Petroleum Operating"), Callon Consolidated Partners, L.P. ("CCP") and CN Resources ("CN") on September 16, 1994 (the "Consolidation"). Historical information about the Company prior to September 16, 1994 includes the financial and operating information of the predecessors of the Company, other than the interest in CN not owned by Callon Petroleum Operating, combined as entities under common control in a manner similar to a pooling of interests. See "The Company." (2) EBITDA is earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is presented because it is a widely accepted financial indication of a company's ability to service and incur debt. EBITDA should not be considered as an alternative to earnings (loss) as an indicator of the Company's operating performance or to cash flow as a measure of liquidity. (3) For purpose of computing this ratio, "earnings" represent income (loss) before income taxes and extraordinary item plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness and that portion of rental expense considered to be representative of the interest factor therein. As a result of the loss incurred for the year ended December 31, 1994 earnings did not cover fixed charges by $313,000. 16 SUMMARY OPERATING AND RESERVE DATA(1)
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ----------------------- ------------------------------------ 1997 1996 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- PRODUCTION DATA: Oil (MBbls) ...................... 237 302 585 594 364 Gas (MMcf) ....................... 6,448 2,912 6,269 6,694 4,076 Total production (MMcfe) ......... 7,869 4,725 9,781 10,261 6,260 AVERAGE SALES PRICE: Oil (per Bbl) .................... $ 19.36 $ 18.12 $ 18.27 $ 16.68 $ 15.63 Gas (per Mcf) .................... 2.52 2.33 2.40 1.96 2.00 Total production (per Mcfe) ..... 2.65 2.59 2.63 2.24 2.21 OTHER OPERATING DATA: Lease operating expenses/Mcfe .... $ 0.43 $ 0.58 $ 0.57 $ 0.49 $ 0.49 Severance taxes/Mcfe ............. 0.09 0.20 0.20 0.17 0.16 Capital expenditures (net) (000's) 33,690 8,867 32,717 24,237 10,412
DECEMBER 31, ---------------------------------- 1996(2) 1995 1994 -------- -------- -------- Reserve Replacement Costs/Mcfe(3) ....... $ 0.74 $ 1.05 $ 0.97 ESTIMATED NET PROVED RESERVES: Oil (MBbls) ........................... 3,819 4,766 4,424 Gas (MMcf) ............................ 50,424 29,667 24,102 Gas equivalent (MMcfe) ................ 73,338 58,263 50,646 Estimated future net cash flows, before income taxes (000's) ......... $216,154 $ 95,730 $ 59,477 PV-10 Value (000's) ................... $160,171 $ 63,764 $ 41,383 - -------------------- (1) The Company succeeded to the business and properties of its predecessor entities on September 16, 1994 pursuant to the Consolidation. Historical data about the Company prior to September 16, 1994 includes the operating data of the Company's predecessors, other than the interest in CN not owned by Callon Petroleum Operating, combined as entities under common control, in a manner similar to a pooling of interests. See "The Company." (2) Future net cash flows attributable to the Company's estimated proved reserves and the present value of such cash flows were based on an average gas price of $3.88 per Mcf and an average oil price of $23.58 per Bbl at December 31, 1996. The average price received for production in 1996 was $2.63 per Mcf for gas and $20.55 per Bbl for oil, without the effects of hedging. (3) See "Glossary." 17 RISK FACTORS THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS UNDER "PROSPECTUS SUMMARY", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES" REGARDING THE COMPANY'S FINANCIAL POSITION, ESTIMATED RESERVE QUANTITIES AND NET PRESENT VALUES OF RESERVES, BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS AND COVENANT COMPLIANCE, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UPON WHICH SUCH FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, IT CAN GIVE NO ASSURANCES THAT SUCH ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED BELOW AND ELSEWHERE IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE CAUTIONARY STATEMENTS. PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS THAT AFFECT THE COMPANY. SIGNIFICANT LEVERAGE AND DEBT SERVICE As of June 30, 1997, as adjusted to give effect to the sale of the Notes and the application of the net proceeds therefrom, the Company's total long-term debt would have been approximately $60.3 million. See "Capitalization" and "Use of Proceeds." The Company's level of indebtedness will have several important effects on its future operations, including (i) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest on its indebtedness and will not be available for other purposes, (ii) covenants contained in the Company's debt obligations will require the Company to meet certain financial tests, and other restrictions will limit its ability to borrow additional funds or to dispose of assets and may affect the Company's flexibility in planning for, and reacting to, changes in its business, including possible acquisition activities and (iii) the Company's ability to obtain financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. The Company's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon the Company's future performance, which will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond its control. SUBORDINATION The Outstanding Notes are and the Exchange Notes will be subordinated in right of payment to all existing and future Senior Indebtedness of the Company and will rank PARI PASSU with the Company's existing and future senior subordinated indebtedness, including the Existing Notes. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes outstanding. The Notes are also structurally subordinated to the obligations of the Company's subsidiaries. As of June 30, 1997, on a pro forma basis giving effect to the issuance of the Notes, the Company had outstanding $100,000 of Senior Indebtedness, $36.0 million of Notes and $24.2 million of Existing Notes, and the total amount of liabilities of the Company's subsidiaries as of June 30, 1997 was $13.9 million, excluding guarantees of Senior Indebtedness. The Existing Notes rank PARI PASSU with the Outstanding Notes and will rank PARI PASSU with the Exchange Notes. Additional Senior Indebtedness may be incurred by the Company from time to time, subject to certain restrictions, and the Company's subsidiaries may incur obligations which 18 are structurally senior to the Notes. See "Description of the Exchange Notes -- Subordination of the Exchange Notes." CONSEQUENCES OF A FAILURE TO EXCHANGE OUTSTANDING NOTES The Outstanding Notes have not been registered under the Securities Act or any state securities laws and therefore may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act and any other applicable securities laws, or pursuant to an exemption therefrom or in a transaction not subject thereto, and in each case in compliance with certain other conditions and restrictions, including the Company's and the Trustee's right in certain cases to require the delivery of opinions of counsel, certifications and other information prior to any such transfer. Outstanding Notes that remain outstanding after the consummation of the Exchange Offer will continue to bear a legend reflecting such restrictions on transfer. In addition, upon consummation of the Exchange Offer, holders of Outstanding Notes that remain outstanding will not be entitled to any rights to have such Outstanding Notes registered under the Securities Act or to any similar rights under the Registration Agreement (subject to certain limited exceptions). The Company currently intends to register under the Securities Act Outstanding Notes that remain outstanding after consummation of the Exchange Offer only if such Outstanding Notes are held by the Initial Purchaser and persons ineligible to participate in the Exchange Offer. If Outstanding Notes are tendered and accepted in the Exchange Offer, the market for untendered Outstanding Notes is likely to diminish; accordingly, holders who do not tender their Outstanding Notes may encounter difficulties in selling such notes following the Exchange Offer. The Exchange Notes and any Outstanding Notes that remain outstanding after consummation of the Exchange Offer will constitute a single series of debt securities under the Indenture and, accordingly, will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount thereof have taken certain actions or exercised certain rights under the Indenture. See "Description of the Exchange Notes." The Indenture provides that if (i) an exchange offer registration statement or resale shelf registration statement is not filed by October 1, 1997 or (ii) an exchange offer registration statement is not declared effective by November 15, 1997, Special Interest will accrue and be payable quarterly until such time as a registration statement is filed or becomes effective, as the case may be. In addition, if (i) an exchange offer is not consummated or a resale shelf registration statement is not declared effective by December 31, 1997 or (ii) either the exchange offer registration statement or the resale shelf registration statement has been declared effective and such registration statement ceases to be effective or usable (subject to certain exceptions), Special Interest will accrue and be payable quarterly until such time as an exchange offer is consummated or a resale shelf registration statement is declared effective, as the case may be. Following consummation of the Exchange Offer neither the Outstanding Notes nor the Exchange Notes will be entitled to any increase in the interest rate thereon. See "Description of the Outstanding Notes" and "Description of the Exchange Notes." LACK OF PUBLIC MARKET The Outstanding Notes were issued to, and the Company believes are currently owned by, a relatively small number of beneficial owners. The Outstanding Notes have not been registered under the Securities Act and will be subject to restrictions on transferability to the extent that they are not exchanged for Exchange Notes. See "-- Consequences of a Failure to Exchange Outstanding Notes." Although the Exchange Notes will generally be permitted to be resold or otherwise transferred by the holders (who are not affiliates of the Company) without compliance with the registration and prospectus delivery requirements under the Securities Act, they will constitute a new issue of securities 19 with no established trading market. See "The Exchange Offer -- Resales of Exchange Notes." The Company has been advised by the Initial Purchaser that the Initial Purchaser presently intends to make a market in the Exchange Notes. However, the Initial Purchaser is not obligated to do so and any market making activity with respect to the Exchange Notes may be discontinued at any time without notice. In addition, such market making activity will be subject to the limits imposed by the Securities Act and the Exchange Act and may be limited during the Exchange Offer. If the Exchange Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities and other factors including general economic conditions and the financial condition of the Company. The Company does not intend to apply for a listing or quotation of the Exchange Notes on any securities exchange or stock market. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. The liquidity of, and trading market for, the Notes also may be adversely affected by general declines in the market for similar securities. Such a decline may adversely affect such liquidity and trading markets independent of the financial performance of, and prospects for, the Company. Notwithstanding the registration of the Exchange Notes in the Exchange Offer, holders who are "affiliates" (as defined under Rule 405 of the Securities Act) of the Company may publicly offer for sale or resell the Exchange Notes only in compliance with the provisions of Rule 144 under the Securities Act. See "The Exchange Offer -- Resales of Exchange Notes." Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "The Exchange Offer -- Resales of Exchange Notes." EXCHANGE OFFER PROCEDURES Issuance of the Exchange Notes in exchange for the Outstanding Notes pursuant to the Exchange Offer will be made only after timely receipt by the Company of such Outstanding Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Outstanding Notes desiring to tender such Outstanding Notes in exchange for Exchange Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes for exchange. VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are substantially dependent on prevailing prices of oil and gas. The Company's ability to maintain or increase its borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond the control of the Company. These factors include weather conditions in the United States, the condition of the United States economy, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil or gas would have an adverse effect on the Company's carrying value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations. 20 The Company's estimated proved reserves, future net cash flows attributable to the Company's estimated net proved reserves and the present value of such cash flows were based on an average gas price of $3.88 per Mcf and an average oil price of $23.58 per Bbl at December 31, 1996. The average price received for production in 1996 was $2.63 per Mcf for gas and $20.55 per Bbl for oil, without the effects of hedging. Volatile oil and gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects. In addition, the marketability of the Company's production depends upon the availability and capacity of gas gathering systems, pipelines and processing facilities. Federal and state regulation of oil and gas production and transportation, general economic conditions and changes in supply and demand all could adversely affect the Company's ability to produce and market its oil and natural gas. If market factors were to change dramatically, the financial impact on the Company could be substantial. The availability of markets and the volatility of product prices are beyond the control of the Company and represent a significant risk. RISKS OF EXPLORATION AND DEVELOPMENT The major focus of the Company's operations over the next two years is expected to be the exploration for and development of oil and gas properties, primarily in federal and state waters in the Gulf of Mexico. Exploration and drilling activities are generally considered to be of a higher risk than acquisitions of producing oil and gas properties. Additionally, the Company's wells in its Deep OCS focus area seek to discover deposits of gas at deep formations, and have more risk than wells seeking to develop hydrocarbons from shallow formations. No assurances can be made that the Company will discover oil and gas in commercial quantities in its exploration and development operations. Expenditure of a material amount of funds in exploration for oil and gas without discovery of commercial quantities of reserves will have a material adverse effect upon the Company. OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS Callon's operations are subject to risks inherent in the oil and gas industry, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution and other environmental risks. These risks could result in substantial losses to the Company due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Moreover, a substantial portion of the Company's operations are offshore and therefore are subject to a variety of operating risks peculiar to the marine environment, such as hurricanes or other adverse weather conditions, to more extensive governmental regulation, including regulations that may, in certain circumstances, impose strict liability for pollution damage, and to interruption or termination of operations by governmental authorities based on environmental or other considerations. The Company maintains insurance of various types to cover its operations, including maritime, employer's liability and comprehensive general liability. Amounts in excess of base coverages are provided by primary and excess umbrella liability policies with maximum limits of $50 million. In addition, the Company maintains operator's extra expense coverage, which provides coverage for the control of wells drilled and/or producing and redrilling expenses and pollution coverage for wells out of control. 21 No assurances can be given that Callon will be able to maintain adequate insurance in the future at rates the Company considers reasonable. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect the Company's financial condition and results of operations. ESTIMATES OF OIL AND GAS RESERVES This Prospectus contains estimates of oil and gas reserves, and the future net cash flows attributable to those reserves, prepared by Huddleston & Co., Inc., independent petroleum and geological engineers (the "Reserve Engineers") and by the Company's reserve engineers. There are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows attributable to such reserves, including factors beyond the control of the Company and the Reserve Engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to such reserves, is a function of the available data, assumptions regarding future oil and gas prices and expenditures for future development and exploitation activities, and of engineering and geological interpretation and judgment. Additionally, reserves and future cash flows may be subject to material downward or upward revisions, based upon production history, development and exploitation activities and prices of oil and gas. Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and the value of cash flows from such reserves may vary significantly from the assumptions and estimates set forth herein. In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data. In calculating reserves on a Mcfe basis, oil was converted to gas equivalent at the ratio of six Mcf of gas to one Bbl of oil. While this ratio approximates the energy equivalency of gas to oil on a Btu basis, it may not represent the relative prices received by the Company on the sale of its oil and gas production. The estimated quantities of proved reserves and the discounted present value of future net cash flows attributable to estimated proved reserves set forth in this Prospectus were prepared by the Reserve Engineers in accordance with the rules of the Commission, and are not intended to represent the fair market value of such reserves. ABILITY TO REPLACE RESERVES The Company's future success depends upon its ability to find, develop and acquire additional oil and gas reserves that are economically recoverable. As is generally the case in the Gulf Coast region, many of the Company's producing properties are characterized by a high initial production rate, followed by a steep decline in production. As a result, the Company must locate and develop or acquire new oil and gas reserves to replace those being depleted by production. Without successful exploration or acquisition activities, the Company's reserves and revenues will decline rapidly. No assurances can be given that the Company will be able to find and develop or acquire additional reserves at an acceptable cost. The exploration for oil and gas requires the expenditure of substantial amounts of capital, and there can be no assurances that commercial quantities of oil or gas will be discovered as a result of such activities. The Company's current capital budget includes drilling two gross (1.5 net) development wells and seven gross (3.3 net) exploratory wells during the last six months of 1997. The estimated cost, net to the Company, to drill and complete these wells is approximately $21.2 million with dry hole costs of approximately $10.3 million. The drilling of several unsuccessful wells in this area could have a material adverse effect on the Company and its ability to repay the Notes. In addition, the successful acquisition of producing properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In addition, no assurances can be given that 22 the Company's exploitation and development activities will result in any increases in reserves. The Company's operations may be curtailed, delayed or canceled as a result of lack of adequate capital and other factors, such as title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties or shortages or delays in the delivery of equipment. In addition, the costs of exploration and development may materially exceed initial estimates. SUBSTANTIAL CAPITAL REQUIREMENTS The Company makes, and will continue to make, substantial capital expenditures for the exploitation, exploration, acquisition and production of oil and gas reserves. Historically, the Company has financed these expenditures primarily with cash generated by operations, proceeds from bank borrowings and issuance of debt and equity securities. The Company's total capital expenditure budget for the last half of 1997 is approximately $25 million and for 1998 will range from approximately $49 million to $74 million depending on the success of the Company's drilling activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Expenditures." The Company makes unsolicited offers for the acquisition of oil and gas properties in the normal course of business. In the event that any such offers are accepted, the amount or composition of the Company's capital expenditure budget could be revised significantly. The Company believes that it will have sufficient cash provided by operating activities, the proceeds from the offering of the Outstanding Notes and borrowings under its Credit Facility to fund such planned capital expenditures. If revenues or the Company's borrowing base decrease as a result of lower oil and gas prices, operating difficulties or declines in reserves, the Company may have limited ability to expend the capital necessary to undertake or complete future drilling programs. There can be no assurance that additional debt or equity financing or cash generated by operations will be available to meet these requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." HEDGING OF PRODUCTION Part of the Company's business strategy is to reduce its exposure to the volatility of oil and gas prices by hedging a portion of its production. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In a typical hedge transaction, the Company will have the right to receive from the counterparty 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, the Company is required to pay the counterparty this difference multiplied by the quantity hedged. The Company is required to pay the difference between the floating price and the fixed price (when the floating price exceeds the fixed price) regardless of whether the Company has 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 the Company to make payments under the hedge agreements even though such payments are not offset by sales of production. Hedging will also prevent the Company from receiving the full advantage of increases in oil or gas prices above the fixed amount specified in the hedge. Approximately 27% of the Company's estimated oil production for the last six months of 1997 is hedged at a New York Mercantile Exchange ("NYMEX") floor price of $18.00 per Bbl and a ceiling price of $24.00 per Bbl (NYMEX). In addition, from July 1997 through March 1998, the Company has hedged 30% of its estimated natural gas equivalent production at an average floor price of $2.00 per MMBtu (NYMEX) and an average ceiling price of $2.66 per MMBtu (NYMEX). 23 COMPETITION The Company operates in the highly competitive areas of oil and gas exploration, development and production. The availability of funds and information relating to a property, the standards established by the Company for the minimum projected return on investment, the availability of alternate fuel sources and the intermediate transportation of gas are factors which affect the Company's ability to compete in the marketplace. The Company's competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines and national and local gas gatherers, many of which possess greater financial and other resources than the Company. See "Business and Properties -- Competition, Markets and Regulation." ENVIRONMENTAL AND OTHER REGULATIONS The Company's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, require remedial measures to mitigate pollution from former operations such as plugging abandoned wells, and impose substantial liabilities for pollution resulting from the Company's operations. Moreover, the recent trend toward stricter standards in environmental legislation and regulation is likely to continue. If such stricter legislation were to be enacted or regulations adopted, it could have a significant impact on the operating costs of the Company, as well as the oil and gas industry in general. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Company. The Company's operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Moreover, the Company could be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on the Company's financial condition and results of operations. The Company maintains insurance coverage for its operations, including limited coverage for sudden environmental damages, but does not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost. Moreover, the Company does not believe that insurance coverage for the full potential liability that could be caused by sudden environmental damages is available at a reasonable cost. Accordingly, the Company may be subject to liability or may lose the privilege to continue exploration or production activities upon substantial portions of its properties in the event of certain environmental damages. See "Business and Properties -- Environmental Regulations." CONTROL OF THE COMPANY, STOCKHOLDERS' AGREEMENT John S. Callon, Fred L. Callon and members of their families (collectively, the "Callon Family") and NOCO Enterprises, L.P., a limited partnership owned by a consortium of European institutional investors ("NOCO"), who collectively and beneficially own over 60% of the outstanding Common Stock have entered into a stockholders' agreement (the "Stockholders' Agreement") pursuant to which members of the Callon Family and NOCO agree (i) to vote for two directors nominated by each party; (ii) not to support certain changes in control without the consent of the other party; and (iii) not to sell Common Stock without first offering it to the other party, except in limited circumstances. As a result of the Stockholders' Agreement, it is expected that the members of the Callon Family and NOCO will be able to control the election of at least four directors of the Company. NOCO has informed the Company that it intends to transfer 1,839,386 of the Common Shares owned by it to Fred. Olsen Energy AS ("FOE"). 24 Upon such transfer, the Common Shares owned by FOE will continue to be subject to the Stockholders' Agreement. See "Principal Stockholders -- Stockholders' Agreement." THE COMPANY The Company was formed under Delaware law in 1994 to succeed to the business and properties of Callon Petroleum Operating, an independent energy company owned by members of the Callon Family, Callon Consolidated Partners, L.P., a publicly traded limited partnership ("CCP"), and CN Resources, a joint venture engaged in the oil and gas business ("CN"). The predecessors of Callon Petroleum Operating were formed in 1950 by John S. Callon. Since that time and until September 16, 1994, Callon Petroleum Operating or its predecessors were actively engaged in the oil and gas business. CCP was a publicly traded limited partnership formed in 1987 by the consolidation of oil and gas limited partnerships formed by Callon Petroleum Operating. Callon Petroleum Operating was the sole general partner of CCP. CN was a general partnership formed in April 1992 of which Callon Petroleum Operating and NOCO were the only partners. Effective September 16, 1994, pursuant to the Consolidation, CCP was merged into the Company and the Company acquired all of the capital stock of Callon Petroleum Operating, as well as the partnership interest in CN formerly owned by NOCO ("NOCO Interest"). As a result, the Company has acquired the properties and liabilities of CCP, Callon Petroleum Operating and CN. Because all of the parties to the Consolidation (other than CN) were under common control, the financial statements and operating data of the Company include the financial statements and operating data of CCP and Callon Petroleum Operating, including Callon Petroleum Operating's ownership interest in CN, which were combined in a manner similar to a pooling of interests. The acquisition of the NOCO Interest was recorded as a purchase effective as of the date of the Consolidation (September 16, 1994). Amounts related to the Company's acquisition of the NOCO Interest, therefore, are included from the date of the purchase for the periods presented in the Consolidated Financial Statements. The Company's principal executive office is located at 200 North Canal Street, Natchez, Mississippi 39120, and its telephone number is (601) 442-1601. 25 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER In connection with the sale of the Outstanding Notes, the Company entered into the Registration Agreement with the Initial Purchaser, pursuant to which the Company agreed to file and to use its best efforts to cause to become effective with the Commission a registration statement with respect (subject to certain exceptions) to the exchange of the Outstanding Notes for debt securities with terms identical in all material respects to the terms of the Outstanding Notes. A copy of the Registration Agreement has been filed as an Exhibit to the Registration Statement of which this Prospectus is a part. The Exchange Offer is being made to satisfy the contractual obligations of the Company under the Registration Agreement. The form and terms of the Exchange Notes are the same as the form and terms of the Outstanding Notes except that: (i) the Exchange Notes have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Outstanding Notes and will not be entitled to resale registration under the Registration Agreement, although the Registration Agreement does provide for prospectus delivery procedures to assist resales of Exchange Notes, and (ii) the Exchange Notes will not provide for any increase in the interest rate thereon. In that regard, the Outstanding Notes provide that if (i) an exchange offer registration statement or resale shelf registration statement is not filed by October 1, 1997 or (ii) an exchange offer registration statement is not declared effective by November 15, 1997, Special Interest will accrue and be payable quarterly until such time as a registration statement is filed or becomes effective, as the case may be. In addition, if (i) an exchange offer is not consummated or a resale shelf registration statement is not declared effective by December 31, 1997 or (ii) either the exchange offer registration statement or the resale shelf registration statement has been declared effective and such registration statement ceases to be effective or usable (subject to certain exceptions), Special Interest will accrue and be payable quarterly until such time as an exchange offer is consummated or a resale shelf registration statement is declared effective, as the case may be. See "Description of the Exchange Notes" and "Description of the Outstanding Notes." The Exchange Offer is not being made to, nor will the Company accept tenders for exchange from, holders of Outstanding Notes in any jurisdiction in which the Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. Unless the context requires otherwise, the term "holder" with respect to the Exchange Offer means any person in whose name the Outstanding Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder, or any person whose Outstanding Notes are held of record by The Depository Trust Company who desires to deliver such Outstanding Notes by book-entry transfer at The Depository Trust Company. TERMS OF THE EXCHANGE The Company hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, to exchange up to $36,000,000 aggregate principal amount of Exchange Notes for a like aggregate principal amount of Outstanding Notes properly tendered on or prior to the Expiration Date and not properly withdrawn in accordance with the procedures described below. The Company will issue, promptly after the Expiration Date, an aggregate principal amount of up to $36,000,000 of Exchange Notes in exchange for a like principal amount of Outstanding Notes tendered and accepted in connection with the Exchange Offer. Holders may tender their Outstanding Notes in whole or in part in a principal amount of $1,000 and integral multiples thereof. The Exchange Offer is not conditioned upon any minimum number of Outstanding Notes being tendered. As of the date of this Prospectus $36,000,000 aggregate principal amount of the Outstanding Notes is outstanding. 26 Holders of Outstanding Notes do not have any appraisal or dissenters' rights in connection with the Exchange Offer. Outstanding Notes that are not tendered for or are tendered but not accepted in connection with the Exchange Offer will remain outstanding and be entitled to the benefits of the Indenture, but will not be entitled to any further registration rights under the Registration Agreement, except under limited circumstances. See "Risk Factors -- Consequences of a Failure to Exchange Outstanding Notes". If any tendered Outstanding Notes are not accepted for exchange because of an invalid tender, or upon the occurrence of certain other events set forth herein or otherwise, certificates for any such unaccepted Outstanding Notes will be returned, without expense, to the tendering holder thereof promptly after the Expiration Date. Holders who tender Outstanding Notes in connection with the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Outstanding Notes in connection with the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes described below, in connection with the Exchange Offer. See "-- Fees and Expenses." NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY RECOMME NDATION TO HOLDERS OF OUTSTANDI NG NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDI NG NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZE D TO MAKE ANY SUCH RECOMME NDATION. HOLDERS OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGAT E AMOUNT OF OUTSTANDI NG NOTES TO TENDER AFTER READING THIS PROSPECTU S AND THE LETTER OF TRANSMITT AL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" means 5:00 p.m., New York City time, on , 1997 unless the Exchange Offer is extended by the Company (in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended). The Company expressly reserves the right in its sole and absolute discretion, subject to applicable law, at any time and from time to time, (i) to delay the acceptance of the Outstanding Notes for exchange, (ii) to terminate the Exchange Offer (whether or not any Outstanding Notes have theretofore been accepted for exchange) if any of the events or conditions referred to under "-- Conditions to the Exchange Offer" have occurred or exist or have not been satisfied, (iii) to extend the Expiration Date of the Exchange Offer and retain all Outstanding Notes tendered pursuant to the Exchange Offer, subject, however, to the right of holders of Outstanding Notes to withdraw their tendered Outstanding Notes as described under "-- Withdrawal Rights," and (iv) to waive any condition or otherwise amend the terms of the Exchange Offer in any respect. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, or if the Company waives a material condition of the Exchange Offer, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered holders of the Outstanding Notes, and the Company will extend the Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act. Any such delay in acceptance, extension, termination or amendment will be followed promptly by oral or written notice thereof to the Exchange Agent and by making a public announcement thereof, and 27 such announcement 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. Without limiting the manner in which the Company may choose to make any public announcement and subject to applicable law, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a release to an appropriate news agency. ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES Upon the terms and subject to the conditions of the Exchange Offer, the Company will exchange, and will issue to the Exchange Agent, Exchange Notes for Outstanding Notes validly tendered and not withdrawn (pursuant to the withdrawal rights described under "-- Withdrawal Rights") promptly after the Expiration Date. In all cases, delivery of Exchange Notes in exchange for Outstanding Notes tendered and accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of (i) Outstanding Notes or a book-entry confirmation of a book-entry transfer of Outstanding Notes into the Exchange Agent's account at the DTC, (ii) the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, and (iii) any other documents required by the Letter of Transmittal. The term "book-entry confirmation" means a timely confirmation of a book-entry transfer of Outstanding Notes into the Exchange Agent's account at DTC. Subject to the terms and conditions of the Exchange Offer, the Company will be deemed to have accepted for exchange, and thereby exchanged, Outstanding Notes validly tendered and not withdrawn as, if and when the Company gives oral or written notice to the Exchange Agent of the Company's acceptance of such Outstanding Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act as agent for the Company for the purpose of receiving tenders of Outstanding Notes, Letters of Transmittal and related documents, and as agent for tendering holders for the purpose of receiving Outstanding Notes, Letters of Transmittal and related documents and transmitting Exchange Notes to validly tendering holders. Such exchange will be made promptly after the Expiration Date. If for any reason whatsoever, acceptance for exchange or the exchange of any Outstanding Notes tendered pursuant to the Exchange Offer is delayed (whether before or after the Company's acceptance for exchange of Outstanding Notes) or the Company extends the Exchange Offer or is unable to accept for exchange or exchange Outstanding Notes tendered pursuant to the Exchange Offer, then, without prejudice to the Company's rights set forth herein, the Exchange Agent may, nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act, retain tendered Outstanding Notes and such Outstanding Notes may not be withdrawn except to the extent tendering holders are entitled to withdrawal rights as described under "-- Withdrawal Rights." Pursuant to the Letter of Transmittal, a holder of Outstanding Notes will warrant and agree in the Letter of Transmittal that it has full power and authority to tender, exchange, sell, assign and transfer Outstanding Notes, that the Company will acquire good, marketable and unencumbered title to the tendered Outstanding Notes, free and clear of all liens, restrictions, charges and encumbrance s, and the Outstanding Notes tendered for exchange are not subject to any adverse claims or proxies. The holder also will warrant and agree that it will, upon request, execute and deliver any additional documents deemed by the Company or the Exchange Agent to be necessary or desirable to complete the exchange, sale, assignment, and transfer of the Outstanding Notes tendered pursuant to the Exchange Offer. 28 PROCEDURES FOR TENDERING OUTSTANDING NOTES VALID TENDER Except as set forth below, in order for Outstanding Notes to be validly tendered pursuant to the Exchange Offer, the Exchange Agent must receive, at of its address set forth under "--Exchange Agent," a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents (collectively, the "Letter of Transmittal") and either (i) tendered Outstanding Notes, or (ii) Outstanding Notes tendered pursuant to the procedures for book-entry transfer set forth below and a book-entry confirmation, in each case on or prior to the Expiration Date, or (iii) Outstanding Notes tendered in accordance with the guaranteed delivery procedures set forth below. If less than all of the Outstanding Notes are tendered, a tendering holder should fill in the amount of Outstanding Notes being tendered in the appropriate box on the Letter of Transmittal. The entire amount of Outstanding Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. BOOK ENTRY TRANSFER The Exchange Agent will establish an account with respect to the Outstanding Notes at DTC for purposes of the Exchange Offer within two business days after the date of this Prospectus. Any financial institution that is a participant in DTC's book-entry transfer facility system may make a book-entry delivery of the Outstanding Notes by causing DTC to transfer such Outstanding Notes into the Exchange Agent's account at DTC in accordance with DTC's procedures for transfers. However, although delivery of Outstanding Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal must in any case be delivered to and received by the Exchange Agent at the Exchange Agent's address set forth under "-- Exchange Agent" on or prior to the Expiration Date, or the guaranteed delivery procedure set forth below must be complied with. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. THE LETTER OF TRANSMITTAL MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO , 1997. SIGNATURE GUARANTEES Certificates for the Outstanding Notes need not be endorsed and signature guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate for the Outstanding Notes is registered in a name other than that of the person surrendering the certificate or (b) such registered holder completes the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" in the Letter of Transmittal. In the case of (a) or (b) above, such certificates for Outstanding Notes must be duly endorsed or accompanied by a properly executed bond power, with the endorsement or signature on the bond power and on the Letter of Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15 under the Exchange 29 Act as an "eligible guarantor" institution, including (as such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal securities broker or dealer or government securities broker or dealer; (iii) a credit union; (iv) a national securities exchange, registered securities association or clearing agency; or (v) a savings association that is a participant in a Securities Transfer Association (an "Eligible Institution"), unless surrendered on behalf of such Eligible Institution. See Instruction 1 to the Letter of Transmittal. GUARANTEED DELIVERY If a holder desires to tender Outstanding Notes pursuant to the Exchange Offer and the certificates for such Outstanding Notes are not immediately available or time will not permit the Letter of Transmittal to reach the Exchange Agent on or before the Expiration Date, or the procedures for book-entry transfer cannot be completed on a timely basis, such Outstanding Notes may nevertheless be tendered, provided that all of the following guaranteed delivery procedures are complied with: (i) such tenders are made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form accompanying the Letter of Transmittal, is received by the Exchange Agent, as provided below, on or prior to Expiration Date; and (iii) the certificates (or a book-entry confirmation) representing all tendered Outstanding Notes, in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal, are received by the Exchange Agent within five New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand, or transmitted by facsimile or mail to the Exchange Agent and must include a guarantee by an Eligible Institution in the form set forth in such notice. Notwithstanding any other provision hereof, the delivery of Exchange Notes in exchange for Outstanding Notes tendered and accepted for exchange pursuant to the Exchange Offer will in all cases be made only after timely receipt by the Exchange Agent of Outstanding Notes, or of a book-entry confirmation with respect to such Outstanding Notes, and a properly completed and duly executed Letter of Transmittal (or facsimile thereof). Accordingly, the delivery of Exchange Notes might not be made to all tendering holders at the same time, and will depend upon when Outstanding Notes, book-entry confirmations with respect to Outstanding Notes and other required documents are received by the Exchange Agent. The Company's acceptance for exchange of Outstanding Notes tendered pursuant to any of the procedures described above will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions of the Exchange Offer. DETERMINATION OF VALIDITY All questions as to the form of documents, validity, eligibility (including time of receipt) and acceptance for exchange of any tendered Outstanding Notes will be determined by the Company, in its sole discretion, whose determination shall be final and binding on all parties. The Company reserves the absolute right, in its sole and absolute discretion, to reject any and all tenders determined by it not to be in proper form or the acceptance of which, or exchange for, may, in the view of counsel to the Company, be unlawful. The Company also reserves the absolute right, subject to applicable law, to waive any of the conditions of the Exchange Offer as set forth under "-- Conditions to the Exchange Offer" or any 30 condition or irregularity in any tender of Outstanding Notes of any particular holder whether or not similar conditions or irregularities are waived in the case of other holders. The Company's interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. No tender of Outstanding Notes will be deemed to have been validly made until all irregularities with respect to such tender have been cured or waived. Neither the Company, any affiliates or assigns of the Company, the Exchange Agent nor any other person shall be under any duty to give any notification of any irregularities in tenders or incur any liability for failure to give any such notification. If any Letter of Transmittal, endorsement, bond power, power of attorney, or any other document required by the Letter of Transmittal is signed by a trustee, executor, administrator, guardian, attorney-in- fact, officer of a corporation or other person acting in a fiduciary or representative capacity such person should so indicate when signing, and unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. A beneficial owner of Outstanding Notes that are held by or registered in the name of a broker, dealer, commercial bank, trust company or other nominee or custodian is urged to contact such entity promptly if such beneficial holder wishes to participate in the Exchange Offer. RESALES OF EXCHANGE NOTES The Company is making the Exchange Offer in reliance on a position of the staff of the Division of Corporation Finance of the Commission as set forth in certain interpretive letters addressed to third parties in other transactions. However, the Company has not sought its own interpretive letter and there can be no assurance that the staff of the Division of Corporation Finance of the Commission would make a determination with respect to the Exchange Offer similar to that made in such interpretive letters to third parties. Based on these interpretations by the staff of the Division of Corporation Finance, and subject to the two immediately following sentences, the Company believes that Exchange Notes issued pursuant to this Exchange Offer in exchange for Outstanding Notes may be offered for resale, resold and otherwise transferred by a holder thereof (other than a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such Exchange Notes. However, any holder of Outstanding Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing Exchange Notes, or any broker-dealer who purchased Outstanding Notes from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the staff of the Division of Corporation Finance of the Commission set forth in the above-mentioned interpretive letters, (b) will not be permitted or entitled to tender such Outstanding Notes in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Outstanding Notes unless such sale is made pursuant to an exemption from such requirements. In addition, as described below, if any broker-dealer holds Outstanding Notes acquired for its own account as a result of market- making or other trading activities and exchanges such Outstanding Notes for Exchange Notes, then such broker-dealer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such Exchange Notes. In the event that applicable interpretations by the staff of the Division of Corporation Finance change or otherwise do not permit resales of the Exchange Notes without compliance with the registration and prospectus delivery requirements of the Securities Act, holders of Exchange Notes who transfer Exchange Notes in violation of the prospectus delivery 31 requirements of the Securities Act or without an exemption from registration thereunder may incur liability thereunder. Each holder of Outstanding Notes who wishes to exchange Outstanding Notes for Exchange Notes in the Exchange Offer will be required to represent that (i) it is not an affiliate of the Company, (ii) any Exchange Notes to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such Exchange Notes, and (iv) if such holder is not a broker-dealer, such holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Outstanding Notes for its own account as the result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledgin g and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the staff of the Division of Corporation Finance of the Commission in the interpretive letters referred to above, the Company believes that broker-dealers who acquired Outstanding Notes for their own accounts as a result of market-making activities or other trading activities (Participating Broker- Dealers) may fulfill their prospectus delivery requirements with respect to the Exchange Notes received upon exchange of such Outstanding Notes (other than Outstanding Notes that represent an unsold allotment from the original sale of the Outstanding Notes) with a prospectus meeting the requirements of the Securities Act, which may be the prospectus prepared for an exchange offer so long as it contains a description of the plan of distribution with respect to the resale of such Exchange Notes. Accordingly, this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer during the period referred to below in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired by such Participating Broker-Dealer for its own account as a result of market-making or other trading activities. Subject to certain provisions set forth in the Registration Agreement, the Company has agreed that this Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of such Exchange Notes for a period ending forty-five days after the consummation of the Exchange Offer or, if earlier, when all such Exchange Notes have been disposed of by such Participating Broker- Dealer. See "Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of the Company may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. In that regard, each Participating Broker-Dealer who surrenders Outstanding Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution of the Letter of Transmittal, that, upon receipt of notice from the Company of the occurrence of any event or the discovery of any fact which makes any statement contained in this Prospectus untrue in any material respect or which causes this Prospectus to omit to state a material fact necessary in order to make the statements herein, in light of the circumstances under which they were made, not misleading or of the occurrence of certain other events specified in the Registration Agreement, such Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant to this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such Participating Broker-Dealer or the Company has given notice that the sale of the Exchange Notes may be resumed, as the case may be. If the Company gives such notice to suspend the sale of the Exchange Notes, it shall extend the forty-five day period referred to above during which Participating Broker- Dealers are entitled to use this Prospectus in connection with the resale of Exchange Notes by the number of days during the period from and including the date of the giving of such notice to and including the date when Participating Broker- Dealers shall have received copies of the 32 amended or supplemented Prospectus necessary to permit resales of the Exchange Notes or to and including the date on which the Company has given notice that the sale of Exchange Notes may be resumed, as the case may be. WITHDRAWAL RIGHTS Except as otherwise provided herein, tenders of Outstanding Notes may be withdrawn at any time on or prior to the Expiration Date. In order for a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission of such notice of withdrawal must be timely received by the Exchange Agent at its address set forth under "-- Exchange Agent" on or prior to the Expiration Date. Any such notice of withdrawal must specify the name of the person who tendered the Outstanding Notes to be withdrawn, the aggregate principal amount of Outstanding Notes to be withdrawn, and (if certificates for such Outstanding Notes have been tendered) the name of the registered holder of the Outstanding Notes as set forth on the Outstanding Notes, if different from that of the person who tendered such Outstanding Notes. If Outstanding Notes have been delivered or otherwise identified to the Exchange Agent, then prior to the physical release of such Outstanding Notes, the tendering holder must submit the serial numbers shown on the particular Outstanding Notes to be withdrawn and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution, except in the case of Outstanding Notes tendered for the account of an Eligible Institution. If Outstanding Notes have been tendered pursuant to the procedures for book-entry transfer set forth in "-- Procedures for Tendering Outstanding Notes," the notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawal of Outstanding Notes, in which case a notice of withdrawal will be effective if delivered to the Exchange Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of tenders of Outstanding Notes may not be rescinded. Outstanding Notes properly withdrawn will not be deemed validly tendered for purposes of the Exchange Offer, but may be retendered at any subsequent time on or prior to the Expiration Date by following any of the procedures described above under "-- Procedures for Tendering Outstanding Notes." All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices will be determined by the Company, in its sole discretion, whose determination shall be final and binding on all parties. Neither the Company, any affiliates or assigns of the Company, the Exchange Agent nor any other person shall be under any duty to give any notification of any irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. Any Outstanding Notes which have been tendered but which are withdrawn will be returned to the holder thereof promptly after withdrawal. INTEREST ON THE EXCHANGE NOTES Each Exchange Note will bear interest at the rate of 10.125% per annum from the most recent date to which interest has been paid or duly provided for on the Outstanding Note surrendered in exchange for such Exchange Note or, if no interest has been paid or duly provided for on such Outstanding Note, from July 31, 1997 (the date of original issuance of such Outstanding Notes). Interest on the Exchange Notes will be payable quarterly on September 15, December 15, March 15 and June 15 of each year, commencing on the first such date following the original issuance date of the Exchange Notes. Holders of Outstanding Notes whose Outstanding Notes are accepted for exchange will not receive accrued interest on such Outstanding Notes for any period from and after the last interest payment date to which interest has been paid or duly provided for on such Outstanding Notes prior to the original issue date of the Exchange Notes or, if no such interest has been paid or duly provided for, will not receive any accrued interest on such Outstanding Notes, and will be deemed to have waived the right to receive any 33 interest on such Outstanding Notes accrued from and after such interest payment date or, if no such interest has been paid or duly provided for, from and after July 31, 1997. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provisions of the Exchange Offer, or any extension of the Exchange Offer, the Company will not be required to accept for exchange, or to exchange, any Outstanding Notes for any Exchange Notes, and, as described below, may terminate the Exchange Offer (whether or not any Outstanding Notes have theretofore been accepted for exchange), or may waive any conditions to or amend the Exchange Offer, if any of the following conditions have occurred or exist or have not been satisfied: (a) the Exchange Offer, or the making of any exchange pursuant to the Exchange Offer, violates applicable law or any applicable interpretation of the staff of the Commission; or (b) any action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency or body with respect to the Exchange Offer; or (c) any law, statute, rule or regulation shall have been adopted or enacted prohibiting or limiting the Exchange Offer; or (d) a banking moratorium shall have been declared by United States federal, New York or Texas state authorities; or (e) trading on the New York Stock Exchange or generally in the United States over-the-counter market shall have been suspended by order of the Commission or any other governmental authority; or (f) such other conditions reasonably acceptable to the Initial Purchaser which, in the Company's judgment, would reasonaly be expected to impair the ability of the Company to proceed with the Exchange Offer. If the Company determines in its sole and absolute discretion that any of the foregoing events or conditions has occurred or exists or has not been satisfied, the Company may, subject to applicable law and the provisions of the Registration Agreement, terminate the Exchange Offer (whether or not any Outstanding Notes have theretofore been accepted for exchange) or may waive any such condition or otherwise amend the terms of the Exchange Offer in any respect. If such waiver or amendment constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered holders of the Outstanding Notes, and the Company will extend the Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act. EXCHANGE AGENT American Stock Transfer & Trust Company has been appointed as Exchange Agent for the Exchange Offer. Delivery of the Letter of Transmittal and any other required documents, questions, requests for assistance, and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent as follows: 34 American Stock Transfer & Trust Company 40 Wall Street New York, New York 718-921-8206 (Telephone) 718-921-8336 (Facsimile) Delivery to other than the above address or facsimile number will not constitute a valid delivery. FEES AND EXPENSES The Company has agreed to 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. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus and related documents to the beneficial owners of Outstanding Notes, and in handling or tendering for their customers. Holders who tender their Outstanding Notes for exchange will not be obligated to pay any transfer taxes in connection therewith. If, however, Exchange Notes are to be delivered to, or are to be issued in the name of, any person other than the registered holder of the Outstanding Notes tendered, or if a transfer tax is imposed for any reason other than the exchange of Outstanding Notes in connection with the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. The Company will not make any payment to brokers, dealers or others soliciting acceptances of the Exchange Offer. USE OF PROCEEDS The net proceeds to the Company from the sale of the Outstanding Notes was $34.8 million. The Company used $18.5 million of the net proceeds of the offering of the Outstanding Notes to repay borrowings under the Credit Facility. Approximately $11.8 million of such borrowings under the Credit Facility were incurred to finance the acquisition from Elf Exploration of a working interest in Mobile Area Block 864 Unit in June 1997. The Company intends to use the remaining net proceeds together with internally generated cash flows and borrowings under its Credit Facility, to fund its capital expenditure budget for the last six months of 1997 estimated to be approximately $25 million. See "Management 's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Pending the use of funds to pay capital expenditures, the Company will invest in short-term investments. As of June 30, 1997, $18.6 million was outstanding under the Credit Facility with a weighted average interest rate of 6.70%. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Agreement. The Company will not receive any cash proceeds from the issuance of the Exchange Notes in the Exchange Offer. In consideration for issuing the Exchange Notes as contemplated in this Prospectus, the Company will receive Outstanding Notes in like principal amount. The form and terms of the Exchange Notes are identical in all material respects to the form and terms of the Outstanding Notes, except certain transfer restrictions and registration rights relating to the Outstanding Notes and except for certain interest provisions relating to such registration rights. See "Description of the Exchange Notes." The Outstanding Notes surrendered in exchange for the Exchange Notes will be retired and 35 canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes will not result in any increase in the outstanding debt of the Company. CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1997 and as adjusted to give effect to the issuance and sale of the Notes and the application of the net proceeds therefrom as described in "Use of Proceeds." This table should be read in conjunction with the Company's Consolidated Financial Statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" found elsewhere in this Prospectus. Issuance of the Exchange Notes will not affect the Company's consolidated capitalization. JUNE 30, 1997 ---------------------- HISTORICAL AS ADJUSTED --------- --------- (IN THOUSANDS) Cash and cash equivalents ......................... $ 8,940 $ 25,240(1) ========= ========= Long-term debt: Credit Facility ................................. $ 18,600 $ 100 Existing Notes .................................. 24,150 24,150 The Notes ....................................... -- 36,000 Stockholders Equity: Preferred Stock, $0.01 par value, 2,500,000 shares authorized; 1,315,500 shares of $2.125 Convertible Exchangeable Preferred Stock, Series A issued and outstanding with a liquidation preference of $32,887,500 ....... 13 13 Common Stock, $0.01 par value, 20,000,000 shares authorized; 5,996,171 shares outstanding 60 60 Unearned Compensation - Restricted Stock ........ (2,181) (2,181) Capital in excess of par value .................. 76,903 76,903 Retained earnings ............................... 7,259 7,259 --------- --------- Total stockholders' equity ...................... 82,054 82,054 --------- --------- Total capitalization ............................ $ 124,804 $ 142,304 ========= ========= - ---------- (1) Assumes the remaining net proceeds from the issuance and sale of the Outstanding Notes, after the repayment of amounts outstanding under the Credit Facility, are invested in cash equivalents. See "Use of Proceeds." 36 SELECTED FINANCIAL DATA The following table sets forth, as of the dates and for the periods indicated, selected financial information for the Company. The financial data for each of the five years in the period ended December 31, 1996 have been derived from the audited Consolidated Financial Statements of the Company for such periods. The financial data for the six month periods ended June 30, 1997 and 1996 has been derived from the Company's unaudited Consolidated Financial Statements. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes thereto. The following data is not necessarily indicative of future results for the Company.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA(1): Revenues: Oil and gas sales ...................... $ 20,844 $ 12,249 $ 25,764 $ 23,210 $ 13,948 $ 10,048 $ 10,015 Interest and other ..................... 695 278 946 627 171 230 232 -------- -------- -------- -------- -------- -------- -------- Total revenues ......................... 21,539 12,527 26,710 23,837 14,119 10,278 10,247 Costs and Expenses: Lease operating expenses ............... 4,164 3,686 7,562 6,732 4,042 3,713 3,702 Depreciation, depletion and amortization 7,581 4,844 9,832 10,376 6,049 3,411 3,360 General and administrative ............. 2,382 1,707 3,495 3,880 3,717 2,350 1,848 Interest ............................... 210 48 313 1,794 624 196 160 -------- -------- -------- -------- -------- -------- -------- Total costs and expenses ............... 14,337 10,285 21,202 22,782 14,432 9,670 9,070 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations ............. 7,202 2,242 5,508 1,055 (313) 608 1,177 Provision (benefit) for income taxes .............................. 2,311 -- 50 -- (200) 113 235 -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle ................................. 4,891 2,242 5,458 1,055 (113) 495 942 Cumulative effect of change in accounting principle (2) .................. -- -- -- -- -- 5,262 -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ........................... 4,891 2,242 5,458 1,055 (113) 5,757 942 Preferred stock dividends ................... 1,398 1,398 2,795 256 -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common shares 3,493 844 2,663 799 (113) 5,757 942 Pro forma adjustment (unaudited): Provision for income taxes(2) ............... -- -- -- -- -- 100 145 -------- -------- -------- -------- -------- -------- -------- Pro forma net income (loss) ................. $ 3,493 $ 844 $ 2,663 $ 799 $ (113) $ 5,657 $ 797 ======== ======== ======== ======== ======== ======== ======== Income (loss) per share before accounting principal change ................ $ 0.55 $ 0.15 $ 0.45 $ 0.14 $ (0.03) $ 0.13 $ 0.25 ======== ======== ======== ======== ======== ======== ======== Cumulative effect of accounting change ..................................... $ -- $ -- $ -- $ -- $ -- $ 1.40 $ -- ======== ======== ======== ======== ======== ======== ======== Pro forma ................................... $ 0.55 $ 0.15 $ 0.45 $ 0.14 $ (0.03) $ 1.50 $ 0.21 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share: Primary ................................ $ 0.55 $ 0.15 $ 0.45 $ 0.14 $ (0.03) $ 1.53 $ 0.25 ======== ======== ======== ======== ======== ======== ======== Assuming full dilution ................. $ 0.52 $ 0.15 $ 0.43 $ 0.14 $ (0.03) $ 1.53 $ 0.25 ======== ======== ======== ======== ======== ======== ======== Shares used in computing earnings per common share: Primary ................................ 6,307 5,755 5,952 5,755 4,346 3,769 3,769 ======== ======== ======== ======== ======== ======== ======== 37 Assuming full dilution ................. 9,318 5,755 6,135 5,755 4,346 3,769 3,769 ======== ======== ======== ======== ======== ======== ======== SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------ ------------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ------------------------ ------------------------------------------------------------------ (UNAUDITED) (IN THOUSANDS, EXCEPT RATIOS) STATEMENT OF CASH FLOWS DATA(1): Net income (loss) ............ $ 4,891 $ 2,242 $ 5,458 $ 1,055 $ (113) $ 5,757 $ 942 Depreciation, depletion and amortization ................ 7,791 4,982 10,131 10,600 6,328 3,657 3,577 Other non-cash items ......... 2,499 65 164 133 (112) (5,114) 270 Net change in assets and liabilities ................. 1,981 3,462 (1,502) (2,336) (756) 435 (2,758) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash provided by operating activities .................. 17,162 10,751 14,251 9,452 5,347 4,735 2,031 ========== ========== ========== ========== ========== ========== ========== Cash provided by (used in) investing activities ........ (33,690) (8,867) (32,717) (24,237) (6,423) (2,710) (3,817) ========== ========== ========== ========== ========== ========== ========== Cash provided by (used in) financing activities ........ 17,799 (955) 21,870 11,765 3,916 (1,695) 233 ========== ========== ========== ========== ========== ========== ========== BALANCE SHEET DATA(1): Working capital .............. $ 4,477 $ 1,716 $ 4,878 $ 4,712 $ 1,896 $ (687) $ (1,011) Oil and gas properties, net .. 108,253 60,304 82,489 57,765 43,920 21,000 22,138 Total assets ................. 140,341 88,124 118,520 83,867 73,786 39,825 35,570 Total debt ................... 42,750 100 24,250 100 19,234 2,691 2,975 Total stockholders' equity ... 82,054 75,973 77,864 75,129 43,431 27,170 22,711 OTHER FINANCIAL DATA(1): Capital expenditures, net .... $ 33,690 $ 8,867 $ 32,717 $ 24,237 $ 10,412 $ 2,710 $ 3,817 EBITDA(2) .................... $ 15,181 $ 7,337 $ 16,066 $ 13,582 $ 6,727 $ 4,496 $ 4,949 Ratio of earnings to fixed charges(3) .................. 35.3 47.7 18.6 1.6 -- 3.6 6.6
- ---------- (1) The Company succeeded to the business and properties of Callon Petroleum Operating, CCP and CN on September 16, 1994 pursuant to the Consolidation. Historical information about the Company prior to September 16, 1994 includes the financial and operating information of the predecessors of the Company, other than the interest in CN not owned by Callon Petroleum Operating, combined as entities under common control in a manner similar to a pooling of interests. See "The Company." (2) EBITA is earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is presented because it is a widely accepted financial indication of a company's ability to service and incur debt. EBITDA should not be considered as an alternative to earnings (loss) as an indicator of the Company's operating performance or to cash flow as a measure of liquidity. (3) For purpose of computing this ratio, "earnings" represent income (loss) before income taxes and extraordinary item plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness and that portion of rental expense considered to be representative of the interest factor therein. As a result of the loss incurred for the year ended December 31, 1994, earnings did not cover fixed charges by $313,000. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are substantially dependent on prevailing prices of oil and gas. The Company's ability to maintain or increase its borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to large fluctuation in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond the control of the Company. These factors include weather conditions in the United States, the condition of the United States economy, the actions of the Organization of Petroleum Exporting Countries, governmental regulation, political stability in the Middle East and elsewhere, the foreign supply of oil and gas, the price of foreign imports and the availability of alternate fuel sources. Any substantial and extended decline in the price of oil or gas would have an adverse effect on the Company's carrying value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations. Volatile oil and gas prices make it difficult to estimate the value of producing properties for acquisition and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on such value. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation projects. The Company uses the full cost method of accounting for the Company's investment in oil and gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized into a "full cost pool." Oil and gas properties in the pool, plus estimated future expenditures to develop proved reserves and future abandonment, site remediation and dismantlement costs, are depleted and charged to operations using the unit of production method based on the ratio of current production to total estimated proved recoverable oil and gas reserves. To the extent that such capitalized costs (net of depreciation, depletion and amortization) exceed the discounted future net cash flows on an after-tax basis of estimated proved oil and gas reserves, such excess costs are charged to operations. Once incurred, the write-down of oil and gas properties is not reversible at a later date even if oil or natural gas prices increase. 39 RESULTS OF OPERATIONS The following table sets forth selected operating data for the Company for the periods and upon the basis indicated.
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31, ----------------------- ------------------------------------ 1997 1996 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Production: Oil (MBbls) ............................ 237 302 585 594 364 Gas (MMcf) ............................. 6,448 2,912 6,269 6,694 4,076 Total production (MMcfe) ............... 7,869 4,725 9,781 10,261 6,260 Average Sales Price: Oil (per Bbl) .......................... $ 19.36 $ 18.12 $ 18.27 $ 16.68 $ 15.63 Gas (per Mcf) .......................... 2.52 2.33 2.40 1.96 2.00 Total production (per Mcfe) ............ 2.65 2.59 2.63 2.24 2.21 Average Costs (per Mcfe): Lease operating expenses (excluding severance taxes) .......... $ 0.43 $ 0.58 $ 0.57 $ 0.49 $ 0.49 Severance taxes ........................ 0.09 0.20 0.20 0.17 0.16 Depreciation, depletion and amortization 0.96 1.03 1.01 1.01 0.97 General and administrative (net of management fees) ............. 0.30 0.36 0.36 0.38 0.59
The following table sets forth selected production data for the Company for the periods and upon the basis indicated. SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------- ------------------------ 1997 1996 1996 1995 1994 ------ ------ ------ ------ ------ (MMCFE) (MMCFE) Production attributable to: Main Pass 163 Area ......... 2,477 33 463 -- -- Chandeleur Block 40 ........ 2,251 757 1,385 144 37 Big Escambia Creek ......... 434 378 739 390 -- Black Bay Complex .......... 558 606 1,208 1,351 603 North Dauphin Island Field . 826 1,475 3,069 5,102 2,524 ------ ------ ------ ------ ------ 6,546 3,249 6,864 6,987 3,164 Other properties ........... 1,323 1,476 2,917 3,274 3,096 ------ ------ ------ ------ ------ Total ................... 7,869 4,725 9,781 10,261 6,260 ====== ====== ====== ====== ====== SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996 For the six months ended June 30, 1997, total oil and gas revenues increased by $8.6 million, or 70%, to $20.8 million when compared to $12.2 million for the same period in 1996. For the six months ending June 30, 1997, oil production and oil revenues decreased to 237 MBbls and $4.6 million, respectively. For the comparable period in 1996, oil production was 302 MBbls while revenues totaled $5.5 million. Oil prices during the first six months of 1997 averaged $19.36, compared to $18.12 for the same period in 1996. Although prices were higher, the loss of production from properties which were sold and a production decline in other non-core properties caused the overall decline in oil revenues. 40 Natural gas production and revenue for the six-month period ending June 30, 1997 were 6.4 Bcf and $16.3 million, respectively, increasing from 2.9 Bcf and gas revenues of $6.8 million in the first six months of 1996. The average sales price for natural gas in the first six months in 1997 was $2.52 per Mcf, a $0.19 per Mcf increase over the same period in 1996. The combination of increased prices and production volumes generated the 140% increase in total gas revenues. Lease operating expenses, excluding severance taxes, for the first half of 1997 increased by 26% to $3.4 million from $2.7 million for the 1996 comparable period. This increase is primarily the result of expenses associated with producing properties acquired in the first quarter. Severance taxes decreased by 22% to $0.7 million during the first six months of 1997 from $0.9 million for the same period in 1996 as a result of production declines attributable to the Company's onshore properties and property sales. Depreciation, depletion and amortization for the first six months of 1997 was $7.6 million, or $0.96 per Mcfe. For the same period in 1996, the total was $4.8 million or $1.03 per Mcfe. During the first six months of 1997, general and administrative expenses increased by 40% to $2.4 million compared to $1.7 million for the six-month period in 1996. Increased executive compensation, travel and transportation expenses and the loss of management fees, as a result of property sales, combined to produce this overall increase. Interest expense during the first half of 1997 was $210,000 compared to $48,000 for the first half of 1996 as a result of the increase in the Company's long-term debt. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995 Oil and gas sales increased $2.6 million, or 11%, during 1996 to $25.8 million compared to $23.2 million in 1995. While oil and gas production volumes for 1996 were lower than those reported in 1995, substantial price increases for both oil and gas more than offset the loss in revenues. The average sales price per barrel sold in 1996 increased to $18.27, compared to $16.68 for 1995. The average sales price per Mcf of gas sold increased from $1.96 in 1995 to $2.40 in 1996. Oil production for 1996 decreased slightly to 585,000 Bbls from the 594,000 Bbls produced in 1995. This reduction was primarily attributable to the implementation of the required environmental protection program (zero discharge) at the Black Bay Complex, the Company's largest single oil producing prospect. During this process, several producing wells were shut-in while various new equipment was installed. In addition, several wells were temporarily shut-in while repairs were conducted on the service lines. Therefore, average daily production for 1996 dropped to 1,599 Bbls/d compared to 1,629 Bbls/d in 1995. Gas production for 1996 was 6.3 Bcf, a decrease from the 6.7 Bcf reported in 1995. This reduction was primarily attributable to the loss of production from the North Dauphin Island Field where problems with excess water content in the gas sales stream were encountered early in the year requiring the installation of a dehydrator and removal of water from the lines. Extraneous water production from the #2A well led to the shut-in of the well and the natural decline of the reservoir pressure. Also during the year, this field incurred a lower production rate due to compressor inefficiencies which led to a compressor restaging program that was completed in late September. Lease operating expenses, including severance taxes, increased from $6.7 million in 1995 to $7.6 million in 1996. A large portion of this increase, $600,000, is attributable to normal expenses associated 41 with new property additions. Other expenses included the installation of a dehydrator and the workover expenses at the North Dauphin Island Field. Depreciation, depletion and amortization expense for 1996 was $9.8 million compared to $10.4 million for 1995. When compared on a per unit-of-production basis, the expense incurred was $1.01 per Mcfe produced for each of the two years. General and administrative expenses declined from $3.9 million for 1995 to $3.5 million for 1996, as a result of the Company's continued efforts to improve operational efficiencies. Interest expense decreased from $1.8 million in 1995 to $313,000 in 1996. This expense reduction corresponds with the smaller average monthly outstanding balance on the long-term debt of the Company for 1995 when compared to 1996. During the fourth quarter of 1995, the Company used $21.5 million of the proceeds from the sale of preferred stock to reduce its long-term debt. During the course of 1996, additional funds advanced under the Company's line of credit were repaid in November when the Company issued $24.2 million of its Existing Notes. The average outstanding balance in long-term debt during 1996 was $5.3 million. The recorded income tax expense for 1996 was $50,000. The computed provision for income taxes at the Company's expected statutory rate was $1.9 million, which was primarily offset by a reduction in the deferred tax asset valuation allowance as a result of the Company's ability to utilize its net operating losses and depletion carryovers. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994 Oil and gas sales increased $9.3 million, or 66%, during 1995 to $23.2 million compared with $13.9 million in 1994. This increase is partially attributable to the Company's purchase in September 1994 of NOCO's interest in CN pursuant to the Consolidation as well as the acquisition of certain properties from W&T Offshore, Inc. ("1994 Properties"). The Company's purchase of the Escambia Minerals properties in June 1995 also contributed $1.9 million to the increase in oil and gas sales. Oil production attributable to the NOCO Interest, the Escambia Minerals properties and the 1994 Properties substantially outweighed normal production declines in previously existing properties, as oil production for 1995 increased to 594 MBbls from the 1994 level of 364 MBbls. The average price per barrel sold also increased by $1.05 in 1995 compared to 1994 prices, resulting in a total $4.3 million increase in oil revenues. Total gas production increased 2.6 Bcf to 6.7 Bcf in 1995 from 4.1 Bcf in 1994. A substantial portion of this increase in production was attributable to the Company's acquisition of the North Dauphin Island Field. Gas production from the North Dauphin Island Field increased from 2.5 Bcf in 1994 to 5.1 Bcf in 1995 and added $5.0 million in revenues in 1995 compared with 1994. Although spot market gas prices declined in 1995, gas price hedges limited the effect of the decline to $0.04 per Mcf. Lease operating expenses, including production taxes, increased 67% during 1995 to $6.7 million, compared to $4.0 million for 1994. This increase was largely attributable to the corresponding increase in oil and gas production caused by the Company's acquisition of the NOCO Interest, the Escambia Minerals properties and the 1994 Properties. The Company's purchase of the NOCO Interest in September 1994 resulted in an increase in combined lease operating expenses attributable to the North Dauphin Island Field and the Black Bay Complex from $1.5 million in 1994 to $3.6 million in 1995. Lease operating expenses on a Mcfe basis increased by less than 2% to $0.66 for 1995 compared to $0.65 for 1994. 42 Total depreciation, depletion and amortization expense was $10.4 million for 1995, compared to $6.0 million for 1994. This increase reflects additional production and reserves resulting from the purchase of the NOCO Interest, the Escambia Minerals properties and the 1994 Properties. General and administrative expenses were $3.9 million for 1995, compared to $3.7 million in 1994. The increase was primarily attributable to the Company's expanding operations. The Company had a zero effective tax rate for 1995, compared to an effective rate of (63)% in 1994. The 1995 rate was primarily due to a reduction in the deferred tax asset valuation allowance of $551,000. The valuation allowance was reduced during 1995 due to a reduction in the gross deferred tax asset. This valuation allowance represents the portion of federal net operating loss carry forward and other temporary differences which the Company believes will not be utilized. LIQUIDITY AND CAPITAL RESOURCES CAPITAL SOURCES The Company's primary sources of capital are its cash flows from operations, borrowings from financial institutions and the sale of debt and equity securities. Cash provided from operations during 1996 totaled $15.8 million. During 1996, the Company borrowed $12.9 million from financial institutions and repaid such borrowing with the proceeds from the sale of $24.2 million of Existing Notes during November, 1996. At December 31, 1996, the Company had working capital in the amount of $4.9 million. Net cash provided by operating activities for the six months ending June 30, 1997 totaled $17.2 million. During the first half of 1997, a total of $36.2 million was paid for capital expenditures and $1.4 million was paid as dividends to the preferred stockholders. The balance of the cash flow was retained for future operating expenses and potential drilling and acquisition opportunities. Effective October 31, 1996, the Company entered into a new Credit Facility with Chase Manhattan Bank. Borrowings under the Credit Facility are secured by mortgages covering substantially all of the Company's producing oil and gas properties. The Credit Facility provides for borrowings of a maximum of the lesser of $50 million or a borrowing base ("Borrowing Base") of $30 million which is adjusted periodically on the basis of a discounted present value of future net cash flows attributable to the Company's proved producing oil and gas reserves. Pursuant to the Credit Facility, depending upon the percentage of the unused portion of the Borrowing Base, the interest rate is equal to either the lender's prime rate or the lender's prime rate plus 0.50%. The Company, at its option, may fix the interest rate on all or a portion of the outstanding principal balance at either 1.00% or 1.375% above a defined "Eurodollar" rate, depending upon the percentage of the unused portion of the Borrowing Base, for periods of up to six months. The weighted average interest rate for the total debt outstanding at December 31, 1996 was 8.25%. Under the Credit Facility, a commitment fee of .25% or .375% per annum on the unused portion of the Borrowing Base (depending upon the percentage of the unused portion of the Borrowing Base) is payable quarterly. The Company may borrow, pay, reborrow and repay under the Credit Facility until October 31, 2000, on which date, the Company must repay in full all amounts then outstanding. At June 30, 1997, the unpaid balance due on this Credit Facility was $18.6 million. On November 27, 1996, the Company issued $24.2 million of Existing Notes. The Company used the proceeds to pay down the Credit Facility and for other corporate purposes. Interest on the Existing Notes is payable quarterly and began on March 15, 1997. The Existing Notes are redeemable at the option of the Company, in whole or in part, on or after December 15, 1997, at 100% of the principal amount thereof, plus accrued interest to the redemption date. The Existing Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future indebtedness of the Company and rank PARI PASSU with the Notes. The Credit Facility and the indentures for the Existing 43 Notes contain, and the indenture for the Notes will contain, various covenants including restrictions on additional indebtedness and payment of cash dividends as well as maintenance of certain financial ratios. The Company periodically uses derivative financial instruments to manage oil and gas price risk. Settlements of gains and losses on commodity price swap contracts are generally based upon the difference between the contract price or prices specified in the derivative instrument and a NYMEX price or other cash or futures index price, and are reported as a component of oil and gas revenues. Gains or losses attributable to the termination of a swap contract are deferred and recognized in revenue when the oil and gas is sold. From October 1, 1996 to March 31, 1997, the Company had in effect hedges of gas equivalent to approximately 16% of its production at a floor price per MMBtu of $1.75 (NYMEX) and a ceiling price per MMBtu of $ 2.20 (NYMEX). In addition, the Company was party to hedges in effect from October 1, 1996 through December 31, 1996 representing approximately 81% of its oil production at a floor price per Bbl of $17.25 (NYMEX) and a ceiling price per Bbl of $19.59 (NYMEX). During the third quarter of 1996, the Company terminated hedges attributable to its fourth quarter 1996 production at a profit, which had the effect of increasing fourth quarter oil and gas revenues by $180,000. The Company is currently a party to hedges that will be in effect for the last six months of 1997 representing approximately 27% of its estimated oil production, at a floor price of $18.00 per Bbl (NYMEX) and a ceiling price per Bbl of $24.00 (NYMEX). In addition, from July 1997 through March 1998, the Company has hedged 30% of its estimated natural gas equivalent production at an average floor price of $2.00 per MMBtu (NYMEX) and an average ceiling price of $2.66 per MMBtu (NYMEX). CAPITAL EXPENDITURES Capital expenditures for 1996 totaled $36.1 million which included $19.2 million of lease acquisitions, $2.7 million for the acquisition of producing properties and equipment and $14.2 million for property development and drilling activities on its properties. During the first half of 1997, capital expenditures were $36.2 million. Of such amount, approximately $12.0 million was expended on drilling and exploration activities and $22.0 million on acquisitions of producing properties, undeveloped mineral interests and seismic information attributable to future drilling sites. The Company has recently shifted the focus of its reserve growth strategy from the acquisition and exploitation of oil and gas properties to exploration and development drilling. For the second half of 1997, the Company expects to concentrate its exploration and development drilling in the Shallow Gas focus area and the Breton Sound focus area. The Company has identified two gross (1.5 net) development and seven gross (3.3 net) exploratory drilling locations for drilling in the second half of 1997, and the Company's capital budget includes $21.2 million to drill and complete these wells. The Company's capital budget for the remainder of 1997 will depend upon the success of its exploration and development drilling. If the Company's exploration drilling operations are successful, it may require additional capital to develop discoveries during late 1997 and thereafter. If the Company's initial drilling operations are not successful, the Company may redeploy its remaining capital budget to other activities. See "Risk Factors - Substantial Capital Requirements." ACCOUNTING POLICIES On October 23, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," effective for the Company at December 31, 1996. Under FAS 123 companies can either record expenses based on the fair value of stock-based compensation upon issuance or elect to remain under the current "APB Opinion No. 25" method, whereby no compensation cost is recognized upon grant, and make disclosures as if FAS 123 had been applied. The Company will continue to account for its stock-based compensation plans under APB Opinion No. 25. 44 In January 1996, the Company adopted the provisions of the Financial Accounting Standards Board Statement No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." FAS 121 requires the Company to review its oil and gas properties whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, and recognize a loss if such recoverable amounts are less than the carrying amount. There have been no impairment losses recognized as of June 30, 1997, but any future losses would be included in depletion, depreciation, amortization and impairment in future accounting periods. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS 128"), "Earnings Per Share", which simplifies the computation of earnings per share. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement for all prior period earnings per share data presented. The Company is currently complying with FAS 128. Also in early 1997, the Financial Accounting Standards Board issued Statement No. 129 ("FAS 129"), "Disclosure of Information about Capital Structure" effective for financial statements issued for periods ending after December 15, 1997. The Company believes it is in compliance with the provisions of this statement. In June 1997, the Financial Accounting Standard Board issued Statement No. 130 ("FAS 130"), "Reporting Comprehensive Income". FAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. FAS 130 is effective for fiscal years ending after December 15, 1997. The Company intends to comply with the provisions of FAS 130. BUSINESS AND PROPERTIES Callon Petroleum Company and its predecessors have been engaged in the acquisition, development, exploration and production of oil and gas since 1950. The Company's properties are geographically concentrated in Louisiana, Alabama and offshore Gulf of Mexico. Callon also manages properties for certain institutional investors. Callon was formed in 1994 through the consolidation of a publicly traded limited partnership, a joint venture with a consortium of European entities and an independent energy company owned by certain members of current management. As of December 31, 1996, the Company had estimated net proved reserves of 73.3 Bcfe with a PV-10 Value of $160.2 million, representing increases of 26% and 151% respectively, from December 31, 1995. The Company's objective is to enhance stockholder value through sustained growth in its reserve base, production levels and resulting cash flows from operations. Over the past two and one-half years, the Company has increasingly supplemented the acquisition of producing properties with the acquisition of acreage with development and exploratory drilling opportunities to further increase potential recoverable reserves. Since 1995, the Company has generated 47 prospects on 217,000 gross acres. In evaluating drilling opportunities, Callon performs extensive geological and geophysical studies using CAEX, including, where appropriate, the acquisition of 3-D seismic or high-resolution 2-D seismic data to facilitate these efforts. EXPLORATION AND DEVELOPMENT OPERATIONS The Company's exploratory and development operations are concentrated in three areas in the Gulf of Mexico: (i) the state waters of Alabama and the federal outer continental shelf ("OCS") in the Gulf of Mexico where the Company explores for shallow gas deposits ("Shallow Gas focus area"); (ii) the Breton Sound area located primarily in the shallow state waters of Louisiana, where the Company explores for hydrocarbon deposits at total well depths of between 8,000 to 14,000 feet ("Breton Sound focus area"); 45 and (iii) other regions of the OCS, where the Company explores for hydrocarbon deposits at total well depths of between 9,000 and 18,000 feet ("Deep OCS focus area"). Wells drilled in the Shallow Gas focus area are characterized by relatively low exploration and development costs, high initial production rates and short reserve lives. Wells drilled in the Breton Sound focus area and Deep OCS focus area are more expensive to drill and complete and have greater risks, but seek larger oil and gas deposits with longer reserve lives. In 1995 and 1996, the Company acquired an extensive infrastructure of production platforms, gathering systems and pipelines in its Shallow Gas focus area and, during 1996, completed four proprietary high resolution 2-D seismic surveys over an eight block area. Based on these surveys, in October and November of 1996, the Company drilled two gross (1.52 net) successful development wells and one gross (1.0 net) successful exploratory well in this area. These wells were placed on production by the end of December 1996 and, coupled with the replacement of compression equipment at the related production facilities, the Company's average daily oil and gas production increased to 43.5 MMcfe/d during the first half of 1997, representing a 67% increase over 1996 average daily production rates. During the first six months of 1997, the Company drilled one additional successful development well (1.0 net), one unsuccessful development well for a net cost of $1.2 million, and performed one major recompletion in its Shallow Gas focus area. Production from the new well commenced in July 1997 and the recompletion is currently producing 6.3 MMcf/d (3.6 MMcf/d net to the Company). The Company's capital budget for the last six months of 1997 includes the drilling of five gross (2.7 net) exploratory wells in its Shallow Gas focus area, for an aggregate net cost to drill and complete of approximately $10.0 million. In its Breton Sound focus area, the Company owns and operates several old prolific fields. In November 1996, the Company completed a 36 square-mile 3-D seismic survey on its Main Pass 35 Field and adjoining acreage which resulted in the identification of one development and seven exploratory drilling prospects. Based upon this new data, the Company acquired an additional 5,170 gross acres, which increased its holdings in the Breton Sound focus area to almost 10,000 gross acres. In July 1997, the Company entered into a joint venture agreement with Burlington Resources Oil & Gas Company to drill these prospects. The Company will operate these prospects and has retained an approximate 42.4% working interest. In addition, the Company acquired a 100% working interest in a development prospect on an adjacent block. The Company's capital budget for the last six months of 1997 in the Breton Sound focus area includes the drilling of two gross (1.45 net) development and one gross (0.45 net) exploratory wells for an aggregate net cost to Callon to drill and complete of approximately $8.2 million. In 1996, the Company joined with Murphy Exploration and Production, Inc. to acquire 18 federal blocks in the Deep OCS focus area and in 1997 joined with Murphy and another oil company to acquire an additional 13 blocks, four of which are located in the Shallow Gas focus area. The Company owns a 25% working interest in 23 of these blocks and a 20% working interest in the remaining eight. Murphy operates these properties. To date Callon has participated with Murphy in the drilling of four gross (1.0 net) unsuccessful exploratory wells at a total cost of $6.1 million, net to the Company. The Company's capital budget for the last six months of 1997 includes the drilling of one gross (0.2 net) Deep OCS focus area exploratory prospect at a net cost to Callon to drill and complete of approximately $2.9 million. In total, the Company's current capital budget includes the drilling of two gross (1.5 net) development wells and seven gross (3.3 net) exploratory wells during the last six months of 1997 at an estimated net cost to the Company to drill and complete of approximately $21.2 million. These drilling operations will be financed from cash flows from operations, the net proceeds of the offering of the Outstanding Notes and borrowings under the Company's Credit Facility. See "Use of Proceeds." 46 PRODUCING PROPERTY ACQUISITIONS Over the past eight years, the Company has increased its reserves through the acquisition of producing properties that are geologically complex, have (or are analogous to fields with) an established production history from stacked pay zones and are candidates for additional exploitation. The Company focuses on reducing operating costs and implementing production enhancements through the application of technologically advanced production and recompletion techniques. Between 1989 and December 31, 1996, Callon acquired producing properties in 21 negotiated transactions, on behalf of itself and, in certain cases, its primary institutional investor, for an aggregate net purchase price of approximately $206 million and, during that period, the Company had an average Reserve Replacement Cost of $0.84 per Mcfe. ELF ACQUISITION In June 1997, the Company purchased from Elf Exploration, Inc. an 18.8% working interest in the Mobile Area Block 864 Unit for approximately $11.8 million. The transaction also included Elf Exploration's 17.5% working interest in Mobile Area Blocks 863 and 907 and a 35% working interest in Mobile Area Block 908. The Mobile Area Block 864 Unit, operated by Chevron, is located in the Company's Shallow Gas focus area about 12 miles south- southwest of the Company's North Dauphin Island Field and is currently producing 26 MMcf/d through the unit's facilities from sub-sea depths of 2,400 feet and 2,700 feet. The Company believes exploratory drilling opportunities exist on the three blocks. See the Company's MAB 864 Acquisition Financial Statements for further information regarding the acquisition from Elf Exploration. TECHNOLOGICAL EXPERTISE Through its acquisition program, the Company has assembled an operational and technical database in certain geographical areas at a low cost to the Company. The relationship with its institutional investors has allowed the Company to pursue larger acquisitions, while the cost sharing arrangements and ongoing management fees have enabled the Company to enhance the rate of return on its properties and to maintain a larger, more experienced team of technical and operating personnel than otherwise would be feasible for a company of its size. 47 SIGNIFICANT PRODUCING PROPERTIES The following table shows the PV-10 Value and estimated net proved oil and gas reserves by major field for the Company's five largest producing fields and for all other properties combined at December 31, 1996. ESTIMATED NET PROVED
PERCENT PV-10 TOTAL OIL GAS PRIMARY VALUE PV-10 RESERVES RESERVES FIELD NAME/LOCATION OPERATOR(S) ($000)(1) VALUE (MBBLS) (MMCF) - ------------------------------ ------- -------- -------- -------- -------- Main Pass 163 Area Federal Waters ............. Callon $ 55,604 34.7% -- 20,196 Chandeleur Block 40 Federal Waters ............. Callon 48,000 30.0 -- 16,782 Big Escambia Creek Southeast Alabama .......... Exxon 14,492 9.1 991 2,673 Black Bay Complex Louisiana State Waters ..... Callon 11,394 7.1 1,920 684 North Dauphin Island Field Alabama State Waters ....... Callon 6,455 4.0 -- 2,685 Other properties ............. Various 24,226 15.1 908 7,404 -------- -------- -------- -------- Total ................... -- $160,171 100.0% 3,819 50,424 ======== ======== ======== ========
- ---------- (1) Future net cash flows attributable to the Company's estimated proved reserves and the present value of such cash flows were based on an average gas price of $3.88 per Mcf and an average oil price of $23.58 per Bbl at December 31, 1996. The average price received for production in 1996 was $2.63 per Mcf for gas and $20.55 per Bbl for oil, without the effects of hedging. MAIN PASS 163 AREA In two separate transactions during 1996, Callon acquired a 100% working interest in Chandeleur Block 41 and Main Pass Blocks 159, 160, 161 and 163 located in its Shallow Gas focus area. The acquisition initially included five wells producing 4 MMcf/d, as well as production facilities at Main Pass 163 capable of handling 90 MMcf/d. Based upon interpretation of seismic data acquired and processed by Callon, an exploratory well was drilled on Main Pass Block 163 during the fourth quarter of 1996. For the six months ending June 30, 1997, the well produced an average of 13.5 MMcf/d. A development well was also drilled during the fourth quarter of 1996 on Main Pass Block 161 and produced an average of 1.2 MMcf/d during the first half of 1997. During the second quarter of 1997, the Company drilled a successful well on Chandeleur Block 41 and production commenced in July 1997. Total production from the Main Pass 163 Area averaged approximately 17.7 MMcf/d for the first six months in 1997. The Main Pass 163 Area wells produce from Shallow Miocene reservoirs at approximate depths of 3,300 feet. Proved reserves at year-end 1996 attributable to this area were 20.2 Bcf, representing 34.7% of the Company's total PV- 10 Value. CHANDELEUR BLOCK 40 The Company and an institutional investor purchased a 33.3% working (27.8% net revenue) interest in Chandeleur Block 40 in 1994 located in the Shallow Gas focus area. On December 29, 1995, Callon acquired an additional 66.7% working (55.5% net revenue) interest in the Chandeleur Block 40 for $9 million and subsequently sold a 22.2% working interest in the field to an industry partner for $3 million. The Company currently holds a combined 52.3% working (43.6% net revenue) interest in this 48 property. The field's remaining proved reserves are estimated to be 16.8 Bcf of natural gas (net to the Company) as of December 31, 1996. When the Company assumed operations of the field, two wells were producing 5.5 MMcf/d of natural gas from the 3,800 foot sand. In February 1996, the Company shut-in one well and successfully reworked the other and increased average field production to 12 MMcf/d of natural gas. During the fourth quarter of 1996, the Company drilled a development well in the field. For the six months ending June 30, 1997, the well was producing an average of 21.5 MMcf/d. The well resulted in a field extension which added 6 Bcf in estimated net proved reserves to the Company as of December 31, 1996. Total field production averaged approximately 29.4 MMcf/d during the first half of 1997. BIG ESCAMBIA CREEK On June 29, 1995, the Company purchased an average working interest of 6.0% (6.6% net revenue interest), subject to a 10% reduction after payout, in nine wells and a 2.9% average royalty interest in another six wells. The gross average daily production for these wells during June 1997 was 3 MBbls of condensate, 1.4 MBbls of natural gas liquids, 7.7 MMcf of residue natural gas and 339 long tons of sulphur. These wells are producing from the Smackover formation at depths ranging from 15,100 to 15,600 feet. Production in this field has been partially curtailed due to low treatment plant capacity and, as a result, no significant field production decline occurred during the past several years. BLACK BAY COMPLEX The Company-operated Black Bay Complex (the "Complex") is located in shallow waters off the Louisiana coast in the Breton Sound focus area. It consists of eight fields, 90 producing wells and approximately 30,000 acres of oil and gas leases, all of which are held by production. The Company owns an average 15.4% working (11.6% net revenue) interest in the Complex and an institutional investor, whose properties are managed by the Company, owns a 32.6% working interest. For the six months ending June 30, 1997, the Complex was producing an average of 4,461 Bbls/d and cumulative production had reached 242 MMBbls of oil and 217 Bcf of natural gas. The discovery well in the Complex was completed in 1949. Forty-five different sandstone formations and 137 separate reservoirs ranging in depth from 6,200 to 9,600 feet have been identified within the Complex. The Company assumed operations of the Complex in August 1992, and since that time the Company has successfully drilled seven development wells, including a horizontal well, and implemented fourteen recompletions, seven of which employed a new stimulation technology. NORTH DAUPHIN ISLAND FIELD The Company owns a 94.4% working (72.6% net revenue) interest in the North Dauphin Island Field located in shallow Alabama state waters in the Company's Shallow Gas focus area. The field was discovered in April 1990, and the wells produce from a Shallow Miocene reservoir at approximately 1,800 feet. For the six months ending June 30, 1997, there were three producing gas wells, two of which were drilled horizontally, with average gross production of 6.7 MMcf per day. The Company also owns a production platform, including compressors and dehydration facilities, an associated gathering system and a 12-inch, 12-mile pipeline ("North Dauphin Island Platform"). This pipeline runs to existing onshore connections with the pipeline systems of Koch Gateway Pipeline Company, Transcontinental Gas Pipe Line Corporation and Florida Gas Transmission Company. The Company gathers its production and gas production from other producers connected to its system, and delivers the gas to the major pipeline connections. The current throughput capacity of the gathering 49 facility is in excess of 100 MMcf/d and with additional compression, the throughput capacity can be increased to 130 MMcf/d. The ownership of the North Dauphin Island Platform and associated pipeline provides the Company with a significant strategic advantage in the North Dauphin Island area. In 1995, the Company signed an agreement with a subsidiary of a major oil company providing for natural gas gathering services through the North Dauphin Island Platform to onshore pipeline connections. The agreement further provides for the subsidiary to purchase firm capacity commitments from the Company for natural gas deliveries through the North Dauphin Island Platform for 15 years, which commenced in April 1996, to gather up to 100 MMcf/d of the subsidiary's natural gas production. Firm capacity reservations will average over $1.0 million per year through the term of the contract. Additional revenues may be received depending upon the actual throughput used by the subsidiary. EXPLORATION AND DEVELOPMENT PROJECTS Over the last two years, the Company shifted the focus of its operations from the acquisition and exploitation of oil and gas properties to exploratory and developmental drilling. The Company's exploration and development activity is focused primarily in three areas in the Gulf of Mexico: the Shallow Gas focus area, the Breton Sound focus area and the Company's Deep OCS focus area. SHALLOW GAS FOCUS AREA The Company's Shallow Gas focus area is located in the OCS offshore blocks of Chandeleur, Main Pass and Viosca Knoll, as well as in the state waters of Alabama. Wells drilled in the Shallow Gas focus area are characterized by relatively low exploration and development costs, high initial production rates and short reserve lives. The Company entered this area in 1993 with the purchase of North Dauphin Island Field and has used state-of- the-art reservoir engineering and seismic technology to develop proprietary processes which the Company believes provides it with a competitive advantage in exploiting shallow (1,800 to 6,000 feet) reservoirs. Through a series of acquisitions in 1995, 1996 and early 1997, Callon acquired and now owns a concentrated leasehold position of 34,200 net acres in eight contiguous blocks within its Shallow Gas focus area on which it has 10 producing wells. These blocks include Main Pass Blocks 159, 160, 161, 163, 164 and 165, and Chandeleur Blocks 40 and 41. Callon owns a 100% working interest in five of the blocks and an average 61% working interest in the remaining three. Callon now owns a 100% working interest in the production facilities at Main Pass Block 163, a 52% interest in the production facilities at Chandeleur Block 40 and an approximate 66% interest in the production facilities at Main Pass Block 165. This acreage position and infrastructure provide the potential for increasing production, lowering operating costs and increasing reserves through further drilling. During the third quarter of 1996, Callon completed the acquisition and processing of more than 1,000 miles of seismic data over its eight blocks and based upon interpretation of this data, identified eight potential drilling locations. During October and November 1996, three Shallow Gas prospects were successfully drilled and completed. The first prospect was drilled on Main Pass Block 163 from a surface location adjacent to the Company's production facility and encountered 54 feet of net pay in a new natural gas reservoir at a depth of approximately 3,300 feet. During the first six months of 1997, the well averaged 13.5 MMcf/d. Callon has a 100% working (83% net revenue) interest in the well which has added 11.2 MMcf/d net to production levels for the first half of 1997. 50 At Chandeleur Block 40, the Company's #A-3 well encountered 44 feet of net pay at a depth of approximately 3,855 feet. New compressor equipment was installed on the Chandeleur Block 40 platform which enabled it to achieve maximum production levels for the new well. The #A-3 well produced at an average rate of 21.5 MMcf/d during the first six months of 1997, giving Chandeleur Block 40 average total natural gas production of 29.4 MMcf/d during such period. This estimated 21.5 MMcf/d increase in production added 9.4 MMcf/d net to the Company's 52.3% working (43.6% net revenue) interest. The third well was a sidetracked development well at Main Pass Block 161. The well was drilled, completed and commenced production during February 1997 after compression facilities were upgraded. Callon has a 100% working (77.8% net revenue) interest in the well which added 1.3 MMcf/d net to its existing production. As a result primarily of the first two wells, Callon's average daily production increased to 43.5 MMcfe/d during the first half of 1997, a 67% increase from average 1996 production rates. During the first six months of 1997, the Company drilled one additional successful development well (1.0 net), one unsuccessful development well for a net cost of $1.2 million, and performed one major recompletion in its Shallow Gas focus area. Production from the new well commenced in July 1997 and the recompletion is currently producing 6.3 MMcf/d (3.6 MMcf/d net to the Company). The Company's capital budget for the last six months of 1997 includes the drilling of five gross (2.7 net) exploratory wells in its Shallow Gas focus area, for an aggregate net cost to drill and complete of approximately $10.0 million. See "Risk Factors -- Substantial Capital Requirements." BRETON SOUND FOCUS AREA The Company's Breton Sound area is located in shallow state waters off the Louisiana coast at the mouth of the Mississippi River. Callon owns interests in and operates several large old prolific fields there. The fields have produced from 165 separate reservoirs ranging in depth from 6,000 to 9,600 feet. The Company's focus has been on the exploitation of the known producing horizons and now is directed toward deeper potential prospects. The Black Bay Complex was discovered in 1949 and since that time has produced 242 MMBbls of oil and 217 Bcf of natural gas from 45 sandstone formations and 137 reservoirs. It consists of eight fields with 90 wells producing 4,500 barrels of oil per day and 30,000 acres of oil and gas leases held by production. Callon holds an average 15.4% working (11.6% net revenue) interest in the Complex and manages a 32.6% working interest for an institutional investor. Since assuming operations of the Complex in 1992, the Company has substantially reduced operating costs, successfully drilled six development wells, including one horizontally, and implemented 14 recompletions. Callon has an inventory of over 32 identified development locations and recompletion candidates at Black Bay and is evaluating the use of 3-D seismic to identify additional reserves. Since its discovery in 1951, production from the Main Pass Block 35 Field, located in Louisiana state waters, has totaled 66.5 MMBbls of oil and 76.5 Bcf of natural gas from 28 reservoirs ranging in depth from 6,000 to 9,000 feet. In November 1996, the Company received a new 36 square-mile 3-D seismic survey covering its Main Pass 32/35 area. Callon identified eight prospects both under and outside of its then existing 4,467 acre Main Pass 32 lease, based upon the new seismic, and in December 1996, the Company acquired six contiguous tracts covering an additional 5,170 acres at a total cost of $3.1 million. In July 1997, the Company entered into a joint venture agreement with Burlington Resources Oil & Gas Company to drill these prospects. The Company will operate these prospects and has retained an approximate 42.4% working interest. Additionally, through a farmout agreement, the Company acquired a 100% working interest in a development prospect on adjacent Main Pass Block 31. The Company's capital budget in the last six months of 1997 in the Breton Sound focus area includes the drilling of two 51 (1.45 net) development and one gross (0.45 net) exploratory wells for an aggregate net cost to Callon to drill and complete of approximately $8.2 million. See "Risk Factors -- Substantial Capital Requirements." The Company anticipates drilling activities to begin in this area in the third quarter of 1997. DEEP OCS FOCUS AREA In addition to prospects in its Shallow Gas and Breton Sound focus areas, the Company has developed an inventory of exploratory prospects in the Gulf of Mexico OCS area where the Company explores for reserves at depths in excess of 10,000 feet. Wells drilled to these objectives are characterized by high risks, higher drilling and completion costs and are subject to delays in commencing sales of oil and gas, as production platforms and transportation facilities are built. Targeted deposits of oil and gas in this focus area are significantly larger than in the Shallow Gas focus area and have longer reserve lives. In April 1996, the Company entered into a joint bidding agreement with Murphy Oil Corporation to acquire and develop oil and gas leases in federal waters in the Gulf of Mexico where Murphy has operated successfully for many years. The focus of the bidding agreement was participation in a diversified group of high-quality 3-D seismic prospects with large reserve potential. At OCS lease sale #157 in April 1996, Callon was the high bidder, with Murphy, on 13 federal offshore blocks and was awarded 12. The Company's successful bids totaled $22.4 million encompassing 61,000 acres offshore Louisiana. The leases are owned 25% by Callon and 75% by Murphy. The blocks include six in the West Cameron South Addition, two in Mississippi Canyon and one block each in Eugene Island, South Marsh Island, Vermilion and Main Pass East Addition. In September 1996, Callon again joined with Murphy and was high bidder on six offshore Texas tracts at OCS lease sale #161. Callon participated in high bids totaling $7.6 million for the six blocks, encompassing 35,000 acres. The blocks include two in the High Island East Addition South Extension, one in the High Island South Addition, and three in Garden Banks. The Company owns a 25% working interest. In March 1997, Callon joined with Murphy and another oil company and were high bidders on 14 blocks at OCS lease sale #166. All but one were awarded by the MMS and Callon owns a 20% working interest in eight of the blocks and a 25% working interest in five. The blocks cover 75,000 acres and are a mix of low, moderate and high-risk prospects. Four of the blocks are in the Company's Shallow Gas focus area and the balance are in the Deep OCS focus area. The Company now owns a 25% interest in 23 blocks and a 20% interest in eight for a total of 31 blocks. The Company's first four gross (1.0 net) exploratory wells drilled with Murphy have been unsuccessful. The test well at West Cameron 603 was drilled to a total depth of 15,200 feet and was abandoned. The Company is evaluating future plans for the block. In February 1997, the Company drilled the first well at Main Pass Block 247 which was plugged and abandoned. A second test well at Main Pass 247 is scheduled for 1998. West Cameron 578/579 and Eugene Island 29 were both dry and abandoned and a second well on Eugene Island 29 is scheduled for 1998. The Company's capital expenditure budget for the last six months of 1997 includes the drilling of one gross (0.25 net) exploratory well for a cost to drill and complete of approximately $2.9 million. 52 RESERVES The following table sets forth certain information about the estimated net proved reserves of the Company as of the dates set forth below. DECEMBER 31, ------------------------------ 1996(1) 1995 1994 -------- -------- -------- Proved developed: Oil (MBbls) ................... 3,385 3,890 3,309 Gas (MMcf) .................... 49,491 20,408 20,582 Proved undeveloped: Oil (MBbls) ................... 434 876 1,115 Gas (MMcf) .................... 933 9,259 3,520 Total proved: Oil (MBbls) ................... 3,819 4,766 4,424 Gas (MMcf) .................... 50,424 29,667 24,102 Estimated pre-tax future net cash flows (000's) ................. $216,154 $ 95,730 $ 59,477 ======== ======== ======== PV-10 Value (000's) ............. $160,171 $ 63,764 $ 41,383 ======== ======== ======== - ---------- (1) Future net cash flows attributable to the Company's estimated proved reserves and the present value of such cash flows were based on an average gas price of $3.88 per Mcf and an average oil price of $23.58 per Bbl at December 31, 1996. The average price received for production in 1996 was $2.63 per Mcf for gas and $20.55 per Bbl for oil, without the effects of hedging. The Reserve Engineers prepared the estimates of proved reserves of the Company and the future net cash flows (and present value thereof) attributable to such proved reserves. Reserves were estimated using oil and gas prices and production and development costs in effect on December 31 of each such year, without escalation, and were otherwise prepared in accordance with the SEC regulations regarding disclosure of oil and gas reserve information. There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of the Company and the Reserve Engineers. The reserve data set forth in this Prospectus represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors, such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors, such as an increase or decrease in product prices that renders production of such reserves more or less economic, may justify revision of such estimates. Accordingly, reserve estimates are different from the quantities of oil and gas that are ultimately recovered. See "Risk Factors -- Estimates of Oil and Gas Reserves." 53 OIL AND GAS PRODUCTION, AVERAGE SALES PRICES AND PRODUCTION COSTS The following table sets forth the quantities of oil and gas produced by the Company from wells located onshore in the continental United States and offshore in Alabama, Louisiana, Texas and federal waters. SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------- ------------------------ 1997 1996 1996 1995 1994 ------ ------ ------ ------ ------ PRODUCTION DATA: Oil (MBbls) .................. 237 302 585 594 364 Gas (MMcf) ................... 6,448 2,912 6,269 6,694 4,076 Total production (MMcfe) ..... 7,869 4,725 9,781 10,261 6,260 The following table sets forth the Company's average sales prices per Bbl of oil and per Mcf of gas and the average production costs (including severance taxes on production and property and transportation charges) per Mcfe for the periods indicated. SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------- ------------------------ 1997 1996 1996 1995 1994 ------ ------ ------ ------ ------ AVERAGE SALES PRICE PER UNIT: Oil (per Bbl) ............. $19.36 $18.12 $18.27 $16.68 $15.63 Gas (per Mcf) ............. 2.52 2.33 2.40 1.96 2.00 Total production (per Mcfe) 2.65 2.59 2.63 2.24 2.21 PRODUCTIVE WELLS AND ACREAGE The following table sets forth the wells drilled and completed by the Company during the periods indicated. All such wells were drilled in the continental United States including federal and state waters in the Gulf of Mexico. YEARS ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994(1) ------------- ------------- ------------- GROSS NET GROSS NET GROSS NET ----- ----- ----- ----- ----- ----- Development: Oil .......................... 1 .09 6 .65 7 .36 Gas .......................... 2 1.52 1 .13 -- -- Non-Productive ............... -- -- -- -- 6 .42 ----- ----- ----- ----- ----- ----- Total ...................... 3 1.61 7 .78 13 .78 ===== ===== ===== ===== ===== ===== Exploration: Oil .......................... -- -- 1 .24 -- -- Gas .......................... 1 1.0 -- -- -- -- Non-Productive ............... -- -- -- -- 1 .24 ----- ----- ----- ----- ----- ----- Total ...................... 1 1.0 1 .24 1 .24 ===== ===== ===== ===== ===== ===== - ---------- (1) Drilling results prior to September 16, 1994 represent the combined drilling results of the Company's predecessors. The Company owned working and royalty interests in approximately 894 gross (35.9 net) producing oil and 316 gross (21.2 net) producing gas wells as of December 31, 1996. A well is categorized as an oil well or a gas well based upon the ratio of oil to gas reserves on a Mcfe basis. However substantially all of the Company's wells produce both oil and gas. 54 The following table shows the approximate developed and undeveloped (gross and net) leasehold acreage of the Company as of December 31, 1996. LEASEHOLD ACREAGE --------------------------------------------- DEVELOPED UNDEVELOPED --------------------- --------------------- STATE GROSS NET GROSS NET - -------------------------------- --------- --------- --------- --------- Alabama ........................ 13,136 12,210 944 190 California ..................... -- -- 480 480 Louisiana ...................... 46,958 5,321 8,766 6,268 Michigan ....................... 4,273 185 -- -- Mississippi .................... 3,323 1,433 564 564 Oklahoma ....................... 8,987 973 -- -- Texas .......................... 12,390 761 -- -- Utah ........................... 2,560 295 -- Federal Waters ................. 54,962 34,553 96,075 24,019 --------- --------- --------- --------- Total ...................... 146,589 55,731 106,829 31,521 ========= ========= ========= ========= As of December 31, 1996, the Company owned various royalty and overriding royalty interests in 1,366 net developed acres and 6,953 undeveloped acres. In addition, the Company owned 5,464 developed and 134,536 undeveloped mineral acres. MAJOR CUSTOMERS For the year ended December 31, 1996, Northridge Energy Marketing Company, Williams Energy Services, Inc. and Sonat Gas Marketing Co. L.P. purchased 21%, 27% and 14%, respectively, of the Company's crude oil and natural gas production. Northridge purchased crude oil production from the Black Bay Complex, Williams Energy Services, Inc. purchased natural gas from the North Dauphin Island Field, and Sonat Gas purchased natural gas from Callon owned interests in federal OCS leases, Chandeleur Block 40, Main Pass 163 and Main Pass 164/165. Because of the nature of oil and gas operations and the marketing of production, the Company believes that the loss of these customers would not have a material adverse impact on the Company's ability to sell its products. TITLE TO PROPERTIES Callon believes that it has satisfactory title to the Company's oil and gas properties in accordance with standards generally accepted in the oil and gas industry, subject to the mortgages under the Credit Facility and such exceptions which, in the opinion of the Company, are not so material as to detract substantially from the use or value of such properties. In addition to the mortgages, the Company's properties are typically subject, in one degree or another, to one or more of the following: royalties and other burdens and obligations, express or implied, under oil and gas leases; overriding royalties and other burdens created by the Company or its predecessors in title; a variety of contractual obligations (including, in some cases, development obligations) arising under operating agreements, farmout agreements, production sales contracts and other agreements that may affect the properties or their titles; back-ins and reversionary interests arising under purchase agreements and leasehold assignments; liens that arise in the normal course of operations, such as those for unpaid taxes, statutory liens securing obligations to unpaid suppliers and contractors and contractual liens under operating agreements; pooling, unitization and communitization agreements, declarations and orders; and easements, restrictions, rights-of-way and other matters that commonly affect oil and gas producing property. To the extent that such burdens and obligations affect the Company's rights to production revenues, they have been taken into account in 55 calculating the Company's net revenue interests and in estimating the size and value of the Company's reserves. Callon believes that the burdens and obligations affecting the Company's properties are conventional in the industry for properties of the kind owned by the Company. OTHER PROPERTIES The Company's headquarters are located in Natchez, Mississippi, in approximately 51,500 square feet of owned space. The Company also maintains field offices in the area of the major fields in which Callon operates properties or has a significant interest, which are owned or leased. EMPLOYEES The Company had 142 employees as of June 30, 1997, none of whom are currently represented by a union. The Company considers itself to have good relations with its employees. The Company employs ten petroleum engineers and four petroleum geoscientists. LITIGATION The Company is a defendant in various legal proceedings and claims which arise in the ordinary course of Callon's business. Callon does not believe the ultimate resolution of such actions will have a material effect on the Company's financial position or results of operations. COMPETITION, MARKETS AND REGULATIONS COMPETITION The oil and gas industry is highly competitive in all of its phases. Callon encounters competition from other oil and gas companies in all areas of the Company's operations, including the acquisition of reserves and producing properties and the marketing of oil and gas. Many of these companies possess greater financial and other resources than the Company. Competition for producing properties is affected by the amount of funds available to the Company, information about a producing property available to the Company and any standards established by the Company for the minimum projected return on investment. Because gathering systems and related facilities are the only practical method for the intermediate transportation of gas, competition for gas delivery is presented by other pipelines and gas gathering systems. Competition may also be presented by alternate fuel sources. MARKETS Callon's ability to market oil and gas from the Company's wells depends upon numerous factors beyond the Company's control, including the extent of domestic production and imports of oil and gas, the proximity of the gas production to gas pipelines, the availability of capacity in such pipelines, the demand for oil and gas by utilities and other end users, the availability of alternate fuel sources, the effects of inclement weather, state and federal regulation of oil and gas production and federal regulation of gas sold or transported in interstate commerce. No assurances can be given that Callon will be able to market all of the oil or gas produced by the Company or that favorable prices can be obtained for the oil and gas Callon produces. The supply of gas capable of being produced has exceeded demand in recent years, as a result of decreased demand for gas in response to economic factors, conservation, lower prices for alternate energy sources and other factors. As a result of this excess supply of gas, gas producers have experienced increased competitive pressure and lower prices. Substantially all of the gas produced by the Company is sold at market responsive prices. 56 In view of the many uncertainties affecting the supply of and demand for oil, gas and refined petroleum products, the Company is unable to predict future oil and gas prices and demand or the overall effect such prices and demand will have on the Company. Callon does not believe that the loss of any of the Company's oil purchasers would have a material adverse effect on the Company's operations. Additionally, since substantially all of the Company's gas sales are on the spot market, the loss of one or more gas purchasers should not materially and adversely affect the Company's financial condition. The marketing of oil and gas by Callon can be affected by a number of factors which are beyond the Company's control, the exact effects of which cannot be accurately predicted. FEDERAL REGULATIONS SALES OF GAS. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated prices for all "first sales" of gas. Thus, all sales of gas by the Company may be made at market prices, subject to applicable contract provisions. TRANSPORTATION OF GAS. The Company's sales of natural gas are affected by the availability, terms and cost of transportation. The rates, terms and conditions applicable to the interstate transportation of gas by pipelines are regulated by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act ("NGA"), as well as under section 311 of the Natural Gas Policy Act ("NGPA"). Since 1985, the FERC has implemented regulations intended to increase competition within the gas industry by making gas transportation more accessible to gas buyers and sellers on an open-access, non-discriminatory basis. Most recently, in Order No. 636, et seq., the FERC promulgated an extensive set of new regulations requiring all interstate pipelines to "restructure" their services. The most significant provisions of Order No. 636 require that interstate pipelines provide firm and interruptible transportation solely on an "unbundled" basis, separate from their sales service, and convert each pipeline's bundled firm city-gate sales service into unbundled firm transportation service and require that pipelines provide firm and interruptible transportation service on a basis that is equal in quality for all gas supplies, whether purchased from the pipeline or elsewhere. The order also recognized that the elimination of city-gate sales service and the implementation of unbundled transportation service would result in considerable costs being incurred by the pipelines. Therefore, Order No. 636 provided mechanisms for the recovery by pipelines from present, former and future customers of certain types of "transition" costs likely to occur due to these new regulations. In subsequent orders, the FERC and the appellate court have substantially upheld the requirements imposed by Order No. 636, although numerous court appeals in which parties have sought review of separate FERC orders implementing Order No. 636 on individual pipeline systems are still pending. In many instances, the result of Order No. 636 and related initiatives has been to substantially reduce or eliminate the interstate pipelines' traditional role as wholesalers of natural gas in favor of providing only storage and transportation services. The FERC has announced several important transportation-related policy statements and proposed rule changes, including a statement of policy and request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology to establish the rates interstate pipelines may charge for their services. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. While the changes being considered would affect the Company only indirectly, they are intended to further enhance competition in natural gas markets. The Company cannot predict what further action the FERC will take on these matters; however, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers. 57 SALES AND TRANSPORTATION OF OIL. Sales of oil and condensate can be made by the Company at market prices not subject at this time to price controls. The price that the Company receives from the sale of these products will be affected by the cost of transporting the products to market. As required by the Energy Policy Act of 1992, the FERC has revised its regulations governing the rates that may be charged by oil pipelines. The new rules, which were effective January 1, 1995, provide a simplified, generally applicable method of regulating such rates by use of an indexing system for setting transportation rate ceilings. In certain circumstances, the new rules permit oil pipelines to establish rates using traditional cost of service and other methods of rate making. The effect that these new rules may have on the cost of moving the Company's products to market cannot yet be determined. LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the area of gas regulation. There are legislative proposals pending in the state legislatures of various states, which, if enacted, could significantly affect the petroleum industry. At the present time it is impossible to predict what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on the Company's operations. FEDERAL, STATE OR INDIAN LEASES. In the event the Company conducts operations on federal, state or Indian oil and gas leases, such operations must comply with numerous regulatory restrictions, including various nondiscrimination statutes, and certain of such operations must be conducted pursuant to certain on-site security regulations and other appropriate permits issued by the Bureau of Land Management ("BLM") or, in the case of the Company's OCS leases in federal waters, Minerals Management Service ("MMS") or other appropriate federal or state agencies. The Company's OCS leases in federal waters are administered by the MMS and require compliance with detailed MMS regulations and orders. The MMS has promulgated regulations implementing restrictions on various production-related activities, including restricting the flaring or venting of natural gas. In addition, the MMS has proposed to amend its regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Under certain circumstances, the MMS may require any Company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition and operations. The MMS proposes to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. Among other matters, this proposed rule would amend the valuation procedure for the sale of federal royalty oil. The Company cannot predict what action the MMS will take on this matter, nor can it predict at this stage of the proceeding how the Company might be affected by this proposed amendment to the MMS' royalty regulations. The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or indirect ownership of any interest in federal onshore oil and gas leases by a foreign citizen of a country that denies "similar or like privileges" to citizens of the United States. Such restrictions on citizens of a "non-reciprocal" country include ownership or holding or controlling stock in a corporation that holds a federal onshore oil and gas lease. If this restriction is violated, the corporation's lease can be canceled in a proceeding instituted by the United States Attorney General. Although the regulations of the BLM (which administers the Mineral Act) provide for agency designations of non-reciprocal countries, there are presently no such designations in effect. The Company owns interests in numerous federal onshore oil and gas leases. It is possible that the Common Stock will be acquired by citizens of foreign countries, which at some time in the future might be determined to be non-reciprocal under the Mineral Act. STATE REGULATIONS Most states regulate the production and sale of oil and gas, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. The rate of production may be regulated and the maximum 58 daily production allowable from both oil and gas wells may be established on a market demand or conservation basis or both. The Company owns certain natural gas pipeline facilities that it believes meet the traditional tests the FERC has used to establish a pipeline's status as a gatherer not subject to FERC jurisdiction under the NGA. State regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Natural gas gathering may receive greater regulatory scrutiny at both state and federal levels in the post-Order No. 636 environment. The Company may enter into agreements relating to the construction or operation of a pipeline system for the transportation of gas. To the extent that such gas is produced, transported and consumed wholly within one state, such operations may, in certain instances, be subject to the jurisdiction of such state's administrative authority charged with the responsibility of regulating intrastate pipelines. In such event, the rates which the Company could charge for gas, the transportation of gas, and the construction and operation of such pipeline would be subject to the rules and regulations governing such matters, if any, of such administrative authority. ENVIRONMENTAL REGULATIONS GENERAL. The Company's activities are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. Activities of the Company with respect to gas facilities, including the operation and construction of pipelines, plants and other facilities for transporting, processing, treating or storing gas and other products, are also subject to stringent environmental regulation by state and federal authorities including the Environmental Protection Agency ("EPA"). Risks are inherent in oil and gas exploration and production operations, and no assurance can be given that significant costs and liabilities will not be incurred in connection with environmental compliance issues; nevertheless, the Company believes that, absent the occurrence of an extraordinary event such as those noted under "Risk Factors," compliance with existing federal, state and local laws, rules and regulations regulating the release of materials into the environment or otherwise relating to the protection of the environment will not have a material adverse effect upon the capital expenditures, earnings or the competitive position of the Company or its operations. The Company cannot predict what effect future regulation or legislation, enforcement policies issued thereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company's operations could have on its activities. SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has in the past owned or leased, numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company believes it has utilized operating and waste disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under the properties owned or leased by the Company or on or under locations where such wastes have been taken for disposal. In addition, many of these properties have been owned or operated by third parties. The Company had no control over such parties' treatment of hydrocarbons or other solid wastes and the manner in which such substances may have been disposed or released. State and federal laws applicable to oil and gas wastes and properties have gradually become stricter over time. Under these new laws, the Company could be required to remove or remediate previously disposed wastes (including wastes disposed or released by prior owners or operators) or property contamination (including groundwater contamination by prior owners or operators) or to perform remedial plugging operations to prevent future contamination. The Company generates wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA and various 59 state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes. Furthermore, it is possible that certain wastes generated by the Company's oil and gas operations that are currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes" under RCRA or other applicable statutes, and therefore be subject to more rigorous and costly operating and disposal requirements. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the owner and operator of a disposal site where a release occurred and any company that disposed or arranged for the disposal of the hazardous substance released at the site. CERCLA also authorizes the EPA and, in some cases, third parties, to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs of such action. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances." The Company may also be an owner of sites on which "hazardous substances" have been released. The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. OIL POLLUTION ACT. The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a variety of regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in United States waters. A "responsible party" includes the owner or operator of an onshore facility, vessel or pipeline, or the lessee or permittee of the area in which an offshore facility is located. The OPA assigns liability to each responsible party for oil removal costs and a variety of public and private damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits also do not apply. Few defenses exist to the liability imposed by the OPA. The failure to comply with OPA requirements may subject a responsible party to civil or even criminal liability. The OPA also imposes ongoing requirements on a responsible party, including proof of financial responsibility to cover at least some costs in a potential spill. Certain amendments to the OPA that were enacted in 1996 require owners and operators of offshore facilities that have a worst case oil spill potential of more than 1,000 barrels to demonstrate financial responsibility in amounts ranging from $10 million in specified state waters to $35 million in federal OCS waters, with higher amounts, up to $150 million in certain limited circumstances, where the MMS believes such a level is justified by the risks posed by the quantity or quality of oil that is handled by the facility. On March 25, 1997, the MMS promulgated a proposed rule implementing these OPA financial responsibility requirements. The Company believes that it currently has established adequate proof of financial responsibility for its offshore facilities. However, the Company cannot predict whether the financial responsibility requirements under the OPA amendments or the proposed rule will result in the imposition of substantial additional annual costs to the Company in the future or otherwise materially adversely affect the Company. The impact of the financial responsibility requirements is not expected to be any more burdensome to the Company than it will be to other similarly or less capitalized owners or operators in the Gulf of Mexico. PROHIBITION ON DISCHARGES OF PRODUCED WATER. In connection with its offshore exploration and production operations offshore Louisiana, the Company is subject to a state-wide prohibition, effective July 1, 1997, against the discharge of produced water into state coastal waters. However, the Company has received an extension of time for complying with this prohibition until September 30, 1998 for its facilities at Chandeleur Block 25 and Main Pass Block 35, and until October 31, 1998 for its facilities at 60 Black Bay Complex. The Company believes that it will be in compliance with the prohibition prior to expiration of the applicable deadlines. AIR EMISSIONS. The operations of the Company are subject to local, state and federal laws and regulations for the control of emissions from sources of air pollution. Administrative enforcement actions for failure to comply strictly with air regulations or permits may result in the payment of civil penalties and, in extreme cases, the shutdown of air emission sources. OSHA AND OTHER REGULATIONS. The Company is subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of CERCLA and similar state statutes require the Company to organize and/or disclose information about hazardous materials used or produced in the Company's operations. The Company believes that it is in substantial compliance with these applicable requirements. 61 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The Company currently has a Board of Directors composed of seven members. In accordance with the Certificate of Incorporation of the Company, as amended (the "Charter"), the members of the Board of Directors are divided into three classes, Class I, Class II and Class III, and are elected for a full term of office expiring at the third succeeding annual stockholders' meeting following their election to office and when a successor is duly elected and qualified. The terms of office of the Class I, Class II and Class III directors expire at the annual meeting of stockholders in 1998, 1999 and 2000, respectively. The Charter also provides that such classes shall be as nearly equal in number as possible. The directors and executive officers of the Company are as follows: NAME ................ AGE PRESENT COMPANY POSITION - --------------------- --- --------------------------------------------------- Fred L. Callon ...... 47 Director; President; Chief Executive Officer (Class III) John S. Callon ...... 77 Director; Chairman of the Board (Class II) Dennis W. Christian . 51 Director; Senior Vice President; Chief Operating Officer (Class III) Robert A. Stanger ... 57 Director (Class I) H. Michael Tatum .... 68 Vice President; Secretary Kathy G. Tilley ..... 51 Vice President John C. Wallace ..... 59 Director (Class I) B.F. Weatherly ...... 53 Director (Class II) John S. Weatherly ... 45 Senior Vice President; Chief Financial Officer; Treasurer Richard O. Wilson ... 67 Director (Class I) All of the directors, other than Messrs. Stanger and Wilson, have served as directors since the Company's inception in 1994. Messrs. Stanger and Wilson have served as directors since March 2, 1995. The following is a brief description of the background and principal occupation of each director and executive officer. Fred L. Callon is President and Chief Executive Officer of the Company and Callon Petroleum Operating. Prior to January 1997, he was President and Chief Operating Officer of the Company and had held that position with the Company or its predecessors since 1984. He has been employed by the Company or its predecessors since 1976. He graduated from Millsaps College in 1972 and received his M.B.A. degree from the Wharton School of Finance in 1974. Following graduation and until his employment by Callon Petroleum Operating, he was employed by Peat, Marwick, Mitchell & Co., certified public accountants. He is a certified public accountant and is a member of the American Institute of Certified Public Accountants and the Mississippi Society of Certified Public Accountants. He is the nephew of John S. Callon. John S. Callon is Chairman of the Board of Directors of the Company and Callon Petroleum Operating. Effective January 2, 1997, John S. Callon retired from his position as Chief Executive Officer of the Company. Mr. Callon founded the Company's predecessors in 1950, and has held an executive office with the Company or its predecessors since that time. He has served as a director of the Mid-Continent Oil and Gas Association and as the President of the Association's Mississippi-Alabama Division. He has also served as Vice President for Mississippi of the Independent Petroleum Association of America. He is a member of the American Petroleum Institute. Mr. Callon is the uncle of Fred L. Callon. 62 Dennis W. Christian is Senior Vice President and Chief Operating Officer for the Company and Callon Petroleum Operating. Prior to January 1977, he was Senior Vice President of Operations and Acquisitions and had held that or similar positions with the Company or its predecessors since 1981. Prior to joining Callon Petroleum Operating, he was resident manager in Stavanger, Norway, for Texas Eastern Transmission Corporation. Mr. Christian received his B.S. degree in petroleum engineering in 1969 from Louisiana Polytechnic Institute. His previous experience includes five years with Chevron U.S.A. Inc. Robert A. Stanger has been the managing general partner since 1978 of Robert A. Stanger & Company, Inc., a Shrewsbury, New Jersey-based firm engaged in publishing financial material and providing investment banking services to the real estate and oil and gas industries. He is a director of Citizens Utilities, Stamford, Connecticut, a provider of telecommunications, electric, gas, and water services. Previously, Mr. Stanger was Vice President of Merrill Lynch & Co. He received his B.A. degree in economics from Princeton University in 1961. Mr. Stanger is a member of the National Association of Securities Dealers, the New York Society of Security Analysts, the International Association of Financial Planners, and the Investment Program Association. H. Michael Tatum is Vice President and Secretary for the Company and Callon Petroleum Operating and is responsible for management of administrative matters. Mr. Tatum has held this position with the Company or its predecessors since 1976, and has been employed by Callon Petroleum Operating since 1969. He graduated from Southern Methodist University in 1967 and is a member of the American Society of Corporate Secretaries and the Society for Human Resource Management. Kathy G. Tilley is Vice President of Acquisitions and New Ventures for the Company and Callon Petroleum Operating and has held that position since April 1996. She was employed by Callon Petroleum Operating in December 1989 as manager of acquisitions and prior thereto, held that or similar positions as a consultant from 1981. Ms. Tilley received her B.A. degree in economics from Louisiana State University in 1967. John C. Wallace is an executive officer of NOCO Management Ltd., the general partner of the general partner of NOCO. He is a Chartered Accountant having qualified with Coopers & Lybrand in Canada in 1963, after which he joined Baring Brothers & Co., Limited in London England. For more than the last ten years, he has served as Chairman of Fred. Olsen Ltd., a London-based corporation which he joined in 1968, where he has specialized in the business of shipping and property development. He is a director of Harland & Wolff PLC, Belfast, A/S Ganger Rolf and A/S Bonheur, Oslo, publicly traded shipping companies. He is also director of Belmont Constructors, Inc., a Houston, Texas-based industrial contractor associated with Fred. Olsen Interests, and other companies associated with Fred. Olsen Interests. B. F. Weatherly is a principal of Amerimark Capital Group, Houston, Texas, an investment banking firm. He is an executive officer of NOCO Management Ltd., the general partner of the general partner of NOCO. Prior to September 1996, he was Executive Vice President, Chief Financial Officer and a director of Belmont Constructors, Inc., a Houston, Texas-based industrial contractor associated with Fred. Olsen Interests. From 1989 to 1991, he was partner in Amerimark Capital Corp., a Dallas investment banking firm. He holds a Master of Accountancy degree from the University of Mississippi. He has previously been associated with Arthur Andersen LLP, and has served as a Senior Vice President of Weatherford International, Inc. B. F. Weatherly and John S. Weatherly are brothers. John S. Weatherly is Senior Vice President, Chief Financial Officer and Treasurer for the Company and Callon Petroleum Operating. Prior to April 1996, he was Vice President, Chief Financial Officer and Treasurer of the Company and had held those positions since 1983. Prior to joining Callon Petroleum Operating in August 1980, he was employed by Arthur Andersen LLP as Audit Manager in the 63 Jackson, Mississippi office. He received his B.B.A. degree in accounting in 1973 and his M.B.A. degree in 1974 from the University of Mississippi. He is a certified public accountant and a member of the American Institute of Certified Public Accountants and the Mississippi Society of Certified Public Accountants. John S. Weatherly and B. F. Weatherly are brothers. Richard O. Wilson for the past ten years has been Chairman of O.G.C. International P.L.C., a Scottish public company engaged in the offshore oil and gas maintenance and construction business headquartered in Aberdeen, Scotland. For the past 13 years, Mr. Wilson has also been Chairman of Dolphin A/S, Stavanger, Norway, and Dolphin Drilling Ltd., Aberdeen, Scotland, both offshore drilling companies owned by Fred. Olsen Interests. He is also Chairman of Belmont Constructors, Inc., a Houston, Texas-based industrial contractor associated with Fred. Olsen Interests. He holds a B.S. degree in civil engineering from Rice University. Mr. Wilson is a Fellow in the American Society of Civil Engineers, a member of the Institute of Petroleum, London, England, and the Cosmos Club, Washington, D.C. Messrs. John S. Callon and Fred L. Callon, as nominees of the Callon Family, and Messrs. B. F. Weatherly and John C. Wallace, as nominees of NOCO, were elected to the Board of Directors pursuant to the terms of a Stockholders' Agreement dated September 16, 1994. See "Principal Stockholders--Stockholders' Agreement." All officers and directors of the Company are United States citizens, except Mr. Wallace, who is a citizen of Canada. COMPENSATION OF DIRECTORS The Company's Board of Directors holds four regular meetings each year. During 1997, as compensation for all services as a director of the Company, each non-employee director will be paid $10,000. Non-employee directors are also granted, upon their initial election or appointment, options to purchase 5,000 shares of Common Stock pursuant to the 1996 Stock Incentive Plan (the "1996 Plan") and will be granted options for an additional 5,000 shares for each year in which they continue to serve as directors. See "Management -- 1996 Plan." On August 23, 1996, the Compensation Committee authorized a one-time grant to each non-employee director of an option to purchase 20,000 shares of Common Stock under the 1996 Stock Incentive Plan, which was approved by the Company's stockholders at the 1997 annual meeting of stockholders. 64 EXECUTIVE COMPENSATION The following table sets forth for the past three years information with respect to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as to whom the total salary and bonus for the year ended December 31, 1996 exceeded $100,000. Such amounts include compensation from the Company's predecessors for the year ended December 31, 1994. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION --------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------- --------------------- ------ OTHER ALL ANNUAL RESTRICTED SECURITIES OTHER NAME AND COMPEN- STOCK UNDERLYING LTIP COMPEN- PRINCIPAL SALARY BONUS SATION AWARD(S) OPTIONS PAYOUTS SATION POSITIONS(1) YEAR ($) ($)(2) $(3) ($) (#) ($) ($)(5) - ----------------------- ---- ------- ------- ------ ------- ---------- ------ ------ John S. Callon ........ 1996 195,670 172,500 -- -- -- -- 12,715 Chairman of the Board 1995 190,000 161,500 -- -- -- -- 10,393 1994 168,000 95,000 -- -- 90,000 -- 9,565 Fred L. Callon ........ 1996 182,761 152,500 -- (4) 75,000 -- 12,928 President and Chief . 1995 170,000 144,500 -- -- -- -- 10,288 Executive Officer ... 1994 150,000 85,000 -- -- 80,000 -- 9,096 Dennis W. Christian ... 1996 160,808 141,000 -- (4) 70,000 -- 11,362 Senior Vice President 1995 150,000 127,500 -- -- -- -- 9,080 and Chief Operating . 1994 118,450 140,000 -- -- 60,000 -- 7,186 Officer John S. Weatherly ..... 1996 143,469 131,000 -- (4) 65,000 -- 10,234 Senior Vice President 1995 130,000 110,500 -- -- -- -- 7,873 and Chief Financial . 1994 100,000 107,500 -- -- 60,000 -- 6,068 Officer and Treasurer Kathy G. Tilley ....... 1996 119,032 105,500 -- (4) 55,000 -- 8,475 Vice President ...... 1995 100,008 85,000 -- -- -- -- 5,933 1994 96,626 78,000 -- -- 30,000 -- 5,739
- ---------- (1) John S. Callon resigned as Chief Executive Officer of the Company on January 2, 1997. Fred L. Callon was appointed Chief Executive Officer of the Company and Dennis W. Christian was appointed Chief Operating Officer of the Company (a position previously held by Fred L. Callon) on January 2, 1997. (2) The amount for 1996 represents that portion of bonuses declared in March 1996 and earned by service during 1996. Bonuses were declared in March 1997, a portion of which were attributable to 1996 and are reflected herein. These amounts also include amounts deferred. (3) Amounts in the column do not include perquisites and other personal benefits, securities or property, unless the annual amount of such compensation exceeds the lesser of $50,000 or 10% of the total of annual salary and bonus reported for the named executive. (4) On August 23, 1996, the Board of Directors authorized the following performance share awards upon approval of the 1996 Plan by the Company's Shareholders at the 1997 annual meeting: Fred L. Callon, 60,000 shares; Dennis W. Christian, 55,000 shares; John S. Weatherly, 50,000 shares; Kathy G. Tilley, 45,000 shares. The 1996 Plan was approved at the 1997 annual meeting, and such shares were awarded as of the date of the annual meeting. The performance shares will vest on January 1, 2001 and are subject to forfeiture upon certain termination of employment events. See "-- 1996 Plan." (5) Amounts reflect the Company's contribution in 1996, 1995 and 1994 of $12,043, $9,500 and $8,400 to John S. Callon's 401(k) savings plan and payment of $672, $893 and $1,165 term life insurance premiums; $11,446, $8,500 and $7,500 to Fred L. Callon's 401(k) savings plan and payment of $1,482, $1,788 and $1,596 term life insurance premiums; $10,060, $7,500 and $5,923 to Mr. Christian's 401(k) savings plan and payment of $1,302, $1,580 and $1,263 term life insurance premiums; $9,077, $6,500 and $5,000 to Mr. Weatherly's 401(k) savings plan and payment of $1,157, $1,373 and $1,068 term life insurance premiums; 65 and $7,509, $5,000 and $4,831 to Ms. Tilley's 401(k) savings plan and payment of $966, $933 and $908 term life insurance premiums. RECENT COMPENSATION AWARDS On August 23, 1996, the Compensation Committee granted stock options to the Company's executive officers and senior management under the 1996 Plan. Pursuant to the awards, Fred L. Callon was granted an option to purchase 75,000 shares of Common Stock; Dennis W. Christian was granted an option to purchase 70,000 shares of Common Stock; H. Michael Tatum was granted an option to purchase 15,000 shares of Common Stock; Kathy G. Tilley was granted an option to purchase 55,000 shares of Common Stock; and John S. Weatherly was granted an option to purchase 65,000 shares of Common Stock. In addition, other members of senior management were granted options to purchase an aggregate 170,000 shares of Common Stock. All of such options were granted at an exercise price of $12.00 per share, the fair market value of the Common Stock on the date of grant, and 20% of each option becomes exercisable on January 1 of each succeeding year, beginning January 1, 1997. Unvested options are subject to forfeiture upon certain termination events. The Compensation Committee also awarded performance shares under the 1996 Plan to the Company's executive officers on August 23, 1996. Fred L. Callon was awarded 60,000 performance shares; Dennis W. Christian was awarded 55,000 performance shares; H. Michael Tatum was awarded 15,000 performance shares; Kathy G. Tilley was awarded 45,000 performance shares; and John S. Weatherly was awarded 50,000 performance shares. All of the performance shares granted vest in whole on January 1, 2001, and are subject to forfeiture upon certain termination of employment events. EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Fred L. Callon entered into an employment agreement with the Company effective September 1, 1996 with a term ending December 31, 2000. Pursuant to this agreement, Fred L. Callon will receive an annual base salary of not less than $200,000 per annum, subject to increase by the Board of Directors or Compensation Committee from time to time. The employment agreement provides that he will be entitled to participate in any incentive compensation program established by the Company for its executive officers. Fred L. Callon also will receive life insurance, participate in the group medical and disability insurance of the Company and receive a monthly automobile allowance under the agreement as well as fuel, oil, maintenance and insurance costs for an automobile. The agreement will be terminated prior to its term by his death or disability or for cause. If the agreement is terminated because of death or disability, the compensation payments continue for the term of the agreement, reduced by the amount of disability insurance paid. If the agreement is terminated for cause, the Company is not required to make additional payments. "Cause" is defined generally as any of the following, as determined by a majority vote of the Board of Directors: intentional or continual neglect of duties, conviction of a felony, or failure or refusal to perform duties in accordance with the employment agreement. The employment agreement further provides that he may terminate the agreement for "good reason," which is defined generally as (a) failure to re-elect him to his office, (b) significant change in his duties, (c) reduction or failure to provide typical increases in his salary following a change in control of the Company, (d) his relocation to an office outside the Natchez, Mississippi area, (e) breach of the agreement by the Company, or (f) failure to maintain his level of participation in the compensation and benefit plans of the Company. If Fred L. Callon terminates his employment for good reason after a change in control, he is entitled to a lump sum payment of three times his targeted annual compensation for that year. The lump sum payment will be reduced to the maximum amount permitted under the Internal Revenue Code of 1986, as amended (the "Code"), that does not constitute a parachute payment unless he elects to receive the full amount, in which case the Company would be liable for the resulting federal excise tax. The Code defines a parachute payment as any severance payment the aggregate present value 66 of which is in excess of three times the employee's average annual compensation over the past five years. If the termination for good reason occurs otherwise than following a change in control, he is entitled to severance pay in the amount that would have been paid under the employment agreement had it not been terminated. Pursuant to the agreement, a "change in control" occurs, if: (i) any person or group of persons acting in concert (within the meaning of Section 13(d) of the Exchange Act) shall have become the beneficial owner of a majority of the outstanding common stock of the Company (other than pursuant to the Stockholders' Agreement), (ii) the stockholders of the Company cause a change in a majority of the members of the board within a twelve-month period, or (iii) the Company or its stockholders enter into an agreement to dispose of all or substantially all of the assets or outstanding capital stock of the Company. Dennis W. Christian and John S. Weatherly entered into employment agreements with the Company effective September 1, 1996 and ending December 31, 2000. The agreements provide that Mr. Christian and Mr. Weatherly will receive an annual base salary of at least $175,000 and $165,000, respectively, and that they are entitled to participate in any incentive compensation program established by the Company for its executive officers. Each agreement terminates upon death or disability or for cause. If either agreement is terminated because of death or disability, compensation payments continue for a period of two years from the date of termination, reduced by the amount of disability insurance paid. If either agreement is terminated for cause, the Company is not required to make any additional payments. "Cause" is defined generally as any of the following, as determined by a majority vote of the Board of Directors: intentional or continual neglect of duties, conviction of a felony, or failure or refusal to perform duties in accordance with the employment agreement. On June 19, 1996, the Company entered into a consulting agreement with John S. Callon which became effective January 2, 1997, the day he retired as Chief Executive Officer of the Company. Pursuant to the agreement, John S. Callon is to provide consulting services to the Company on matters pertaining to corporate or financial strategy, investor relations and public/private financing opportunities for no more than 20 hours per month, ten months a year. The agreement remains in effect from the effective date until December 31, 2001, subject to renewal for succeeding five years periods unless earlier terminated. As compensation for his services under the agreement, John S. Callon will be paid a fee ("Consultation Fee") of not less than $190,000 per year increased annually based upon the change in the Consumer Price Index, as adjusted for inflation. In addition, he will remain eligible to participate in the Company's major medical and disability coverage, and will be entitled to participate in all other employee benefit plans (other than a cash bonus program) provided to full-time executives of the Company. As an inducement for entering into the agreement, John S. Callon was granted 25,000 shares of Common Stock, 20% of which vests on each of the first five anniversaries of the effective date of the agreement. Upon termination of the agreement other than for cause, John S. Callon or his spouse shall be entitled to receive a termination payment equal to the Consultation Fee, as adjusted for inflation, to be paid annually until the later of the death of John S. Callon (if applicable) or his spouse. In lieu of the termination payment, John S. Callon or his spouse may elect to receive, subject to the approval of the Board of Directors a lump sum payment of $1.5 million. In addition, if the agreement terminates due to the Company's breach, John S. Callon and his spouse shall be entitled to liquidated damages. The Company may terminate the agreement for cause. "Cause" is defined generally in the agreement as willful misconduct or intentional and continual neglect of duties which has materially and adversely affected the Company. Pursuant to the 1996 Plan and the 1994 Plan (as defined below), in the case of a merger or consolidation where the Company is not the surviving entity, or if the Company is about to sell or otherwise dispose of substantially all of its assets while unvested options remain outstanding, the Compensation Committee or other plan administrator may, in its discretion and without stockholder approval, declare some or all options exercisable in full before or simultaneously with such merger, consolidation or sale of assets without regard for prescribed waiting periods. Alternatively, the 67 Compensation Committee or other plan administrator may cancel all outstanding options provided option holders are given notice and a period of 30 days prior to the merger, consolidation or sale to exercise the options in full. INCENTIVE PLANS The Company currently maintains two stock options plans for employees pursuant to which options may be granted for the purchase of Common Stock: the 1994 Callon Petroleum Company Stock Incentive Plan (the "1994 Plan") and the 1996 Callon Petroleum Company Stock Incentive Plan (the "1996 Plan"). The Company in the past has used and will continue to use, stock options and performance share grants to attract and retain key employees in the belief that employee stock ownership and stock related compensation devices encourage a community of interest between employees and stockholders. No additional awards may be granted under the 1994 Plan. As of June 30, 1997, there were 145,000 shares available for grant under the 1996 Plan. 1994 PLAN. The 1994 Plan was adopted on June 30, 1994. Pursuant to the 1994 Plan, 600,000 shares of Common Stock were reserved for issuance upon the exercise of options or as performance shares. The 1994 Plan is administered by the Compensation Committee of the Board of Directors. Members of the Compensation Committee currently are Messrs. Stanger, Wallace, B. F. Weatherly and Wilson. No stock options were granted under the 1994 Plan during 1995 and 1996, other than automatic grants to non-employee directors. 1996 PLAN. On September 26, 1996, the Board of Directors of the Company approved and adopted the 1996 Plan and the Plan was approved by the stockholders of the Company at the 1997 annual meeting. Individual awards under the 1996 Plan may take the form of one or more of (i) incentive stock options; (ii) non-qualified stock options; or (iii) performance shares. The 1996 Plan is administered by a plan administrator which may be either (i) the Board of Directors of the Company; (ii) any duly constituted committee of the Board of Directors consisting of at least two non-employee directors; or (iii) any other duly constituted committee of the Board of Directors. The plan administrator will select the officers, key employees and consultants who will receive awards and the terms and conditions of those awards. The maximum number of shares of Common Stock that may be subject to outstanding awards may not exceed 300,000. Shares of Common Stock tendered as payment for shares issued upon exercise of an option or which are attributable to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. The option price of any incentive stock option shall be 100% of the fair market value of a share of Common Stock on the date the incentive option is granted. Any incentive option must be exercised within ten years of the date of grant. Unless otherwise determined by the plan administrator, the option price of any non-qualified stock option shall be 100% of the fair market value of a share of Common Stock on the date the option is granted. Vesting of stock options and performance shares, and the term of any non-qualified stock option or performance share award is determined by the plan administrator. The 1996 Plan provides that each director that is not an employee of the Company shall, on the date on which he or she is initially elected or appointed a director of the Company, be granted a stock option to purchase 5,000 shares of Common Stock for the fair market price on the date of grant and for a term of ten years. After each subsequent annual meeting of stockholders at which such person continues to serve as a director, he or she will automatically be granted a stock option to purchase an additional 5,000 shares of Common Stock for the fair market price on the date of such grant and for a term of ten years. 68 In the event of a termination of employment, outstanding options and performance shares may be subject to forfeiture and/or time limitations. Stock options and performance shares are evidenced by written agreements, the terms and provisions of which may differ. No stock option is transferable other than by will or by the laws of descent or distribution. The 1996 Plan may be amended by the Board of Directors without the consent of the stockholders except that any amendment, thought effective when made, will be subject to stockholder approval if required by any federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. In addition, no amendment can impair the rights of a holder of an outstanding award under the Plan without such holder's consent. 1997 EMPLOYEE STOCK PURCHASE PLAN. The 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was authorized by the Board of Directors on September 26, 1996 and approved by the stockholders of the Company at the 1997 annual meeting. The 1997 Purchase Plan is intended to provide eligible employees of the Company and its participating affiliates with the continuing opportunity to acquire a propriety interest in the Company through participation in a payroll-deduction based employee stock purchase plan designed to operate in compliance with Section 423 of the Code. An aggregate of 250,000 shares of Common Stock have been reserved for issuance over the ten-year term of the 1997 Purchase Plan. This share reserve is drawn from either newly-issued shares of Common Stock or shares of Common Stock repurchased by the Company, including shares repurchased on the open market. The 1997 Purchase Plan is administered by the Compensation Committee of the Company's Board of Directors or such other duly constituted committee of the Company's Board of Directors (the "1997 Plan Administrator"). The 1997 Purchase Plan is implemented in a series of successive offering periods, each with a maximum duration (not to exceed twenty-four (24) months) designated by the 1997 Plan Administrator prior to the start date. The initial offering period began on September 1, 1997 and will continues through June 30, 1999. The next offering period will start on the first business day in July 1999 and terminate on the last business day in June 2001. Any subsequent offering periods will begin as designated by the 1997 Plan Administrator. Each offering period is comprised of a series of successive semi-annual purchase periods. Generally, purchase periods run from the first business day in January to the last business day in June each year and from the first business day in July each year to the last business day in December in each year. Shares of Common Stock will be purchased on behalf of participants on the last day of each such semi-annual period. Any individual who is employed on a basis under which he or she is regularly expected to work for more than 20 hours per week for more than five months per calendar year in the employ of the Company or any participating parent or subsidiary corporation (including any corporation which subsequently becomes such at any time during the term of the 1997 Purchase Plan) is eligible to participate in the 1997 Purchase Plan. Each participant may authorize periodic payroll deductions in any multiple of 1% (up to a maximum of 15%) of his or her base salary each offering period to be applied to the acquisition of Common Stock on each semi-annual purchase date. On each semi-annual purchase date (the last business day in June and December of each year), the payroll deductions of each participant is automatically applied to the purchase of whole shares of Common Stock at the purchase price in effect for the participant for that purchase date. 69 The purchase price per share at which Common Stock is purchased on the participant's behalf on each purchase date within the offering period is equal to eighty-five percent (85%) of the lower of (i) the fair market value per share of Common Stock on the participant's entry date into that offering period or (ii) the fair market value per share of Common Stock on that purchase date. The fair market value per share of Common Stock on any relevant date will be the closing selling price per share on such date on the Nasdaq NMS. The 1997 Purchase Plan imposes certain limitations upon a participant's rights to acquire Common Stock, including the following limiations: (i) No purchase right may be granted to any individual who owns stock (including stock purchasable under any outstanding purchase rights) possessing 5% or more of the total combined voting power or value of all classes of stock of the Company of any of its affiliates. (ii) No purchase right granted to a participant may permit such individual to purchase Common Stock at a rate greater than $25,000 worth of such Common Stock (valued at the time such purchase right is granted) for each calendar year the purchase right remains outstanding at any time. (iii) No participant may purchase more than 1,000 shares of Common Stock on any semi-annual purchase date. The purchase right immediately terminates upon the participant's termination of employment or loss of eligible employee status or upon his or her affirmative withdrawal from the offering period. The payroll deductions collected for the purchase period in which the purchase right terminates will be refunded. No participant has any stockholder rights with respect to the shares of Common Stock covered by his or her purchase right until the shares are actually purchased on the participant's behalf. The 1997 Purchase Plan terminates upon the earliest to occur of (i) the last business day in June 2007, (ii) the date on which all available shares are issued or (iii) the date on which all outstanding purchase rights are exercised in connection with an acquisition of the Company. The Board may at any time alter, suspend or discontinue the 1997 Purchase Plan as of the close of any purchase period. However, the Board may not, without stockholder approval, materially increase the number of shares issuable under the 1997 Purchase Plan, and certain other amendments may require stockholder approval pursuant to applicable laws or regulations. 70 OPTION GRANTS IN LAST FISCAL YEAR There were no individual grants of stock options under the 1994 Plan made during the year ended December 31, 1996 to the Chief Executive Officer of the Company or any of the four most highly compensated executive officers of the Company named in the Summary Compensation Table. There were grants of stock options under the 1996 Plan during the year ended December 31, 1996 to the Chief Executive Officer and the four most highly compensated executive officers of the Company. The following table sets forth information concerning individual grants of stock options under the 1996 Plan to the Chief Executive Officer of the Company, the four most highly compensated executive officers of the Company, all current executive officers as a group ("Executive Group"), all current directors who are not executive officers as a group ("Director Group"), and all employees, including all current officers who are not executive officers, as a group ("Employee Group"). OPTION GRANTS IN YEAR ENDING DECEMBER 31, 1996
INDIVIDUAL GRANTS ---------------------------------------------------- % OF TOTAL POTENTIAL REALIZABLE OPTIONS VALUE AT ASSUMED NUMBER OF GRANTED ANNUAL RATES OF SECURITIES TO EXERCISE STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(C) OPTIONS IN FISCAL PRICE EXPIRATION -------------------------- NAME GRANTED YEAR(A) ($/SH)(B) DATE 5% ($) 10% ($) - -------------------- --------- --------- -------- --------------- ----------- ------------ John S. Callon ..... -- -- -- -- $ -- $ -- Fred L. Callon .... 75,000 17% $ 12.00 August 23, 2006 566,005 1,434,368 Dennis W. Christian 70,000 16% $ 12.00 August 23, 2006 528,271 1,338,744 John S. Weatherly . 65,000 14% $ 12.00 August 23, 2006 490,538 1,243,119 Kathy G. Tilley ... 55,000 12% $ 12.00 August 23, 2006 415,070 1,051,870 Executive Group (6 persons) ....... 280,000 62% $ 12.00 August 23, 2006 2,113,086 5,354,975 Director Group (4 persons) ....... 80,000 18% $ 12.00 August 23, 2006 603,739 1,529,993 Employee Group (8 persons) ....... 170,000 38% $ 12.00 August 23, 2006 1,282,945 3,251,235 All Stockholders(d) 5,758,667 N/A N/A N/A $ 43,459,137 $ 110,133,985
- ---------------- (a) The Company granted a total of 450,000 options to employees under the 1996 Plan for the year ended December 31, 1996. (b) The options were granted on August 23, 1996. The fair market value of the Common Stock at the date of grant was $12.00. Options are not exercisable prior to six months from the date of grant and, unless a shorter period is provided by the 1996 Plan or the plan administrator, are for a term of ten years, subject to vesting as provided by the plan administrator. Further, options are subject to forfeiture and/or time limitations in the event of a termination of employment. The 1996 Plan was approved by the Company's stockholders at the 1997 annual meeting. No stock appreciation rights have been granted by the Company since its inception. (c) Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Commission and do not represent the Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall market conditions. There can be no assurance that the amounts reflected will be achieved. (d) All Stockholders are shown for comparison purposes only. 71 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth certain information concerning the number and value of unexercised options to purchase Common Stock by the Chief Executive Officer and the four most highly compensated executive officers named in the Summary Compensation Table at December 31, 1996. No stock options were exercised by such persons in 1996. AGGREGATED OPTION EXERCISES IN 1996 AND OPTION VALUES AT DECEMBER 31, 1996
UNEXERCISED OPTIONS AT DECEMBER 31, 1996 ---------------------------------------- NUMBER OF VALUE OF UNDERLYING IN-THE-MONEY SECURITIES OPTIONS SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE(A) UNEXERCISABLE(B) - ------------------- -------- ---------- ------------- ---------------- John S. Callon .... -- -- 90,000/-- $815,625/-- Fred L. Callon..... -- -- 95,000/60,000 830,938/423,750 Dennis W. Christian -- -- 74,000/56,000 642,625/395,500 John S. Weatherly.. -- -- 73,000/52,000 635,563/367,250 Kathy G. Tilley.... -- -- 41,000/44,000 349,563/310,750
- ------------- (a) Represents awards granted under the 1994 Plan and the 1996 Plan. (b) As of December 31, 1996, the fair market value of the Common Stock was $19.0625. LONG-TERM INCENTIVE PLAN AWARDS At this time, Callon does not have a long-term incentive plan for the Company's employees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee are Messrs. Stanger, Wallace, B. F. Weatherly and Wilson, none of whom are or have been officers or employees of the Company. STOCKHOLDERS' AGREEMENT. In connection with the Consolidation, the Company, the Callon Family and NOCO entered into the Stockholders' Agreement which contains certain voting requirements and transfer restrictions. Messrs. Wallace, B. F. Weatherly and Wilson are affiliates of NOCO. See "-- Certain Transactions." REGISTRATION RIGHTS. NOCO is party to a Registration Rights Agreement dated September 16, 1994. Messrs. Wallace, B. F. Weatherly and Wilson are affiliates of NOCO. See "--Certain Transactions." CERTAIN TRANSACTIONS CONSOLIDATION. Pursuant to the Consolidation in which certain of the Company's predecessor entities were merged into the Company effective September 16, 1994, John S. Callon, Fred L. Callon and other non-employee members of the Callon Family exchanged all of the outstanding stock of Callon Petroleum Operating for an aggregate of 1,892,278 shares of Common Stock of the Company. Certain Callon Family members also converted units of limited partnership interest ("Units") in CCP into an aggregate of 9,635 shares of Common Stock, representing one-third of a share of Common Stock for each 72 Unit. Of the 1,831,591 shares beneficially owned by the Callon Family, 292,040 are beneficially owned by John S. Callon and 729,180 are beneficially owned by Fred L. Callon. The number of shares of Common Stock issued in the Consolidation was based upon the Company's assignment of exchange values to the assets and liabilities of CCP, Callon Petroleum Operating and CN. STOCKHOLDERS' AGREEMENT. In connection with the Consolidation, the Company, the Callon Family (including John S. Callon and Fred L. Callon) and NOCO entered into the Stockholders' Agreement which (a) provides that the Callon Family shall vote for two directors to the Company's Board of Directors as directed by NOCO and NOCO will vote for two directors to the Company's Board of Directors as directed by the Callon Family, (b) contains certain restrictions on transfer of the Common Stock owned by the Callon Family and NOCO, and (c) provides that neither the Callon Family nor NOCO can transfer shares of Common Stock in connection with, or vote for, consent to or otherwise approve, a transaction which would result in certain changes of control or fundamental changes without the prior written consent of the other party. The Callon Family and NOCO own an aggregate of more than 60% of the Company's outstanding Common Stock. REGISTRATION RIGHTS. The Callon Family (including John S. Callon and Fred L. Callon) is party to a Registration Rights Agreement dated September 16, 1994 (the "Registration Rights Agreement"), pursuant to which they are entitled to require the Company to register Common Stock owned by them with the Commission for sale to the public in a firm commitment public offering and generally to include shares owned by them in registration statements filed by the Company. NOCO and the Company have entered into a similar agreement. WILCOX ENERGY. Prior to the consummation of the Consolidation, Callon Petroleum Operating distributed the capital stock of its wholly owned subsidiary, Wilcox Energy Company ("Wilcox"), to its stockholders (i.e., the Callon Family, including John S. Callon and Fred L. Callon). The business of Wilcox is the drilling of shallow exploratory wells in the Wilcox Trend, and Callon Petroleum Operating did not believe that Wilcox would fit within the Company's business strategy. NOTE TO AFFILIATE. Prior to the Consolidation, CN from time to time loaned money to NOCO on a short-term basis, at approximately the interest rate earned by CN on short-term cash investments. In 1993, $4.0 million was borrowed. On December 31, 1993, $1.0 million was outstanding at an interest rate of 4.0%. In 1994, the outstanding loan balance of $1.0 million was repaid prior to the Consolidation. FEES TO NOCO. Prior to the Consolidation, the partnership agreement of CN provided that CN would reimburse Callon Petroleum Operating and NOCO at cost for overhead and executive and other personnel services for operations of CN. During 1993, CN paid Callon Petroleum Operating $1.4 million and paid NOCO $320,000 as such reimbursement. NOCO Management, Ltd., the general partner of NOCO Holdings, L.P. (the sole limited partner of NOCO) and whose members include John C. Wallace, Richard O. Wilson and B. F. Weatherly, directors of the Company, received $190,200 in 1993 of such amounts in fees for services provided to CN by its members, including Mr. Wallace and B.F. Weatherly. In turn, Mr. Wallace received $13,500 of such amounts in 1993, and B.F. Weatherly received $67,500 of such amounts in 1993 from NOCO Management, Ltd. for such services. In 1994, the Company reimbursed NOCO $131,000 for costs and expenses incurred by NOCO in the Consolidation. No overhead payments have been made following the effective date of the Consolidation. 73 PRINCIPAL STOCKHOLDERS The following table sets forth, as of June 30, 1997, certain information with respect to the ownership of shares of Common Stock and the Company's Series A Preferred Stock as to (i) all persons known by the Company to be the beneficial owners of 5% or more of the outstanding shares of Common Stock, (ii) each director, (iii) certain executive officers, and (iv) all executive officers and directors of the Company as a group. Information set forth in the table with respect to beneficial ownership of Common Stock and Series A Preferred Stock has been obtained from filings made by the named beneficial owners with the Commission or, in the case of executive officers and directors of the Company, has been provided to the Company by such individuals.
COMMON STOCK PREFERRED STOCK ------------------------ ------------------ AMOUNT AND AMOUNT AND NAME AND NATURE OF PERCENT NATURE OF PERCENT ADDRESS OF BENEFICIAL OF BENEFICIAL OF BENEFICIAL OWNER(1) OWNERSHIP CLASS OWNERSHIP CLASS - -------------------------------- --------- ----- ------- ----- DIRECTORS: John S. Callon ............... 292,040(2) 4.80% -- -- Fred L. Callon ............... 729,180(3) 11.97 -- -- Dennis W. Christian .......... 129,000(4) 2.13 -- -- Robert A. Stanger ............ 20,856(5) * -- -- John C. Wallace .............. 2,007,883(6) 33.37 -- -- B.F. Weatherly ............... 2,005,125(7) 33.33 -- -- Richard O. Wilson ............ 2,008,531(8) 33.37 1,000 * NAMED EXECUTIVE OFFICERS: John S. Weatherly ............ 123,896(9) 2.04 -- -- Kathy G. Tilley .............. 86,147(10) 1.43 -- -- DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (10 PERSONS) ...... 3,476,142(11) 53.67 1,000 * CERTAIN BENEFICIAL OWNERS: NOCO Enterprises, L.P. ....... 6814 Northampton Way Houston, Texas 77055 ....... 1,984,758(12) 33.10 -- -- Wellington Management Company 75 State Street Boston, Massachusetts 02109 . 607,704(13) 9.26 247,690 18.83
- ---------------------- * less than 1% (1) Unless otherwise indicated, each of the above persons may be deemed to have sole voting and dispositive power with respect to such shares. (2) Of the 292,040 shares beneficially owned by John S. Callon, 97,040 are owned directly by him and he has sole voting and dispositive power over such shares, 105,000 shares are held in a family limited partnership, and 90,000 shares are subject to options under the Company's 1994 Plan exercisable within 60 days. Shares indicated as owned by John S. Callon do not include shares of Common Stock owned by NOCO and shares of Common Stock owned by certain other members of the Callon Family including 61,837 shares owned by John S. Callon's wife and over which he disclaims beneficial ownership. Under the terms of the Stockholder's Agreement among the 74 Callon Family and NOCO dated September 16, 1994, John S. Callon and the other members of the Callon Family have the right of first refusal to acquire shares of Common Stock proposed to be sold by NOCO under certain circumstances and all parties to the Stockholders' Agreement have agreed to support two directors nominated by the Callon Family and two directors nominated by NOCO. John S. Callon disclaims beneficial ownership of the NOCO shares. (3) Of the 729,180 shares beneficially owned by Fred L. Callon, 201,556 shares are owned directly by him; 268,016 shares are held by him as custodian for certain minor Callon Family members; 78,430 shares are held by him as trustee of certain Callon Family trusts; 80,000 shares are subject to options under the 1994 Plan exercisable within 60 days; 15,000 shares are subject to options under the 1996 Plan exercisable within 60 days; 60,000 shares represent performance shares issued under the 1996 Plan which do not vest until January 1, 2001; and 26,178 shares are held by Fred L. Callon as Trustee of shares held by the Callon Petroleum Company Employee Savings and Protection Plan. Shares indicated as owned by Fred L. Callon do not include shares of Common Stock owned by NOCO and shares of Common Stock owned by other members of the Callon Family, including 25,009 shares owned by Fred L. Callon's wife over which he disclaims beneficial ownership. Under the terms of the Stockholders' Agreement, Fred L. Callon and the other members of the Callon Family have the right of first refusal to acquire shares of Common Stock proposed to be sold by NOCO under certain circumstances and all parties to the Stockholders' Agreement have agreed to support two directors nominated by the Callon Family and two directors nominated by NOCO. Fred L. Callon disclaims beneficial ownership of these shares. (4) Includes 60,000 shares subject to options under the 1994 Plan and 14,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days, and 55,000 shares represent a performance share award under the 1996 Plan which do not vest until January 1, 2001. (5) Includes 15,000 shares subject to options under the 1994 Plan and 5,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days. (6) Includes 3,125 shares owned directly by John C. Wallace, 15,000 shares subject to options under the 1994 Plan and 5,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days, and 1,984,758 shares owned by NOCO. See note (l2) below. (7) Includes 367 shares owned directly by B.F. Weatherly, 15,000 shares subject to options under the 1994 Plan and 5,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days, and 1,984,758 shares owned by NOCO. See note (l2) below. (8) Includes 1,500 shares owned directly by Richard O. Wilson, 15,000 shares subject to options under the 1994 Plan and 5,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days, 2,273 shares issuable upon conversion of 1,000 shares of Series A Preferred Stock and 1,984,758 shares owned by NOCO. See note (l2) below. (9) Includes 217 shares which are held by Mr. Weatherly as custodian for his minor children, 60,000 shares subject to options under the 1994 Plan, 13,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days, and 50,000 shares represent a performance share award under the 1996 Plan which do not vest until January 1, 2001. (10) Includes 30,000 shares subject to options under the 1994 Plan, 11,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days and 45,000 shares represent a performance share award under the 1996 Plan which do not vest until January 1, 2001. (11) Includes 405,000 shares subject to options under the 1994 Plan, 76,000 shares subject to options under the 1996 Plan, all of which are exercisable within 60 days and 225,000 shares represent performance share awards under the 1996 Plan which do not vest until January 1, 2001. (12) The sole limited partner of NOCO is NOCO Holdings, L.P., and the sole general partner of NOCO is NOCO Properties Inc., a wholly-owned subsidiary of NOCO Holdings, L.P. The general partner of NOCO Holdings, L.P. is NOCO Management, Ltd., a limited liability company. The management of NOCO Management, Ltd. is vested in its four members: John C. Wallace, Barry I. Meade, B. F. Weatherly and Richard O. Wilson. The address of NOCO Holdings, L.P. and NOCO Management, Ltd. is the same as that listed above for NOCO. Mr. Wallace's address is 65 Vincent 75 Square, London England SWIP 2RX. Mr. Meade's address is 6814 Northampton Way, Houston, Texas 77055. Mr. B.F. Weatherly's address is 9603 Doliver Street, Houston, Texas 77063. Mr. Wilson's address is 674 Shartle Circle, Houston, Texas 77024. Messrs. Wallace, Weatherly and Meade also serve as officers of NOCO Management, Ltd. NOCO Properties Inc. and NOCO Management, Ltd. may be deemed to be the beneficial owner of the Common Stock to be held by NOCO as a result of their respective general partner interests in NOCO and NOCO Holdings, L.P. As a result of their positions with NOCO Management, Ltd., Messrs. Wallace, Meade, Weatherly and Wilson may be deemed to share the power to vote and dispose of such Common Stock and thereby to be the beneficial owner of such Common Stock. Under the terms of the Stockholders' Agreement, NOCO has the right of first refusal to acquire shares of Common Stock proposed to be sold by members of the Callon Family under certain circumstances and all parties to the Stockholders' Agreement have agreed to support two directors nominated by the Callon Family and two directors nominated by NOCO. NOCO disclaims beneficial ownership of the shares owned by members of the Callon Family. Because of the Stockholders' Agreement, NOCO and members of the Callon Family may be deemed to be a "group" for purposes of beneficial ownership under SEC regulations. If such a group were deemed to exist, it would beneficially own over 60% of the Common Stock. NOCO has informed the Company that it intends to transfer 1,839,386 of the Common Shares owned by it to Fred. Olsen Energy AS ("FOE"). Upon such transfer, the Common Shares owned by FOE will continue to be subject to the Stockholders' Agreement. See "Principal Stockholders -- Stockholders' Agreement." (13) Includes 563,000 shares issuable upon conversion of 247,690 shares of Series A Preferred Stock. STOCKHOLDERS' AGREEMENT Pursuant to the Stockholders' Agreement among the Callon Family and NOCO dated September 16, 1994, the Callon Family and NOCO each elect two directors to the Company's Board of Directors. Specifically, the Stockholders' Agreement provides that the Callon Family and NOCO shall use their best efforts, including voting the shares of Common Stock which they own, to cause the Company's Board of Directors to be composed of at least four members, two of such members to be selected by the Callon Family and two of such members to be selected by NOCO. The Stockholders' Agreement also contains restrictions on transfer of shares of Common Stock owned by the Callon Family and NOCO and prohibits the Callon Family and NOCO from taking certain actions which would result in certain changes of control or fundamental changes, without the consent of the other party. See "Management -- Certain Transactions." As a result of the Stockholders' Agreement, the Callon Family, on the one hand, and the Callon Family and NOCO on the other, may be deemed to form a "group" for purposes of beneficial ownership under Commission regulations. The Callon Family disclaims beneficial ownership of the Common Stock owned by NOCO. In addition, each Callon Family stockholder disclaims beneficial ownership of all shares of Common Stock owned by the other Callon Family stockholders and the existence of a group comprised of the Callon Family stockholders. If NOCO and the Callon Family were deemed to be a group, it would beneficially own more than 60% of the outstanding Common Stock. 76 DESCRIPTION OF THE EXCHANGE NOTES The Exchange Notes are to be issued under the Indenture, dated as of July 31, 1997, between the Company and American Stock Transfer & Trust Company, as trustee (the "Trustee"). The Exchange Notes will be issued under the same Indenture as the Outstanding Notes and the Outstanding Notes and the Exchange Notes will constitute a single series of debt securities under the Indenture. If the Exchange Offer is consummated, any Outstanding Notes that remain outstanding after consummation of the Exchange Offer and the Exchange Notes issued in the Exchange Offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal of Notes (as defined herein) have taken certain actions or exercised certain rights under the Indenture. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the provisions of the Indenture (including the definition of certain terms in the Indenture), the form of which is available upon request to the Company at the address set forth under "Available Information." Wherever particular provisions and definitions of the Indenture are referred to, such provisions and definitions are incorporated by reference as part of the statements made, and the statements are qualified in their entirety by such reference. As used in this "Description of the Exchange Notes," the term "Company" refers only to Callon Petroleum Company. The Outstanding Notes and Exchange Notes are sometimes referred to herein as the "Notes." Article and Section references are to Articles and Sections of the Indenture. GENERAL. The Exchange Notes will be limited to $36.0 million aggregate principal amount. The Exchange Notes will be issued in global or registered form only, without coupons, in denominations of $1,000 and any integral multiple thereof. Interest on the Exchange Notes will accrue from July 31, 1997 or from the most recent interest payment date to which interest has been paid, and will be payable quarterly on the 15th day of each March, June, September and December in each year, commencing December 15, 1997, at 10.125%. Interest will be payable to the person in whose name the Exchange Note is registered at the close of business on the first day of March, June, September and December, as the case may be, immediately preceding such interest payment date. The Exchange Notes will mature on September 15, 2002, unless redeemed earlier at the option of the Company as set forth below. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Exchange Notes. Principal, premium, if any, and interest will be payable at an office or agency to be maintained by the Company in New York City, except that, at the option of the Company for the Exchange Notes that are not in book entry form, interest may be paid by check mailed to the person entitled thereto. The Exchange Notes may be presented for registration of transfer or exchange at an office or agency to be maintained by the Company in New York City. The Exchange Notes will be exchangeable without service charge but the Company may require payment to cover taxes or other government charges. Except under the conditions described in "Certain Covenants -- Liens" below, the Exchange Notes will not be secured by the assets of the Company or any of its Subsidiaries or Affiliates or otherwise. All indebtedness of the Company under the Credit Facility (which constitutes Senior Indebtedness) is secured by substantially all of the producing oil and gas assets of the Company and its Subsidiaries. In addition, the rights of the Company to participate in any distribution of assets of any Subsidiary upon its liquidation or reorganization or otherwise (and thus the ability of the Holders of the Exchange Notes to benefit indirectly from such distribution) are subject to the prior claims of creditors of the Subsidiary. BOOK ENTRY EXCHANGE NOTES The Outstanding Notes have been and the Exchange Notes will initially be issued in the form of one or more Global Exchange Notes (as defined in the Indenture) held in book-entry form. The Exchange Notes will be deposited with the Trustee as custodian for the Depository, and the Depository or its nominee will initially be the sole registered holder of the Exchange Notes for all purposes under the 77 Indenture. Except as set forth below, a Global Exchange Note exchanged may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository. Upon the issuance of a Global Exchange Note, the Depository or its nominee will credit, on its internal system, the accounts of persons holding through it with the respective principal amounts of the individual beneficial interests represented by such Global Exchange Note exchanged in the Exchange Offer. Ownership of beneficial interests in a Global Exchange Note will be limited to persons that have accounts with the Depository ("participants") or persons that may hold interests through participants. Ownership of beneficial interests by participants in a Global Exchange Note will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by the Depository or its nominee for such Global Exchange Note. Ownership of beneficial interests in such Global Exchange Note by persons that hold through participants will be shown on, and the transfer of that ownership interest within such participant will be effected only through, records maintained by such participant. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Exchange Note. Payment of principal of, premium, if any, on and interest on Exchange Notes represented by any such Global Exchange Note will be made to the Depository or its nominee, as the case may be, as the sole registered owner and the sole holder of the Exchange Notes represented thereby for all purposes under the Indenture. None of the Company, the Trustee, and agent of the Company or the Initial Purchaser will have any responsibility or liability for any aspect of the Depository's reports relating to or payments made on account of beneficial ownership interests in a Global Exchange Note representing any Exchange Notes or for maintaining, supervising or reviewing any of the Depository's records relating to such beneficial ownership interests. The Company has been advised by the Depository that upon receipt of any payment of principal of, premium, if any, on or interest on, any Global Exchange Note, the Depository will immediately credit, on its book entry registration and transfer system, the accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such Global Exchange Note, as shown on the records of the Depository. The Company expects that payments by participants to owners of beneficial interests in a Global Exchange Note held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in "street name" and will be the sole responsibility of such participants. So long as the Depository or its nominee, is the registered owner or holder of such Global Exchange Note, the Depository or such nominee, as the case may be, will be considered the sole owner or holder of the Exchange Notes represented by such Global Exchange Note for the purposes of receiving payment on such Exchange Notes, receiving notices and for all other purposes under the Indenture and the Exchange Notes. Beneficial interests in the Exchange Notes represented by such Global Exchange Note will be evidenced only by, and transfers thereof will be effected only through, records maintained by the Depository and its participants. Except as provided above, owners of beneficial interests in a Global Exchange Note will not be entitled to and will not be considered the holders of such Global Exchange Note for any purposes under the Indenture. Accordingly, each person owning a beneficial interest in a Global Exchange Note must rely on the procedures of the Depository and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the Indenture. The Company understands that under existing industry practices, in the event that the Company requests any action of holders or that an owner of a beneficial interest in a Global Exchange Note desires to give or take action that a holder is entitled to give or take under the Indenture, the Depository would authorize the participants holding the relevant beneficial interest to give or take such action, and such participants would authorize beneficial owners through such 78 participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. The Depository has advised the Company that it will take any action permitted to be taken by a Holder of Exchange Notes (including the presentation of Exchange Notes for exchange as described below) only at the direction of one or more participants to whose account with the Depository interests in the Global Exchange Note are credited and only in respect of such portion of the aggregate principal amount of the Exchange Notes as to which such participant or participants has or have given such direction. The Depository has advised the Company that the Depository is a limited-purpose trust company organized under the Banking Law of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the Exchange Act. The Depository was created to hold the securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations some of whom (and/or their representatives) own the Depository. Access to the Depository's book entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. CERTIFICATED EXCHANGE NOTES The Exchange Notes represented by a Global Exchange Note are exchangeable for certificated Exchange Notes only if (i) the Depository notifies the Company that it is unwilling or unable to continue as a depository for such Global Exchange Note or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act, and a successor depository is not appointed by the Company within 90 days, (ii) the Company executes and delivers to the Trustee a notice that such Global Exchange Note shall be so transferable, registrable and exchangeable, and such transfer shall be registrable or (iii) there shall have occurred and be continuing an Event of Default or an event which, with the giving of notice or lapse of time or both, would constitute an Event of Default with respect to the Exchange Notes represented by such Global Exchange Note. Any Global Exchange Note that is exchangeable for certificated Exchange Notes pursuant to the preceding sentence will be transferred to, and registered and exchanged for, certificated Exchange Notes in authorized denominations and registered in such names as the Depository or its nominee holding such Global Exchange Note may direct. Subject to the foregoing, a Global Exchange Note is not exchangeable, except for a Global Exchange Note of like denomination to be registered in the name of the Depository or its nominee. In the event that a Global Exchange Note becomes exchangeable for certificated Exchange Notes, (i) certificated Exchange Notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (ii) payment of principal, any repurchase price, and interest on the certificated Exchange Notes will be payable, and the transfer of the certificated Exchange Notes will be registrable, at the office or agency of the Company maintained for such purposes, and (iii) no service charge will be made for any issuance of the certificated Exchange Notes, although the Company may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. SUBORDINATION OF THE EXCHANGE NOTES The payment of the principal of, and premium, if any, and interest on the Exchange Notes will be subordinated in right of payment, as set forth in Article Thirteen of the Indenture, to the prior payment in 79 full of Senior Indebtedness, which will include borrowings under the Credit Facility, whether outstanding on the date of the Indenture or thereafter incurred. In the event of any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relating to the Company or to its creditors, as such, or to its assets, or any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary and whether or not including insolvency or bankruptcy, or any assignment for the benefit of creditors or other marshalling of assets or liabilities of the Company (provided that this provision will not require the repayment of all Senior Indebtedness in full in connection with the consolidation or merger of the Company or its liquidation or dissolution following the conveyance, transfer, lease or other disposition of all or substantially all the properties and assets of the Company and its Restricted Subsidiaries on a consolidated basis upon the terms and conditions described under the "Consolidation, Merger and Sale of Assets" covenant described below as a prerequisite to any payments being made to Holders of Notes), the holders of Senior Indebtedness will first be entitled to receive payment in full of all amounts due on or in respect of all Senior Indebtedness, or provision must be made for such payment, before the Holders of Notes will be entitled to receive any direct or indirect payment or distribution of any kind or character (other than any payment or distribution in the form of Permitted Junior Securities) on account of principal of (or premium, if any, on) or interest on the Notes or on account of the purchase or redemption or other acquisition of the Notes (including pursuant to an optional redemption or a Redemption Event). In the event that, notwithstanding the foregoing, the Trustee or the Holder of any Note receives any payment or distribution of properties or assets of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, in respect of principal of (or premium, if any, on) or interest on the Notes before all Senior Indebtedness is paid or provided for in full, then the Trustee or the Holders of Notes receiving any such payment or distribution (other than a payment or distribution in the form of Permitted Junior Securities) will be required to pay or deliver such payment or distribution forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of properties of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full. The Company also may not make any payment or distribution of any properties or assets of the Company of any kind or character (other than Permitted Junior Securities) on account of principal of (or premium, if any, on) or interest on the Notes or on account of the purchase or redemption or other acquisition of Notes upon the occurrence of a Payment Event of Default with respect to any Specified Senior Indebtedness and receipt by the Trustee of written notice thereof until such Payment Event of Default shall have been cured or waived or shall have ceased to exist or such Specified Senior Indebtedness shall have been paid in full or otherwise discharged, after which the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. The Company also may not make any payment or distribution of any properties or assets of the Company of any kind or character (other than Permitted Junior Securities) on account of any principal of (or premium, if any, on) or interest on the Notes or on account of the purchase or redemption or other acquisition of Notes for the period specified below ("Payment Blockage Period") upon the occurrence of a Non-payment Event of Default with respect to any Specified Senior Indebtedness and receipt by the Trustee and the Company of written notice thereof from one or more of the holders of such Specified Senior Indebtedness (or their representative). The Payment Blockage Period will commence upon the earlier of the dates of receipt by the Trustee or the Company of such notice from one or more of the holders of such Specified Senior Indebtedness (or their representative) and shall end on the earliest of (i) 179 days thereafter, (ii) the date, as set forth in a written notice from the holders of the Specified Senior Indebtedness (or their representative) to the Company or the Trustee, on which such Non-payment Event of Default is cured, waived in writing or ceases to exist or such Specified Senior Indebtedness is discharged or (iii) the date on which such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from one or more of such holders (or their representative) initiating 80 such Payment Blockage Period, after which the Company will resume (unless otherwise prohibited pursuant to the immediately preceding paragraph) making any and all required payments in respect of the Notes, including any missed payments. In any event, not more than one Payment Blockage Period may be commenced during any period of 360 consecutive days. No Non-payment Event of Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee can be made the basis for a subsequent Payment Blockage Notice. In the event that, notwithstanding the foregoing, the Company makes any payment to the Trustee or the Holder of any Exchange Note prohibited by the subordination provision of the Indenture, then such payment will be required to be paid over and delivered forthwith to the Company. If the Company fails to make any payment on the Notes when due or within any applicable grace period, whether or not on account of the payment blockage provision described above, such failure would constitute an Event of Default under the Indenture and would enable the Holders of the Notes to accelerate the maturity thereof. See " -- Events of Default and Remedies." As a result of such subordination provisions described above, in the event of a distribution of assets upon the liquidation, receivership, reorganization or insolvency of the Company, creditors of the Company who are holders of Senior Indebtedness may recover more, ratably, than the Holders of the Notes, and assets which would otherwise be available to pay obligations in respect of the Notes will be available only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Exchange Notes. The subordination provisions described above will cease to be applicable to the Exchange Notes upon any Legal Defeasance or Covenant Defeasance of the Exchange Notes as described under "-- Legal Defeasance and Covenant Defeasance." Senior Indebtedness may also be issued and incurred in the future, subject only to certain limitations contained in the covenant described under "Certain Covenants -- Limitation on Indebtedness for Money Borrowed." The Exchange Notes will also be structurally subordinated to all liabilities of the Company's Subsidiaries. CERTAIN COVENANTS RESTRICTIONS ON DIVIDENDS, REDEMPTIONS AND OTHER PAYMENTS (a) The Indenture provides that the Company shall not, either directly or indirectly through any Restricted Subsidiary, (i) declare or pay any dividend, either in cash or property, on any shares of its capital stock (except dividends or other distributions payable solely in shares of capital stock of the Company), (ii) purchase, redeem or retire any shares of its capital stock or any warrants, rights or options to purchase or acquire any shares of its capital stock or (iii) make any other payment or distribution in respect of the Company's capital stock (such dividends, purchases, redemptions, retirements, payments and distributions being herein collectively called "Restricted Payments") if, after giving effect thereto, (1) an Event of Default would have occurred; or (2) (A) the sum of (i) such Restricted Payments plus (ii) the aggregate amount of all Restricted Payments made during the period after the date of the Indenture would exceed (B) the sum of (i) $5 million plus (ii) 25% of the Company's Consolidated Net Income subsequent to March 31, 1997 (with 100% reduction for a loss). (b) Notwithstanding paragraph (a) above, the Company may take the following actions so long as no Event of Default shall have occurred and be continuing: 81 (1) the payment of dividends on any of the shares of the Series A Preferred Stock of the Company outstanding on the date of this Indenture; (2) the payment of any dividend on any other Capital Stock of the Company or any Restricted Subsidiary within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of paragraph (a) above (and such payment shall be deemed to have been paid on such date of declaration for purposes of any calculation required by the provisions of paragraph (a) above); and (3) the repurchase, redemption or other acquisition or retirement of any shares of (A) the Series A Preferred Stock of the Company outstanding on the date of this Indenture and (B) any class of capital stock of the Company or any Restricted Subsidiary, in exchange for, or out of the aggregate net cash proceeds of a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of shares of common stock of the Company. The actions described in clauses (1), (2) and (3) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this covenant and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (2) of paragraph (a). For purposes of this covenant, the amount of any Restricted Payment payable in property shall be deemed to be the fair market value of such property as determined by the Board of Directors of the Company. (Section 1006) LIMITATION ON INDEBTEDNESS FOR BORROWED MONEY The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume, guarantee or become liable ("incur") with respect to any Indebtedness for Money Borrowed, including Acquired Indebtedness but excluding Permitted Indebtedness, if, immediately after giving effect to any such creation, incurrence, assumption or guarantee (including giving effect to the retirement of any existing Indebtedness for Money Borrowed from the proceeds of such additional Indebtedness for Money Borrowed): (1) The ratio of (a) the aggregate amount of the outstanding Indebtedness for Money Borrowed of the Company and its Restricted Subsidiaries as of the end of the immediately preceding fiscal quarter of the Company, as determined on a consolidated basis in accordance with GAAP, to (b) the Consolidated EBITDA for the immediately preceding four fiscal quarters of the Company, would exceed 10.0 to 1.0; or (2) The Interest Coverage Ratio would have been at least 2.4 to 1.0. Further, the Indenture will provide that the Company will not permit any Restricted Subsidiary to incur any Indebtedness for Money Borrowed (except to the Company or another Restricted Subsidiary) that is expressly subordinate in right of payment to any other Indebtedness for Money Borrowed of such Restricted Subsidiary. (Section 1007) LIENS The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, except for Permitted Liens, upon any of their respective assets or properties, whether now owned or acquired after the date of the Indenture, or any income or profits therefrom to secure any Pari Passu Indebtedness or Subordinated Indebtedness, unless prior to or contemporaneously therewith the Notes are directly secured equally and ratably, provided that (1) if such secured indebtedness is Pari Passu Indebtedness, the Lien 82 securing such Pari Passu Indebtedness shall be subordinate and junior to, or PARI PASSU with, the Lien securing the Notes and (2) if such secured indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness shall be subordinate and junior to the Lien securing the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes. The foregoing covenant will not apply to any Lien securing Acquired Indebtedness, provided that any such Lien extends only to the properties or assets that were subject to such Lien prior to the related acquisition by the Company or such Restricted Subsidiary and was not created, incurred or assumed in contemplation of such transaction. (Section 1008) LIMITATION ON RANKING OF FUTURE INDEBTEDNESS The Indenture provides that the Company will not incur or permit to remain outstanding any Indebtedness for Money Borrowed (including Acquired Indebtedness and Permitted Indebtedness) which is expressly subordinate in right of payment to any Senior Indebtedness, other than Subordinated Indebtedness or Pari Passu Indebtedness. For purposes of this covenant, the incurrence of Senior Indebtedness which is unsecured shall not, because of its unsecured status, be deemed to be subordinate in right of payment to any Senior Indebtedness which is secured. (Section 1013) LIMITATIONS ON RESTRICTED SUBSIDIARY DIVIDENDS The Indenture provides that the Company shall not and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause to become effective any encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends in cash or make any other distribution on its capital stock to the Company or any other Restricted Subsidiary, (b) pay any indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans, advances, or capital contributions to the Company or any other Restricted Subsidiary, or (d) transfer any of its properties or assets to the Company or another Restricted Subsidiary, except in each instance (i) as set forth in the instrument evidencing or the agreement governing Acquired Indebtedness of any acquired Person which becomes a Restricted Subsidiary, provided, that any restriction or encumbrance under such instrument or agreement existed at the time of acquisition, was not put in place in anticipation of such acquisition, and is not applicable to any Person, other than the Person or property or assets of the Person so acquired; (ii) customary provisions of any lease or license of the Company or any Restricted Subsidiary relating to the property covered thereby and entered into in the ordinary course of business; (iii) any encumbrance or restriction arising under applicable law; (iv) any encumbrance or restriction arising under the Indenture, the Credit Facility, or other indebtedness or other agreements existing on the date of original issuance of the Notes; (v) any restrictions with respect to a Restricted Subsidiary imposed pursuant to an agreement that has been entered into for the sale or disposition of the stock, business, assets or properties of such Restricted Subsidiary; (vi) any encumbrance or restriction arising under the terms of purchase money obligations, but only to the extent such purchase money obligations restrict or prohibit the transfer of the property so acquired; (vii) any encumbrance or restriction arising under customary non-assignment provisions in installment purchase contracts; (viii) any encumbrance or restriction on the ability of any Restricted Subsidiary to transfer any of its property acquired after the date of the Indenture to the Company or any other Restricted Subsidiary that is required by a lender to, or purchaser of any indebtedness of, such Restricted Subsidiary in connection with a financing of the acquisition of such property (including with respect to the purchase of asset portfolios and pursuant to the underwriting or origination of mortgage loans) by such Restricted Subsidiary; and (ix) any encumbrance or restriction pursuant to any agreement that extends, refinances, renews or replaces any agreement described in the foregoing clauses (i) through (viii), and except with respect to clause (d) only, restrictions in the form of Liens which are not prohibited as described in the "Liens" covenant and which contain customary limitations on the transfer of collateral. (Section 1014) 83 LIMITATION ON TRANSACTIONS WITH AFFILIATES The Indenture provides that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any transaction (or series of related transactions), including, without limitation, the sale, purchase, lease, or exchange of any property or the rendering of any service (a "Transaction"), involving payments in excess of $50,000, with any Affiliate of the Company (other than the Company or a Restricted Subsidiary), on terms and conditions less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available at such time in a comparable Transaction in arm's length dealings with an unrelated Person as determined by the Board of Directors, such approval to be evidenced by a Board Resolution. The provisions of the immediately preceding paragraph will not apply to: (1) Restricted Payments otherwise permitted pursuant to the covenant described under " -- Restrictions on Dividends, Redemptions and Other Payments"; (2) fees and compensation (including amounts paid pursuant to employee benefit plans) paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary, as determined by the Board of Directors or the senior management thereof in the exercise of their reasonable business judgment; or (3) payments for goods and services purchased in the ordinary course of business on an arm's length basis. (Section 1015) REPORTS So long as the Company is a reporting company under the Exchange Act, the Company will furnish to Holders of the Exchange Notes annual reports of the Company containing audited consolidated financial statements and interim reports with unaudited consolidated summary financial data on a quarterly basis. If the Company ceases to be a reporting company under the Exchange Act, the Company will furnish to Holders of the Exchange Notes annual audited consolidated financial statements and quarterly unaudited consolidated summary financial statements. (Section 704) EVENTS OF DEFAULT AND REMEDIES An Event of Default will include: (i) failure to pay the principal of or premium, if any, on the Notes when due at Stated Maturity, upon redemption or upon acceleration, as provided in the Indenture, whether or not prohibited by the subordination provisions of the Indenture, (ii) failure to pay any interest on the Notes for 30 days, whether or not prohibited by the subordination provisions of the Indenture, (iii) failure to give the Company Notice as described under "-- Repurchase at Option of Holders in Certain Circumstances," (iv) failure to perform, or a breach of, any other covenant or agreement set forth in the Indenture for 30 days after receipt of written notice from the Trustee or Holders of at least 25% in aggregate principal amount of the outstanding Notes specifying the default and requiring the Company to remedy such default, (v) default in the payment at Stated Maturity of Indebtedness for Money Borrowed of the Company or any Restricted Subsidiary having an outstanding principal amount due at Stated Maturity greater than $2.5 million and such default having continued for a period of 30 days beyond any applicable grace period, (vi) an event of default as defined in any mortgage, indenture or instrument of the Company or any Restricted Subsidiary shall have happened and resulted in acceleration of Indebtedness for Money Borrowed which, together with the principal amount of any other Indebtedness for Money Borrowed so accelerated, exceeds $2.5 million or more at any time, and such default shall not be cured or waived and such acceleration shall not have been rescinded or annulled within a period of 30 days from the occurrence of such acceleration, (vii) certain events of insolvency, receivership or reorganization of the Company or any Material Subsidiary and (viii) entry of a final judgment, decree or order against the Company or any Material Subsidiary for the payment of money in excess of $2.5 million and such judgment, decree or order continues unsatisfied for 30 days without a stay of execution. (Section 501) 84 If any Event of Default (other than as specified in clause (vii) above) occurs and is continuing, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by notice to the Trustee and the Company, may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Notes then outstanding shall, declare the principal of, premium, if any, and accrued interest on all of the Notes due and payable immediately, upon which declaration all amounts payable in respect of the Notes shall be immediately due and payable. If an Event of Default specified in clause (vii) above occurs and is continuing, then the principal of, premium, if any, and accrued interest on all of the Notes then outstanding shall automatically become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder of Notes. (Section 502) After a declaration of acceleration under the Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Notes, by written notice to the Company and the Trustee, may rescind such declaration if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes, (iii) the principal of (and premium, if any, on) any Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes (without duplication of any amount paid or deposited pursuant to clause (ii) or (iii) ); (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction; and (c) all Events of Default, other than the nonpayment of principal of (and premium, if any, on) or interest on the Notes that has become due solely by such declaration of acceleration, have been cured or waived. (Section 502) No Holder of any of the Exchange Notes will have any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless such Holder has notified the Trustee of a continuing Event of Default and the Holders of at least 25% in aggregate principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee under the Notes and the Indenture, the Trustee has failed to institute such proceeding within 60 days after receipt of such notice and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by Holders of a majority in aggregate principal amount of the outstanding Exchange Notes. Such limitations will not apply, however, to a suit instituted by a Holder of a Note for the enforcement of the payment of the principal of (or premium, if any, on) or interest on such Exchange Note on or after the respective due dates expressed in such Exchange Note. (Section 507 and 508) During the existence of an Event of Default, the Trustee will be required to exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will not be under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders of Notes unless such Holders shall have offered to the Trustee reasonable security or indemnity. Subject to certain provisions concerning the rights of the Trustee, the Holders of a majority in aggregate principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee under the Indenture. (Sections 512, 601 and 603) 85 The Holders of not less than a majority in aggregate principal amount of the Notes then outstanding may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences, except in respect of the payment of the principal of (or premium, if any, on) or interest on any Note or in respect of a provision of the Indenture which cannot be modified or amended without the consent of the Holder of each Note affected thereby as described below under " -- Modification and Waiver." (Section 513) If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee shall mail to each Holder of Notes notice of the Default or Event of Default within 90 days after the occurrence thereof. Except in the case of a Default or an Event of Default in payment of principal of (or premium, if any, on) or interest on any Notes, the Trustee may withhold the notice to the Holders of Notes if the Trustee determines in good faith that withholding the notice is in the interest of such Holders. (Section 602) The Company is required to deliver to the Trustee annual and quarterly statements regarding compliance with the Indenture, and the Company will also be required, upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. (Section 1011) REPURCHASE AT OPTION OF HOLDERS IN CERTAIN CIRCUMSTANCES If Senior Indebtedness of the Company and its Restricted Subsidiaries is not less than the greater of (i) $50 million and (ii) 45% of Total Consolidated Assets for at least 30 consecutive days during any consecutive 12 month period after August 1, 1997 (a "Repurchase Event"), each Holder of Notes shall have the right, at the Holder's option, to require the Company to repurchase all of such Holder's Notes, or any portion of the principal amount thereof that is equal to $1,000 or an integral multiple of $1,000 in excess thereof, on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined), at a price equal to (i) if the Repurchase Event occurs on or prior to July 31, 2000, 104% of the principal amount, (ii) if the Repurchase Event occurs after July 31, 2000 and on or prior to July 31, 2001, 102% and (ii) if the Repurchase Event occurs thereafter, 100% of the principal of the principal amount of the Notes to be repurchased, together with interest accrued to the Repurchase Date (the "Repurchase Price"). Within 30 days after the occurrence of a Repurchase Event, the Company is obligated to give to all Holders of the Notes notice, as provided in the Indenture (the "Company Notice"), of the occurrence of such Repurchase Event and of the repurchase right arising as a result thereof, or, at the request of the Company on or before the 15th day after such occurrence, the Trustee shall give the Company Notice. The Company must also deliver a copy of the Company Notice to the Trustee and to the office of each Paying Agent. To exercise the repurchase right, a Holder of Notes must deliver written notice to the Trustee or any Paying Agent of the Holder's exercise of such right, together with the Notes with respect to which the right is being exercised, in accordance with the procedures set forth in the Indenture. Any repurchase in connection with a Repurchase Event could, depending on the circumstances and absent a waiver from the holders of Senior Indebtedness, be blocked by the subordination provisions of the Debentures. See "-- Subordination of the Exchange Notes." Failure by the Company to repurchase the Notes when required may result in an Event of Default with respect to the Notes whether or not such repurchase is permitted by the subordination provisions. See "-- Events of Default and Remedies." Rule 13e-4 under the Exchange Act requires the dissemination of certain information to security holders in the event of an issuer tender offer and may apply in the event that the repurchase option 86 becomes available to Holders of the Notes. The Company will comply with this rule to the extent applicable at that time. The foregoing provisions would not necessarily afford Holders of the Exchange Notes protection in the event of highly leveraged or other transactions involving the Company that may adversely affect Holders. REDEMPTION AT OPTION OF THE COMPANY The Exchange Notes will not be redeemable at the Company's option prior to September 15, 2000. Thereafter, the Exchange Notes will be subject to redemption at the option of the Company, in whole or in part, upon not less than 30 or more than 60 days' notice mailed to the registered Holders thereof, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest to the applicable redemption date, if redeemed during the twelve-month period beginning on September 15 of the years indicated below: YEAR PERCENTAGE ---- ---------- 2000.............................................. 102% 2001 and thereafter............................... 100% The redemption price will be paid with interest accrued to the date fixed for redemption. If the Company elects to redeem less than all of the Notes, the Trustee will select which Notes to redeem by lot or such other method as it shall deem fair and appropriate, including the selection for redemption of a portion of the principal amount of any Note but not less than $1,000. On and after the redemption date, interest will cease to accrue on the Exchange Notes or portions thereof called for redemption. (Article Eleven) MODIFICATION AND WAIVER With certain limited exceptions which permit modifications of the Indenture by the Company and the Trustee only, the Indenture may be modified by the Company with the consent of Holders of not less than a majority in aggregate principal amount of outstanding Notes; provided however, that no such changes shall without the consent of the Holder of each Note affected thereby (i) change the maturity date of the principal of, or the due date of any installment of interest on, any Note, (ii) reduce the principal of, or the rate of interest on, any Note, (iii) change the place of payment or the currency in which any portion of the principal of, or interest on, any Note is payable, (iv) impair the right to institute suit for the enforcement of any such payment, (v) reduce the above-stated percentage of Holders of the outstanding Notes necessary to modify the Indenture, (vi) modify the foregoing requirements or reduce the percentage of outstanding Notes necessary to waive any past default or certain covenants or (vii) reduce the relative ranking of the Notes. (Section 902) The Holders of a majority in aggregate principal amount of outstanding Notes may waive compliance by the Company with certain covenants, most of which are described above under " -- Certain Covenants." (Section 1012) CONSOLIDATION, MERGER AND SALE OF ASSETS The Company may not consolidate with, merge with, or transfer all or substantially all of its assets to another entity where the Company is not the surviving corporation unless (i) such other entity assumes the Company's obligations under the Indenture, (ii) such other entity shall be a Person organized and 87 existing under the laws of the United States of America, any state thereof or the District of Columbia, and (iii) after giving effect thereto, no event shall have occurred and be continuing which, after notice or lapse of time, would become an Event of Default. (Section 801) LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have all of the obligations of the Company discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes and to have been discharged from all their other obligations with respect to such Notes, except for (i) the rights of Holders of outstanding Notes to receive payment in respect of the principal of and premium, if any, and interest on such Notes when such payments are due, (ii) the Company's obligations to replace any temporary Notes, register the transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes and maintain an office or agency for payments in respect of the Notes, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture, some of which are described under " -- Certain Covenants" above, and thereafter any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Notes ("Covenant Defeasance"). In the event Covenant Defeasance occurs, certain events (not including nonpayment, bankruptcy, insolvency and reorganization events) described under " -- Events of Default and Remedies" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in United States dollars, Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of (and premium, if any, on) and interest on the outstanding Notes to redemption or maturity; (ii) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance or Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance or Covenant Defeasance had not occurred (in the case of Legal Defeasance, such opinion must refer to and be based upon a published ruling of the Internal Revenue Service or a change in applicable federal income tax laws); (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clause (vi) under the first paragraph under " -- Events of Default and Remedies" is concerned, at any time during the period ending on the 91st day after the date of deposit; (iv) such Legal Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest under the Indenture or the Trust Indenture Act of 1939 with respect to any securities of the Company; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which the Company is a party or by which it is bound; and (vi) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent under the Indenture to either Legal Defeasance or Covenant Defeasance, as the case may be, have been complied with. (Article Twelve) SATISFACTION AND DISCHARGE OF INDENTURE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or 88 paid and Notes for whose payment money or Government Obligations have theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable or will become due and payable at their Stated Maturity within one year, or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the serving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of (and premium, if any, on) and interest on the Notes to the date of deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or redemption date, as the case may be, together with instructions from the Company irrevocably directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums then due and payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. (Sections 401 and 402) GOVERNING LAW The Indenture and the Exchange Notes will be governed and construed in accordance with the laws of the State of New York. (Section 113) THE TRUSTEE American Stock Transfer & Trust Company is the Trustee under the Indenture. The Trustee acts as Trustee in respect of the Company's Existing Notes. The Trustee is the transfer agent and registrar for both the Common Stock and the Series A Preferred Stock. The Indenture provides for the indemnification of the Trustee by the Company under certain circumstances. (Section 607) The Indenture (including the provisions of the Trust Indenture Act of 1939 incorporated by reference therein) will contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; PROVIDED, HOWEVER, if it acquires any conflicting interest (as defined in the Trust Indenture Act of 1939) it must eliminate such conflict or resign. (Sections 613 and 614) CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. (Section 101) "Acquired Indebtedness" means Indebtedness for Money Borrowed of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with the acquisition by the Company or a Restricted Subsidiary of assets from such Person, and not incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Restricted Subsidiary. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of 89 this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Average Life" means, with respect to any Indebtedness for Money Borrowed, as at any date of determination, the quotient obtained by dividing (a) the sum of the products of (i) the number of years (and any portion thereof) from the date of determination to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund or mandatory redemption payment requirements) of such Indebtedness for Money Borrowed multiplied by (ii) the amount of each such principal payment by (b) the sum of all such principal payments. "Board of Directors" means the board of directors of the Company or any duly authorized committee of that board. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as capital lease obligations on a balance sheet of such Person under GAAP and, for purposes of the Indenture, the amount of such obligations at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Consolidated EBITDA" means, for any period, determined in accordance with GAAP on a consolidated basis for the Company and its Restricted Subsidiaries, the sum of Consolidated Net Income, plus depreciation, depletion, amortization and other non-cash charges, income tax expense, and interest expense, for such period, each as deducted in determining such Consolidated Net Income. "Consolidated Interest Expense" means, for any period, the interest expense for such period, which is required to be shown as such on the financial statements of the Company and its Restricted Subsidiaries, on a consolidated basis, prepared in accordance with GAAP. "Consolidated Net Income" means, for any period, the amount of consolidated net income (loss) of the Company and its Restricted Subsidiaries for such period, determined in accordance with GAAP; provided, however, that there shall be included in Consolidated Net Income any net extraordinary gains or losses for such period (less all fees and expenses related thereto); and, provided, further, that there shall not be included in Consolidated Net Income (1) any net income (loss) of a Restricted Subsidiary for any portion of such period during which it was not a Consolidated Subsidiary, (2) any net income (loss) of businesses, properties or assets acquired or disposed of (by way of merger, consolidation, purchase, sale or otherwise) by the Company or any Restricted Subsidiary for any portion of such period prior to the acquisition thereof or subsequent to the disposition thereof or (3) any net income for such period resulting from transfers of assets received by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary. "Consolidated Subsidiary" means a Restricted Subsidiary the financial statements of which are consolidated with the financial statements of the Company. "Corporation" includes corporations, associations, companies, joint stock companies, limited liability companies or business trusts. "Credit Facility" means that certain Amended and Restated Credit Agreement, dated as of October 31, 1996, among the Company, Callon Petroleum Operating Company, Callon Offshore Production, Inc., the several banks and other financial institutions from time to time parties thereto (the "Banks"), and The 90 Chase Manhattan Bank, as agent for the Banks, as the same may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time. "Event of Default" has the meaning specified in the covenant described under "-- Events of Default and Remedies." "Existing Indenture" means that certain Indenture dated as of November 27, 1996 between the Company and American Stock Transfer & Trust Company, as Trustee, as the same may have been amended or supplemented from time to time prior to the date hereof. "Existing Notes" means the 10% Senior Subordinated Notes due December 15, 2001 issued pursuant to the Existing Indenture. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board in effect on the date of the Indenture. "Holder" when used with respect to the Notes, means the Person in whose name such Note is registered in the Note Register. "Indebtedness for Money Borrowed" means any of the following obligations of the Company or any Restricted Subsidiary: (1) any obligations, contingent or otherwise, for borrowed money or for the deferred purchase price of property, assets, securities or services (including, without limitation, any interest accruing subsequent to an event of default), (2) all obligations (including the Notes) evidenced by bonds, notes, debentures or other similar instruments, (3) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), except any such obligation that constitutes a trade payable and an accrued liability arising in the ordinary course of business, if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet prepared in accordance with GAAP, (4) all Capitalized Lease Obligations, (5) liabilities of the Company actually due and payable under bankers acceptances and letters of credit, (6) all indebtedness of the type referred to in clause (1), (2), (3), (4) or (5) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or security interest in property of the Company or any Restricted Subsidiary (including, without limitation, accounts and contract rights), even though the Company or any Restricted Subsidiary has not assumed or become liable for the payment of such indebtedness, and (7) any guarantee or endorsement (other than for collection or deposit in the ordinary course of business) or discount with recourse of, or other agreement, contingent or otherwise, to purchase, repurchase, or otherwise acquire, to supply, or advance funds or become liable with respect to, any indebtedness or any obligation of the type referred to in any of the foregoing clauses (1) through (6), regardless of whether such obligation would appear on a balance sheet; provided, however, that Indebtedness for Money Borrowed shall not include (i) Production Payments and Reserve Sales, (ii) any liability for gas balancing incurred in the ordinary course of business, (iii) accounts payable or other obligations of the Company or a Restricted Subsidiary in the ordinary course of business in connection with the obtaining of goods or services, and (iv) any liability under any and all (A) employment or consulting agreements or employee benefit plans or arrangements and (B) futures contracts, forward contracts, swap, cap or collar contracts, option contracts, or other similar derivative agreements. "Interest Coverage Ratio" means, for any date of determination, the ratio of (1) Consolidated EBITDA for the immediately preceding four fiscal quarters of the Company to (2) Consolidated Interest Expense for such immediately preceding four fiscal quarters. 91 "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing) upon or with respect to any property of any kind. A Person shall be deemed to own subject to a Lien any property which such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Material Subsidiary" means any Restricted Subsidiary whose assets or revenues comprise at least five percent (5%) of the assets or revenues of the Company and the Restricted Subsidiaries on a consolidated basis as of the end of, or for the, Company's most recently completed fiscal quarter, as determined from time to time. "Non-payment Event of Default" means any event (other than a Payment Event of Default), the occurrence of which (with or without notice or the passage of time) entitles one or more Persons to accelerate the maturity of any Specified Senior Indebtedness. "Note Register" means the register maintained by or for the Company in which the Company shall provide for the registration of the Notes and of transfer of the Notes. "Pari Passu Indebtedness" means any Indebtedness for Money Borrowed of the Company that is pari passu in right of payment to the Exchange Notes including, without limitation, the Notes. "Payment Event of Default" means any default in the payment or required prepayment of principal of (or premium, if any, on) or interest on any Specified Senior Indebtedness when due (whether at final maturity, upon scheduled installment, upon acceleration or otherwise). "Permitted Indebtedness" means any of the following: (a) Indebtedness for Money Borrowed outstanding on the date of the Indenture (and not repaid or defeased with the proceeds of the offering of the Notes); (b) Indebtedness for Money Borrowed of the Company to a Restricted Subsidiary and Indebtedness for Money Borrowed of a Restricted Subsidiary to the Company or a Restricted Subsidiary; provided, however, that upon any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness for Money Borrowed (except to the Company or a Restricted Subsidiary), such Indebtedness for Money Borrowed shall be deemed, in each case, to be incurred and shall be treated as an incurrence for purposes of the "Limitation on Indebtedness for Money Borrowed" covenant at the time the Restricted Subsidiary in question ceased to be a Restricted Subsidiary; (c) any guarantee of Senior Indebtedness incurred in compliance with the "Limitation on Indebtedness for Money Borrowed" covenant, by a Restricted Subsidiary or the Company; and (d) any renewals, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company or a Restricted Subsidiary of any Indebtedness for Money Borrowed incurred pursuant to clause (i) of this definition, including any successive refinancings by the Company or such Restricted Subsidiary, so long as (A) any such new Indebtedness for Money Borrowed shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness for Money Borrowed being refinanced provides for an 92 amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness for Money Borrowed refinanced or the amount of any premium reasonably determined by the Company or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of the Company or such Restricted Subsidiary incurred in connection with such refinancing, and (B) in the case of any refinancing of Indebtedness for Money Borrowed of the Company that is not Senior Indebtedness, such new Indebtedness for Money Borrowed is either PARI PASSU with the Notes or subordinated to the Notes at least to the same extent as the Indebtedness being refinanced and (C) such new Indebtedness for Money Borrowed has an Average Life equal to or longer than the Average Life of the Indebtedness for Money Borrowed being refinanced and a final Stated Maturity equal to or later than the final Stated Maturity of the Indebtedness for Money Borrowed being refinanced. "Permitted Junior Securities" means any equity securities or subordinated debt securities of the Company or any successor obligor with respect to the Senior Indebtedness provided for by a plan of reorganization or readjustment that, in the case of any such subordinated debt securities, are subordinated in right of payment to all Senior Indebtedness that may at the time be outstanding to substantially the same degree as, or to a greater extent than, the Notes are so subordinated as provided in the Indenture. "Permitted Liens" means any of the following types of Liens: (a) Liens existing as of the date the Notes are first issued (except to the extent such Liens secure any Pari Passu Indebtedness or Subordinated Indebtedness that is repaid or defeased with proceeds of the offering of the Notes), and any renewal, extension or refinancing of any such Lien provided that thereafter such Lien extends only to the properties that were subject to such Lien prior to the renewal, extension or refinancing thereof; (b) Liens securing the Notes; and (c) Liens in favor of the Company. "Person" means any individual, Corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Production Payments and Reserve Sales" means the grant or transfer to any Person of a royalty, overriding royalty, net profits interest, production payment (whether volumetric or dollar denominated), master limited partnership interest or other interest in oil and gas properties, which reserves the right to receive all or a portion of the production or the proceeds from the sale of production attributable to such properties where the holder of such interest has recourse solely to such production or proceeds of production, subject to the obligation of the grantor or transferor to operate and maintain, or cause the subject interests to be operated and maintained, in a reasonably prudent manner or other customary standard and/or subject to the obligation of the grantor or transferor to indemnify for environmental matters. "Restricted Subsidiary" means any Subsidiary, whether existing on or after the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms of the Indenture. "Senior Indebtedness" means the principal amount of (and premium, if any, on), and interest on and all other amounts due on or in connection with, (1) any Indebtedness for Money Borrowed of the 93 Company, whether now outstanding or hereafter created, incurred, assumed or guaranteed, unless in the instrument creating or evidencing such Indebtedness for Money Borrowed or pursuant to which such Indebtedness for Money Borrowed is outstanding it is provided that such indebtedness is subordinate in right of payment or in rights upon liquidation to any other Indebtedness for Money Borrowed of the Company and (2) all renewals, extensions and refundings of any such indebtedness. "Specified Senior Indebtedness" means (a) all Senior Indebtedness of the Company in respect of the Credit Facility and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings, or replacements (each, for purposes of this definition, a "refinancing") thereof by the Company, including any successive refinancings thereof by the Company and (b) any other Senior Indebtedness and any refinancings thereof by the Company having a principal amount of at least $5 million as of the date of determination and provided that the agreements, indentures or other instruments evidencing such Senior Indebtedness or pursuant to which such Senior Indebtedness was issued specifically designates such Senior Indebtedness as "Specified Senior Indebtedness" for purposes of the Indenture. For purposes of this definition, a refinancing of any Specified Senior Indebtedness shall be treated as Specified Senior Indebtedness only if the Senior Indebtedness issued in such refinancing ranks or would rank PARI PASSU with the Specified Senior Indebtedness refinanced and only if the Senior Indebtedness issued in such refinancing is permitted by the covenant described under "Certain Covenants -- Limitation of Indebtedness for Money Borrowed." "Stated Maturity" with respect to any Exchange Note or any installment of principal thereof or interest thereon means the date established by the Indenture as the fixed date on which the principal of such Exchange Note or such installment of principal or interest is due and payable, and, when used with respect to any other Indebtedness for Money Borrowed or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness for Money Borrowed as the fixed date on which the principal of such Indebtedness for Money Borrowed or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness for Money Borrowed of the Company which is expressly subordinated in right of payment to the Notes, including, without limitation, the Convertible Debentures. "Subsidiary" means any Corporation of which at the time of determination the Company or one or more Subsidiaries owns or controls directly or indirectly more than 50% of the Voting Stock. "Total Consolidated Assets" is defined in the indenture as the total assets of the Company and its Restricted Subsidiaries on a consolidated basis as of the date of the Company's most recent quarterly balance sheet prepared in accordance with GAAP. "Unrestricted Subsidiary" means (i) any Subsidiary that at the time of determination will be designated an Unrestricted Subsidiary by the Board of Directors as provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary as an Unrestricted Subsidiary so long as neither the Company nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness for Money Borrowed of such Subsidiary or has any assets or properties which are subject to any Lien securing any Indebtedness for Money Borrowed of such Subsidiary. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing a Board Resolution with the Trustee giving effect to such designation. The Board of Directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation, (i) no Event of Default shall have occurred and be continuing and (ii) the Company could occur $1.00 of additional Indebtedness for Money Borrowed (other than Permitted Indebtedness) under the "Limitation on Indebtedness for Money Borrowed" covenant. 94 "Voting Stock" means stock, interests, participations, rights in or other equivalents in the equity interests (however designated) with respect to a Corporation having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Corporation, provided that, for the purposes hereof, stock which carries only the right to vote conditionally on the happening of an event shall not be considered Voting Stock whether or not such event shall have happened. 95 DESCRIPTION OF THE OUTSTANDING NOTES The terms of the Outstanding Notes are identical in all material respects to the Exchange Notes, except that the Outstanding Notes have not been registered under the Securities Act, are subject to certain restrictions on transfer and are entitled to certain registration rights under the Registration Agreement (which rights terminate upon the consummation of the Exchange Offer, except under limited circumstances). The Exchange Notes will not provide for any increase in the interest rate thereon. In that regard, the Outstanding Notes provide that if an (i) exchange offer registration statement or resale shelf registration statement is not filed by October 1, 1997 or (ii) exchange offer registration statement is not declared effective by November 15, 1997, Special Interest will accrue and be payable quarterly until such time as an exchange offer registration statement is filed or becomes effective, as the case may be. In addition, (i) if an exchange offer is not consummated or a resale shelf registration statement is not declared effective by December 31, 1997 or (ii) if either the exchange offer registration statement or the resale shelf registration statement has been declared effective and such registration statement ceases to be effective or usable (subject to certain exceptions) in connection with resale of Exchange Notes or Outstanding Notes during periods specified in the Registration Agreement, Special Interest will accrue and be payable quarterly until such time as an exchange offer is consummated or a resale shelf registration statement is declared effective, as the case may be, or until the exchange offer registration statement or resale registration statement may again be used. Special Interest will accrue at a rate of 0.5% per annum during the 90-day period immediately following the occurrence of any failure to comply with the requirements set forth above and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall such rate exceed 1.50% per annum. The Exchange Notes are not entitled to any such Special Interest. In addition, the Outstanding Notes and the Exchange Notes will constitute a single series of debt securities under the Indenture. See "Description of the Exchange Notes." CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following summary describes certain United States Federal income tax consequences generally applicable to a holder that exchanges Outstanding Notes for Exchange Notes in the Exchange Offer. This discussion is based on the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), existing and proposed Treasury regulations, and judicial and administrative determinations, all of which are subject to change at any time, possibly on a retroactive basis. It relates only to persons who hold their Outstanding Notes, and will hold Exchange Notes exchanged therefor, as "capital assets" within the meaning of Section 1221 of the Code. It does not discuss state, local or foreign tax consequences, nor, except as otherwise noted, does it discuss tax consequences to categories of holders that are subject to special rules, such as foreign persons, tax-exempt organizations, insurance companies, banks and dealers in stocks and securities. Tax consequences may vary depending on the particular status of an investor. No rulings will be sought from the Internal Revenue Service ("IRS") with respect to the Federal income tax consequences of the Exchange Offer. THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO PARTICIPATE IN THE EXCHANGE OFFER. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE ITS OUTSTANDING NOTES FOR EXCHANGE NOTES. THE EXCHANGE OFFER Under recently-issued Treasury regulations, the exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange Offer should not constitute a significant modification of the terms of the Outstanding Notes and, accordingly, such exchange should be treated as a "nonevent" for Federal income 96 tax purposes. Therefore, such exchange should have no Federal income tax consequences to holders of Outstanding Notes who participate in the exchange, and each such holder would continue to be required to include interest on the Exchange Notes in its gross income in accordance with its method of accounting for Federal income tax purposes. TREATMENT OF INTEREST In general, interest on an Outstanding Note or Exchange Note will be taxable to a beneficial owner who or which is (i) a citizen or resident of the United States, (ii) a corporation created or organized under the laws of the United States or any State thereof (including the District of Columbia) or (iii) a person otherwise subject to United States Federal income taxation on its worldwide income (a "U.S. Holder") as ordinary income at the time it is received or accrued, depending on the U.S. Holder's method of accounting for tax purposes. Under the tax rules relating to original issue discount, holders of debt instruments issued at a discount that exceeds a nominal amount may be required to recognize taxable interest income prior to the receipt or accrual of stated interest. The Outstanding Notes were treated by the Company as issued without taxable original issue discount. In the case of a debt instrument issued that provides for contingent payments, Treasury Regulations provide that such payments will not be taken into account in computing original issue discount if there is a remote likelihood that the payments will occur. Had the Company failed to effect the Exchange Offer on a timely basis, special interest (the "Special Interest") would have accrued on the Outstanding Notes. Because the Company determined that, when the Outstanding Notes were issued, there was only a remote possibility that events would occur which would cause the Special Interest to accrue on the Outstanding Notes, the Company determined that the Special Interest should not be taken into account in concluding that the Outstanding Notes were issued without original issue discount. The IRS could disagree with this determination. Each U.S. Holder should consult his own tax advisor with respect to the possible accrual of original issue discount on the Outstanding Notes. OPTIONAL REDEMPTION OR REPURCHASE The Outstanding Notes and the Exchange Notes are subject to (i) redemption at the option of the Company, on or after September 15, 2000, at predetermined redemption prices plus any accrued and unpaid interest, and (ii) repurchase at the option of each Holder thereof upon the circumstances described under "Description of the Exchange Notes -- Mandatory Redemption at the Option of the Holders" at predetermined redemption prices plus any accrued and unpaid interest. See "Description of the Exchange Notes." Upon the optional redemption or repurchase of an Outstanding Note or an Exchange Note, it is expected that the amount received by a Holder in excess of the Holder's adjusted tax basis in the Outstanding Note or Exchange Note will be taxable as capital gain, if the Outstanding Note or the Exchange Note is held as a capital asset (except to the extent that such amount received is attributable to accrued but unpaid interest or market discount, which will be treated as ordinary income). PAYMENTS OF PRINCIPAL; DISPOSITIONS Upon the sale, exchange, redemption, retirement at maturity or other disposition of an Outstanding Note or an Exchange Note, a U.S. Holder will generally recognize taxable gain or loss equal to the difference between the sum of cash plus the fair market value of all other property received on such disposition (except to the extent such cash or property is attributable to accrued but unpaid interest or market discount, which will be taxable as ordinary income) and such U.S. Holder's adjusted tax basis in the Outstanding Note or the Exchange Note. A U.S. Holder's adjusted tax basis in an Outstanding Note or an Exchange Note generally will equal the cost of the Outstanding Note or the Exchange Note to such U.S. Holder (increased for accrued original issue discount, if any), less any principal payment received by such U.S. Holder. Gain or loss realized by a U.S. Holder on the sale, redemption or other disposition of an 97 Outstanding Note or an Exchange Note generally will be long-term capital gain or loss if, at the time of the disposition, the Outstanding Note or the Exchange Note has been held for more than 18 months. Beginning after December 31, 2000, special capital gain rates may apply if the Outstanding Note or Exchange Note has been held for more than five years. AMORTIZABLE BOND PREMIUM If a U.S. Holder pays an amount (exclusive of accrued and unpaid interest through the acquisition date) in excess of the Outstanding Note's or the Exchange Note's stated redemption price at maturity at the time of its acquisition ("Bond Premium"), the U.S. Holder will not be required to include original issue discount, if any, in his income and may elect to amortize Bond Premium. If Bond Premium is amortized, the amount of interest that must be included in the U.S. Holder's income from each period ending on an interest payment date or stated maturity, as the case may be, will be reduced by the portion of the Bond Premium allocable to such period based on the Outstanding Note's or the Exchange Note's yield to maturity and the U.S. Holder's adjusted basis in the Outstanding Notes or the Exchange Notes will be reduced accordingly. This election applies to all notes acquired by the U.S. Holder during the year of election and thereafter. MARKET DISCOUNT A U.S. Holder, other than an initial holder, will be treated as holding an Outstanding Note or an Exchange Note at a market discount (a "Market Discount Note") if the amount for which such U.S. Holder purchased the Outstanding Note or the Exchange Note is less than the Outstanding Note's or the Exchange Note's, respectively, stated redemption price at maturity, or, in the case of an Outstanding Note issued with original issue discount, the "revised issue price," as defined in Section 1278 of the Code, subject in both cases to a de minimis rule. An initial holder of an Outstanding Note will be treated as holding a Market Discount Note if the initial holder purchased such Outstanding Note for less than its issue price. In general, any partial payment of principal on, or gain recognized on the maturity, optional redemption or repurchase, or disposition of, a Market Discount Note will be treated as ordinary interest income to the extent of accrued market discount on such Market Discount Note. Alternatively, a U.S. Holder of a Market Discount Note may elect to include market discount in income currently over the life of the Market Discount Note. Such an election applies to all debt instruments with market discount acquired by the electing U.S. Holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the IRS. Market discount accrues on a straight-line basis, unless the U.S. Holder elects to accrue such discount on a constant yield to maturity basis. Such an election is applicable only to the Market Discount Note with respect to which it is made and is irrevocable. A U.S. Holder of a Market Discount Note that does not elect to include market discount in income currently generally will be required to defer deductions for interest on borrowings allocable to such Market Discount Note, in an amount not exceeding the accrued market discount on such Market Discount Note, until the maturity or disposition of such Market Discount Note. If such Market Discount Note is disposed of in a non-taxable transaction (other than a nonrecognition transaction described in Section 1276(c) of the Code) accrued market discount will be includable as ordinary income to the U.S. Holder as if such U.S. Holder had sold the Market Discount Note at its then fair market value. BACKUP WITHHOLDING Under the Code, a holder of an Outstanding Note or Exchange Note may be subject, under certain circumstances, to "backup withholding" at a 31% rate with respect to payments in respect of interest thereon or the gross proceeds from the disposition thereof. This withholding generally applies only if the holder (i) fails to furnish his or her social security or other taxpayer identification number ("TIN") after request therefor, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has failed to report properly payments of interest and dividends and the IRS has notified the Company that he or she is 98 subject to backup withholding, or (iv) fails, under certain circumstances, to provide a certified statement, signed under penalty of perjury, that the TIN provided is his or her correct number and that he or she is not subject to backup withholding. Any amount withheld from a payment to a holder under the backup withholding rules is allowable as a credit against such holder's Federal income tax liability, provided that the required information is furnished to the IRS. Corporations, Non-U.S. Holders and certain other entities described in the Code and Treasury regulations are generally exempt from such withholding if their exempt status is properly established. DESCRIPTION OF OUTSTANDING SECURITIES AND DEBT INSTRUMENTS COMMON STOCK The Company is authorized by its Charter to issue up to 20,000,000 shares of Common Stock, $0.01 par value. As of June 30, 1997, 5,996,171 shares of Common Stock were issued and outstanding. Holders of Common Stock are entitled to one vote per share in the election of directors and on all other matters submitted to a vote of stockholders. Such holders do not have the right to cumulate their votes in the election of directors. Holders of Common Stock have no redemption or conversion rights and no preemptive or other rights to subscribe for securities of the Company. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share equally and ratably in all of the assets remaining, if any, after satisfaction of all debts and liabilities of the Company, and of the preferential rights of any series of preferred stock then outstanding. The outstanding shares of Common Stock are validly issued, fully paid and nonassessable. Holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. American Stock Transfer & Trust Company is transfer agent and registrar for the Common Stock. PREFERRED STOCK The Company is authorized by its Charter to issue 2,500,000 shares of preferred stock, $0.01 par value per share. The Board of Directors has the authority to divide the preferred stock into one or more series and to fix and determine the relative rights and preferences of the shares of each such series, including dividend rates, terms of redemption, sinking funds, the amount payable in the event of voluntary liquidation, dissolution or winding up of the affairs of the Company, conversions rights and voting powers. The Company has authorized the issuance of the Convertible Exchangeable Preferred Stock, Series A, consisting of up to 1,380,000 shares of preferred stock ("Series A Preferred Stock"). SERIES A PREFERRED STOCK In November 1995, the Company issued and sold 1,315,500 shares of its Series A Preferred Stock. The following description of the Series A Preferred Stock is qualified in its entirety by the Certificate of Designations dated November 22, 1995, a copy of which is filed as an exhibit to the Company's Form 10-K for fiscal year ended December 31, 1995. DIVIDEND RIGHTS. Holders of the Series A Preferred Stock are entitled to an annual cash dividend of $2.125 per share, payable quarterly. If dividends are not paid in full on all outstanding shares of the Series A Preferred Stock and any other security ranking on parity with the Series A Preferred Stock, dividends declared on the Series A Preferred Stock and such other parity stock are paid pro rata. Unless full cumulative dividends on all outstanding shares of Series A Preferred Stock have been paid, no dividends (other than in Common Stock or other stock ranking junior to the Series A Preferred Stock) may be paid, or any other distributions made, on the Common Stock or on any other stock of the Company ranking junior to the Series A Preferred Stock, nor may any Common Stock or any other stock of the Company ranking junior to or on a parity with the Series A Preferred Stock be redeemed, purchased or 99 otherwise acquired for any consideration by the Company (except by conversion into or exchange for stock of the Company ranking junior to the Series A Preferred Stock). CONVERSION. The Series A Preferred Stock is convertible at any time prior to being called for redemption into Common Stock at a rate of approximately 2.273 shares of Common Stock for each share of Series A Preferred Stock, subject to adjustment for certain antidilutive events. The Company from time to time may reduce the conversion price by any amount for a period of at least 20 days if the Board of Directors determines that such reduction is in the best interests of the Company. In the event of certain changes in control or fundamental changes, holders of Series A Preferred Stock have the right to convert all of their Series A Preferred Stock into Common Stock at a rate equal to the average of the last reported sales prices of the Common Stock for the five business days ending on the last business day preceding the date of the change in control or fundamental change. The Company or its successor may elect to distribute cash to such holders in lieu of Common Stock at an equal value. EXCHANGE. The Series A Preferred Stock may be exchanged at the option of the Company for Convertible Debentures beginning on January 15, 1998 at the rate of $25 principal amount of Convertible Debentures for each share of Preferred Stock, provided that all accrued and unpaid dividends have been paid and certain other conditions are met. See "-- Convertible Debentures," below. REDEMPTION. On or after December 31, 1998 the Company may from time to time redeem the Series A Preferred Stock at an initial redemption price of $26.488. On December 31 of each year thereafter and until December 31, 2005, the redemption price decreases. On December 31, 2005 and thereafter, the redemption price shall remain at $25. VOTING RIGHTS. The holders of Series A Preferred Stock have no voting rights, except as otherwise provided by law. However, if dividend payments are in arrears in an amount equal to or exceeding six quarterly dividends, the number of directors of the Company will be increased by two and the holders of the Series A Preferred Stock (voting separately as a class) will be entitled to elect the additional two directors until all dividends have been paid. In addition, the Company may not create, issue or increase the authorized number of shares of any class or series of stock ranking senior to the Series A Preferred Stock or alter, change or repeal any of the powers, rights or preferences of the holders of the Series A Preferred Stock as to adversely affect such powers, rights or preferences. CONVERTIBLE DEBENTURES The Company may, at its option, exchange its Convertible Debentures for its Series A Preferred Stock. If issued, the Convertible Debentures will be issued under an indenture between the Company and Bank One, Columbus, NA, as trustee, a copy of which is filed as an exhibit to the Company's Form 10-K for fiscal year 1996. The statements below are summaries of certain provisions of such indenture and the Convertible Debentures, do not purport to be complete and are qualified in their entirety by such reference. GENERAL. The Convertible Debentures will be unsecured, subordinated obligations of the Company, limited in aggregate principal amount to the aggregate liquidation preference of the Series A Preferred Stock and will mature on December 31, 2010. The Company will pay interest on the Convertible Debentures semiannually following the issue thereof at the rate of 8.5% per annum. The Convertible Debentures are to be issued in fully registered form, without coupons, in denominations of $25 or any integral multiple thereof. CONVERSION. The Convertible Debentures will be convertible at any time after issue and prior to being called for redemption into Common Stock at the conversion rate in effect on the Series A Preferred Stock at the date of exchange, subject to adjustment for certain antidilutive events. The Company from 100 time to time may reduce the conversion price in order that certain stock-related distributions which may be made by the Company to its shareholders will not be taxable. Each holder of a Convertible Debenture will be entitled to conversion rights identical in substance to the rights applicable to holders of Series A Preferred Stock in the event of a change in control or fundamental change. SUBORDINATION Payment of principal of (and premium, if any) and interest on the Convertible Debentures will be subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, including the Notes. During the continuation of any default in the payment of principal, interest or premium on any senior indebtedness, no payment with respect to the principal, interest or premium (if any) on the Convertible Debentures may be made until such default on the senior indebtedness shall have been cured or waived or shall have ceased to exist. REDEMPTION On or after December 31, 1998, the Convertible Debentures may be redeemed at the option of the Company at a redemption price (expressed as percentages of principal amount) of 105.95%. On December 31 of each year thereafter and until December 31, 2005, the redemption price decreases. On December 31, 2005 and thereafter, the redemption price shall remain at 100.00%. EVENTS OF DEFAULT. Upon an Event of Default, the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Convertible Debentures may accelerate the maturity of all Convertible Debentures, subject to certain conditions. An Event of Default is defined in the indenture generally as (i) failure to pay principal or premium, if any, on any Convertible Debenture when due at maturity, upon redemption or otherwise; (ii) failure to pay an interest on any Convertible Debenture when due and continuing for 30 days; (iii) breach of such indenture or Convertible Debentures by the Company; (iv) certain events in bankruptcy, insolvency or reorganization; (v) default on indebtedness (other than non-recourse indebtedness) resulting in more than $7,500,000 becoming due and payable prior to its maturity; or (vi) a judgment or decree entered against the Company involving a liability of $7,500,000 or more. CREDIT FACILITY Effective October 31, 1996, the Company amended and restated its Credit Facility which is secured by mortgages covering substantially all of the Company's producing oil and gas properties. The Credit Facility provides for borrowings of a maximum of the lesser of $50 million and a Borrowing Base of $30 million which is adjusted periodically on the basis of a discounted present value attributable to the Company's proven producing oil and gas reserves. Pursuant to the Credit Facility, depending upon the percentage of the unused portion of the Borrowing Base, the interest rate is equal to either Prime or Prime plus 0.50%. Prime is the prime commercial lending rate announced from time to time by the lender. The Company, at its option, may fix the interest rate on all or a portion of the outstanding principal balance at either 1.00% or 1.375% above an agreement-defined "Eurodollar" rate, depending upon the percentage of the unused portion of the Borrowing Base, for periods of up to six months. The weighted average interest rate for the total debt outstanding at June 30, 1997 was 6.70%. Under the Credit Facility, a commitment fee of .25% or .375% per annum on the unused portion of the Borrowing Base (depending upon the percentage of the unused portion of the Borrowing Base) is payable quarterly. The Company may borrow, pay, reborrow and repay under the Credit Facility until October 31, 2000, on which date the Company must repay in full all amounts then outstanding. Borrowings under the Credit Facility are guaranteed by certain of the Company's subsidiaries. The Credit Facility has certain customary covenants including, but not limited to, covenants with respect to the following matters: (i) limitation on restricted payments, distributions and investments; (ii) limitations on guarantees and indebtedness; (iii) limitation on prepayments of subordinated indebtedness; (iv) limitation on prepayments of additional indebtedness; (v) limitation on mergers and issuances of securities; (vi) limitation on sales of property; (vii) limitation on transactions with affiliates; (viii) limitation on 101 derivative contracts; (ix) limitation on acquisitions, new businesses and margin stock; and (x) limitation with respect to certain prohibited types of contracts and multi-employer ERISA plans. The Company is also required to maintain certain financial ratios and conditions, including without limitation an EBITDA to debt service coverage ratio, a net worth requirement and a funded debt to capitalization ratio. EXISTING NOTES On November 24, 1996, the Company sold $24,150,000 aggregate principal amount of 10% Senior Subordinated Notes due December 15, 2001 (the "Existing Notes"). The following description of the Existing Notes is qualified in its entirety by reference to the indenture for the Existing Notes ("Existing Indenture"), a form of which is available upon request of the Company. Capitalized terms have the meanings assigned to them in the Existing Indenture. Payments of principal, interest and premium, if any, under the Existing Notes are subordinate to all existing and future Senior Indebtedness of the Company and PARI PASSU with the Notes. The Existing Notes are not entitled to the benefit of mandatory sinking fund payments. The Existing Notes are subject to redemption at any time on or after December 15, 1997, at the option of the Company, at par plus accrued and unpaid interest to the date fixed for redemption. The Existing Notes contain covenants substantially identical to the Notes. See "Description of the Exchange Notes - Certain Covenants." PLAN OF DISTRIBUTION Based on interpretations of the staff of the Division of Corporation Finance of the Commission set forth in no- action letters issued to third parties, the Company believes that, except as described below, Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by respective holders thereof (other than a holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that (i) such Exchange Notes are acquired in the ordinary course of such holder's business and (ii) such holder is not participating, and has no arrangement or understanding with any person to participate in a distribution of the Exchange Notes. A holder of Outstanding Notes that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or who intends to participate in the Exchange Offer for the purpose of distributing Exchange Notes, or that is a broker-dealer that purchased Outstanding Notes from the Company to resell pursuant to an exemption from registration (a) cannot rely on such interpretations by the staff of the Division of Corporation Finance of the Commission, (b) will not be permitted or entitled to tender such Outstanding Notes in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of such Outstanding Notes. Any holder who tenders Outstanding Notes in the Exchange Offer with the intention or for the purpose of participating in a distribution of the Exchange Notes cannot rely on such interpretation by the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Unless an exemption from registration is otherwise available, any such resale transaction should be covered by an effective registration statement containing selling security holders information required by Item 507 of Regulation S-K under the Securities Act. To date, the staff of the Commission has taken the position that a broker-dealer that has acquired securities in exchange for securities that were acquired by such broker-dealer as a result of market making activities or other trading activities (a "Participating Broker-Dealer") may fulfill its prospectus delivery requirements with the prospectus contained in an exchange offer registration statement. 102 Each holder of Outstanding Notes who wishes to exchange its Outstanding Notes for Exchange Notes in the Exchange Offer will be required to make certain representations to the Company set forth in "The Exchange Offer -- Procedures for Tendering." Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where such Outstanding Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business on the forty-fifth day after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit from any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of forty-five days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to indemnify the holders of the Outstanding Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the Exchange Notes will be passed upon by Butler & Binion, L.L.P., Houston, Texas. 103 EXPERTS The financial statements of the Company as of December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as stated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. The statement of revenues an direct operating expenses of the working interest in Mobile Area Block 864 Unit acquired by Callon Petroleum Operating Company for the year ended December 31, 1996 included in this Prospectus has been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of said firm as experts in accounting and auditing. The information appearing in this Prospectus regarding quantities of reserves of oil and gas and that future net cash flows and the present values thereof from such reserves is based on estimates of such reserves and present values prepared by Huddleston & Co., Inc., an independent petroleum and geological engineering firm. 104 GLOSSARY The following definitions shall apply to the technical terms used in this Prospectus. "Bbls" means barrels. "Bbls/d" means barrels per day. "Bcf" means billion cubic feet. "Bcfe" means billion cubic feet equivalent, determined using the ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids. "Gross" means the number of wells or acres in which the Company has an interest. "MBbls" means thousands of barrels. "Mcf" means thousands of cubic feet. Gas volumes are stated at the legal pressure base of the state or area in which the reserves are located at 60 degrees Fahrenheit. "Mcf/d" means thousand cubic feet per day. "Mcfe" means one thousand cubic feet equivalent, determined using the ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids. "MMBbls" means millions of barrels. "MMBtu" means a million British thermal units. A British thermal unit is the heat required to raise the temperature of a one-pound mass of water from 59.5 to 60.5 degrees Fahrenheit under specified conditions. "MMcf" means millions of cubic feet. "MMcfe" means one million cubic feet equivalent, determined using the ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids. "Net" is determined by multiplying gross wells or acres by the Company's working interest in such wells or acres. "PV-10 Value" means the present value, discounted at 10%, of future net cash flows from estimated proved reserves, calculated holding prices and costs constant at amounts in effect on the date of the report (unless such prices or costs are subject to change pursuant to contractual provisions). "Reserve Replacement Costs," expressed in dollars per Mcfe, is calculated by dividing the amount of total capital expenditures for oil and gas activities by the amount of proved reserves added during the same period (including the effect on proved reserves of reserve revisions). 105 INDEX TO FINANCIAL STATEMENTS PAGE CALLON PETROLEUM COMPANY (HISTORICAL): Report of Independent Public Accountants.......................... F-2 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995........................................ F-3 Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1996 and for the Years Ended December 31, 1996, 1995 and 1994..................................................... F-4 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 1997 and for the Years Ended December 31, 1996, 1995 and 1994.................................. F-5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 and for the Years Ended December 31, 1996, 1995 and 1994..................................................... F-6 Notes to Consolidated Financial Statements........................ F-7 CALLON PETROLEUM COMPANY (PRO FORMA): Introduction...................................................... F-21 Pro Forma Consolidated Financial Statements....................... F-22 Notes to Pro Forma Consolidated Financial Statements.............. F-24 MAB 864 ACQUISITION Report of Independent Public Auditors............................. F-25 Statement of Revenues and Direct Operating Expenses for the year ended December 31, 1996.............................. F-26 Notes to Statement of Revenues and Direct Operating Expenses.......................................................... F-27 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Callon Petroleum Company: We have audited the accompanying consolidated balance sheets of Callon Petroleum Company (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Callon Petroleum Company and subsidiaries, as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New Orleans, Louisiana February 19, 1997 F-2 CALLON PETROLEUM COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30, ------------------------------ 1997 1996 1995 --------- --------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ........................................ $ 8,940 $ 7,669 $ 4,265 Accounts receivable .............................................. 9,641 12,661 8,329 Other current assets ............................................. 712 516 238 --------- --------- --------- Total current assets .......................................... 19,293 20,846 12,832 --------- --------- --------- Oil and gas properties, full cost accounting method: Evaluated properties ............................................. 351,633 322,970 304,737 Less accumulated depreciation, depletion and amortization ........ (274,143) (266,716) (257,143) --------- --------- --------- 77,490 56,254 47,594 Unevaluated properties excluded from amortization ................ 30,763 26,235 10,171 --------- --------- --------- Total oil and gas properties .................................. 108,253 82,489 57,765 --------- --------- --------- Pipeline and other facilities, net .................................. 6,463 6,618 5,371 Other property and equipment, net ................................... 1,883 1,594 1,633 Deferred tax asset .................................................. 3,101 5,412 5,462 Long-term gas balancing receivable .................................. 496 660 619 Other assets, net ................................................... 852 901 185 --------- --------- --------- Total assets .................................................. $ 140,341 $ 118,520 $ 83,867 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ......................... $ 8,060 $ 8,273 $ 3,131 Undistributed oil and gas revenues ............................... 2,827 2,260 2,153 Accrued net profits interest payable (Note 9) .................... 3,929 5,435 2,836 --------- --------- --------- Total current liabilities ..................................... 14,816 15,968 8,120 --------- --------- --------- Long-term debt ...................................................... 42,750 24,250 100 Deferred income ..................................................... 170 48 86 Long-term gas balancing payable ..................................... 551 390 432 --------- --------- --------- Total liabilities ............................................. 58,287 40,656 8,738 --------- --------- --------- Stockholders' equity: Preferred Stock, $0.01 par value; 2,500,000 shares authorized; 1,315,500 shares of Convertible Exchangeable Preferred Stock, Series A issued and outstanding with a liquidation preference of $32,887,500 (Note 11) ...................................... 13 13 13 Common Stock, $0.01 par value; 20,000,000 shares authorized; 5,996,171 at June 30, 1997 and 5,758,667 and 5,754,529 shares outstanding at December 31, 1996 and 1995, respectively .................................................. 60 58 58 Unearned compensation - restricted stock ......................... (2,181) -- -- Capital in excess of par value ................................... 76,903 74,027 73,955 Retained earnings ................................................ 7,259 3,766 1,103 --------- --------- --------- Total stockholders' equity .................................... 82,054 77,864 75,129 --------- --------- --------- Total liabilities and stockholders' equity .................... $ 140,341 $ 118,520 $ 83,867 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-3 CALLON PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------- ---------------------------- 1997 1996 1996 1995 1994 ------- ------- ------- ------- -------- (UNAUDITED) Revenues: Oil and gas sales ....... $20,844 $12,249 $25,764 $23,210 $ 13,948 Interest and other ...... 695 278 946 627 171 ------- ------- ------- ------- -------- Total revenues ....... 21,539 12,527 26,710 23,837 14,119 ------- ------- ------- ------- -------- Costs and expenses: Lease operating expenses 4,164 3,686 7,562 6,732 4,042 Depreciation, depletion and amortization ...... 7,581 4,844 9,832 10,376 6,049 General and administrative ........ 2,382 1,707 3,495 3,880 3,717 Interest ................ 210 48 313 1,794 624 ------- ------- ------- ------- -------- Total costs and expenses ........... 14,337 10,285 21,202 22,782 14,432 ------- ------- ------- ------- -------- Income (loss) from operations .............. 7,202 2,242 5,508 1,055 (313) Income tax expense (benefit) ............. 2,311 -- 50 -- (200) ------- ------- ------- ------- -------- Net income (loss) .......... 4,891 2,242 5,458 1,055 (113) Preferred stock dividends .. 1,398 1,398 2,795 256 -- ------- ------- ------- ------- -------- Net income (loss) available to common shares ......... $ 3,493 $ 844 $ 2,663 $ 799 $ (113) ======= ======= ======= ======= ======== Net income (loss) per common share: Primary ................. $ 0.55 $ 0.15 $ 0.45 $ 0.14 $ (0.03) ======= ======= ======= ======= ======== Assuming full dilution .. $ 0.52 $ 0.15 $ 0.43 $ 0.14 $ (0.03) ======= ======= ======= ======= ======== Shares used in computing net income (loss) per common share: Primary ................. 6,307 5,755 5,952 5,755 4,346 ======= ======= ======= ======= ======== Assuming full dilution .. 9,318 5,755 6,135 5,755 4,346 ======= ======= ======= ======= ======== The accompanying notes are an integral part of these financial statements. F-4 CALLON PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
UNEARNED COMPENSATION- CAPITAL IN CAPITAL PREFERRED COMMON RESTRICTED EXCESS OF RETAINED ACCOUNTS STOCK STOCK STOCK PAR VALUE EARNINGS -------- -------- -------- -------- -------- -------- Balances, December 31, 1993 ............................. $ 27,170 $ -- $ -- $ -- $ -- $ -- Pre consolidation income (loss) ....................... (417) -- -- -- -- -- Distributions ........................................... (1,191) -- -- -- -- -- Consolidation (Note 1) .................................. (25,562) -- 58 -- 43,069 -- Post consolidation income ............................... -- -- -- -- -- 304 -------- -------- -------- -------- -------- -------- Balances, December 31, 1994 ............................. -- -- 58 -- 43,069 304 Net income .............................................. -- -- -- -- -- 1,055 Sale of preferred stock (Note 11) ....................... -- 13 -- -- 30,886 -- Preferred stock dividends ............................... -- -- -- -- -- (256) -------- -------- -------- -------- -------- -------- Balances, December 31, 1995 ............................. -- 13 58 -- 73,955 1,103 Net income .............................................. -- -- -- -- -- 5,458 Preferred stock dividends ............................... -- -- -- -- -- (2,795) Shares issued pursuant to employee benefit plan ................................. -- -- -- -- 72 -- -------- -------- -------- -------- -------- -------- Balances, December 31, 1996 ............................. -- 13 58 -- 74,027 3,766 Net income (Unaudited) .................................. -- -- -- -- -- 4,891 Preferred stock dividends (Unaudited) ................... -- -- -- -- -- (1,398) Shares issued pursuant to employee benefit plan (Unaudited) .............................. -- -- -- -- 178 -- Restricted stock issued to officers (Unaudited) ......... -- -- 2 (2,700) 2,698 -- Unearned compensation - restricted stock - (Unaudited) .......................................... -- -- -- 519 -- -- -------- -------- -------- -------- -------- -------- Balances, June 30, 1997 (Unaudited) .......................................... $ -- $ 13 $ 60 $ (2,181) $ 76,903 $ 7,259 ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-5 CALLON PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------------- ----------------------------------- 1997 1996 1996 1995 1994 -------- -------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net income (loss) ................................................. $ 4,891 $ 2,242 $ 5,458 $ 1,055 $ (113) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization ....................... 7,791 4,982 10,131 10,600 6,328 Amortization of deferred costs ................................. 188 65 114 133 88 Deferred income tax expense (benefit) .......................... 2,311 -- 50 -- (200) -------- -------- -------- -------- -------- 15,181 7,289 15,753 11,788 6,103 Changes in current assets and liabilities: Accounts receivable .......................................... 3,020 330 (4,332) 566 565 Other current assets ......................................... (196) 123 (278) (217) (8) Accounts payable ............................................. (1,152) 3,029 4,049 (2,570) (1,242) Change in gas balancing receivable ............................. 164 84 (41) 115 (148) Change in gas balancing payable ................................ 161 (37) (42) (127) 210 Change in deferred income ...................................... 122 (22) (28) (42) (43) Change in other assets, net .................................... (138) (45) (830) (61) (90) -------- -------- -------- -------- -------- Cash provided by operating activities .......................... 17,162 10,751 14,251 9,452 5,347 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures ............................................ (36,214) (9,166) (34,291) (24,323) (10,420) Equity issued to purchase CN cash (Note 4) ...................... -- -- -- -- 3,989 Cash proceeds from sale of mineral interests .................... 2,524 299 1,574 86 8 -------- -------- -------- -------- -------- Cash used in investing activities ............................... (33,690) (8,867) (32,717) (24,237) (6,423) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in debt ................................................ 18,500 -- -- -- -- Unearned restricted stock compensation .......................... 519 -- -- -- -- Equity issued by conversion of stock options .................... 30 -- -- -- -- Payments on debt ................................................ -- -- (25,850) (25,134) (20,627) Proceeds from debt issuance ..................................... -- -- 50,000 6,000 25,734 Dividends/distributions paid .................................... -- -- -- -- (1,191) Sale of preferred stock ......................................... -- -- -- 30,899 -- Common stock issued pursuant to employee benefit plan ........... 148 -- 72 -- -- Increase in accrued preferred stock dividends payable ........... -- 443 443 256 -- Dividends on preferred stock .................................... (1,398) (1,398) (2,795) (256) -- -------- -------- -------- -------- -------- Cash provided by (used in) financing activities ................. 17,799 (955) 21,870 11,765 3,916 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents .............. 1,271 929 3,404 (3,020) 2,840 Cash and cash equivalents: Balance, beginning of period .................................... 7,669 4,265 4,265 7,285 4,445 -------- -------- -------- -------- -------- Balance, end of period .......................................... $ 8,940 $ 5,194 $ 7,669 $ 4,265 $ 7,285 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-6 CALLON PETROLEUM COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO JUNE 30, 1997 AND 1996 IS UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION Callon Petroleum Company, formerly Callon Petroleum Holding Company, (the "Company") was organized under the laws of the state of Delaware in March 1994 to serve as the surviving entity in the consolidation to combine the businesses and properties of Callon Consolidated Partners, L.P. ("CCP"), Callon Petroleum Operating Company ("CPOC") and CN Resources ("CN"), directly or indirectly, with the Company. CPOC was the general partner of CCP, and CN was a general partnership between CPOC and NOCO Enterprises, L. P. ("NOCO"), a limited partnership owned by private investors (CPOC, CCP and CN are referred to collectively as the "Constituent Entities"). The combination of the businesses and properties of the Constituent Entities with the Company was effected in three simultaneous transactions on September 16, 1994 (collectively, the "Consolidation"): (i) CCP was merged (the "Merger") into the Company and each unit of limited partner interest in CCP ("Units") was converted into the right to receive one-third of a share of Common Stock of the Company ("Common Stock"). Subject to compliance with certain requirements, any holder of less than 100 Units could elect to receive, in lieu of shares of Common Stock, $4.50 in cash per Unit owned. CCP unitholders received 1,877,493 shares of Common Stock of the Company. (ii) Holders of capital stock of CPOC exchanged such capital stock for an aggregate of 1,892,278 shares of Common Stock of the Company, resulting in CPOC becoming a wholly owned subsidiary of the Company (the "Share Exchange"). (iii) NOCO exchanged its partner interest for 1,984,758 shares of Common Stock of the Company, resulting in CN becoming directly and indirectly wholly owned by the Company (the "CN Exchange"). See Note 4. As a result of the Consolidation, all of the businesses and properties of the Constituent Entities are owned (directly or indirectly) by the Company, and the former stockholders of CPOC, partners of CCP and NOCO have become stockholders of the Company. Certain registration rights were granted to the holders of the capital stock of CPOC and NOCO. See Note 7. The Company and its predecessors have been engaged in the acquisition, development and exploration of crude oil and natural gas since 1950. The Company's properties are geographically concentrated in Louisiana, Alabama and offshore Gulf of Mexico. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements of the Company reflect the combination of CPOC, CCP, and CPOC's interest in CN as a reorganization of entities under common control (accounted for similar to a "pooling of interest"). NOCO's interest in CN was recorded as a purchase effective at the date of the Consolidation (September 16, 1994), thus amounts related to the CN Exchange are included from the date of the purchase for the periods presented in the Consolidated Financial Statements. CPOC made no direct investment in CN, therefore the inclusion of 100% of the assets and liabilities of CN in the Consolidated Balance Sheet, as of the purchase date, are attributable to NOCO's interest in CN. Because F-7 no revenues or expenses, as of the date of the Consolidation, were attributable to CPOC's interest in CN until NOCO had received a preferential return on its investment, all of the revenues and expenses of CN through September 16, 1994, are also attributable to NOCO. See Note 4 for pro forma information. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND REPORTING The Consolidated Financial Statements include the accounts of the Company, and its subsidiary, CPOC. CPOC also has subsidiaries which are Callon Offshore Production, Inc., Mississippi Marketing, Inc. and Callon Exploration Company. All intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to presentation in the current year. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". FAS 121 was adopted by the Company on January 1, 1996. The effect of adopting FAS 121 was not material to the Company's financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", effective for the Company at December 31, 1996. Under FAS 123, companies can either record expenses based on the fair value of stock-based compensation upon issuance or elect to remain under the current "APB Opinion No. 25" method, whereby no compensation cost is recognized upon grant, and make disclosures as if FAS 123 had been applied. The Company will continue to account for its stock-based compensation plans under APB Opinion No. 25. See Note 10. In June 1997, the Financial Accounting Standard Board issued Statement No. 130 ("FAS 130"), "Reporting Comprehensive Income". FAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. FAS 130 is effective for fiscal years ending after December 15, 1997. The Company intends to comply with the provisions of FAS 130. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties whereby all costs incurred in connection with the acquisition, exploration and development of oil and gas reserves, including certain overhead costs, are capitalized. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals, interest capitalized on unevaluated leases and other costs related to exploration and development activities. Payroll and general and administrative costs include salaries and related fringe benefits paid to employees directly engaged in the acquisition, exploration and/or development of oil and gas properties as well as other directly identifiable general and administrative costs associated with such activities. Costs associated with unevaluated properties are excluded from amortization. Unevaluated property costs are transferred to evaluated F-8 property costs at such time as wells are completed on the properties, the properties are sold or management determines these costs have been impaired. Costs of properties, including future development and net future site restoration, dismantlement and abandonment costs, which have proved reserves and those which have been determined to be worthless, are depleted using the unit-of-production method based on proved reserves. If the total capitalized costs of oil and gas properties, net of amortization, exceed the sum of (1) the estimated future net revenues from proved reserves at current prices and discounted at 10% and (2) the cost of unevaluated properties (the full cost ceiling amount), then such excess is charged to expense during the period in which the excess occurs. Upon the acquisition or discovery of oil and gas properties, management estimates the future net costs to be incurred to dismantle, abandon and restore the property using geological, engineering and regulatory data available. Such cost estimates are periodically updated for changes in conditions and requirements. Such estimated amounts are considered as part of the full cost pool subject to amortization upon acquisition or discovery. Such costs are capitalized as oil and gas properties as the actual restoration, dismantlement and abandonment activities take place. As of June 30, 1997, December 31, 1996 and 1995, estimated future site restoration, dismantlement and abandonment costs, net of related salvage value and amounts funded by abandonment trusts (see Notes 7 and 9), were not material. Depreciation of other property and equipment is provided using the straight-line method over estimated lives of three to twenty years. Depreciation of the pipeline facilities is provided using the straight-line method over a 27 year estimated life. NATURAL GAS IMBALANCES The Company follows an entitlement method of accounting for its proportionate share of gas production on a well by well basis, recording a receivable to the extent that a well is in an "undertake" position and conversely recording a liability to the extent that a well is in an "overtake" position. DERIVATIVES The Company uses derivative financial instruments (see Note 6) for price protection purposes on a limited amount of its future production, and does not use them for trading purposes. Such derivatives are accounted for on an accrual basis and amounts paid or received under the agreements are recognized as oil and gas sales in the period in which they accrue. RESERVE FOR DOUBTFUL ACCOUNTS The balance in the reserve for doubtful accounts included in accounts receivable is $374,000, $393,000 and $481,000 at June 30, 1997, December 31, 1996 and 1995 respectively. Net charge offs were $88,000 and $181,000 in 1996 and 1994 and net recoveries were $2,000 in 1995. There were no provisions to expense in the three year period ended December 31, 1996 or the six months ended June 30, 1997. Net charge offs were $2,000 and $88,000 for the six months ended June 30, 1997 and 1996, respectively. STATEMENTS OF CASH FLOWS For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company paid no federal income taxes for the three years ended December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, the Company made cash payments of $250,807, $1,910,000 and $377,000, respectively, for interest charged on its indebtedness, and $1,337,000 for the six months ended June 30, 1997. F-9 PER SHARE AMOUNTS Per share amounts are calculated on a weighted average basis in accordance with the common shares issued in the Consolidation described in Note 1, adjusted for the effect of stock options considered common stock equivalents computed using the treasury stock method. Fully diluted earnings per share for the six months ended June 30, 1997 was calculated assuming the conversion of the Company's preferred stock into common stock. The preferred stock was not included in prior calculations due to their antidilutive effect on fully diluted earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("FAS 128"), "Earnings Per Share", which simplifies the computation of earnings per share. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement for all prior period earnings per share data presented. Accordingly, basic earnings per share and diluted earnings per share calculated in accordance with FAS 128 were $0.58 and $0.52 per share, respectively, for the first six months of 1997 and $0.15 and $0.15 per share, respectively, for the first six months of 1996. Also in early 1997, the Financial Accounting Standards Board issued Statement No. 129 ("FAS 129"). "Disclosure of Information about Capital Structure" effective for financial statements issued for periods ending after December 15, 1997. The Company believes it is in compliance with the provisions of this statement. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of cash, cash equivalents, accounts receivable, accounts payable and long-term debt approximate book value at June 30, 1997 and December 31, 1996. Fair value of long-term debt (specifically the 10% senior subordinated notes) is based on quoted market value. 3. INCOME TAXES The Company follows the asset and liability method of accounting for deferred income taxes prescribed by Financial Accounting Standards Board Statement No. 109 ("FAS 109") "Accounting for Income Taxes". The statement provides for the recognition of a deferred tax asset for deductible temporary timing differences, capital and operating loss carryforwards, statutory depletion carryforward and tax credit carryforwards, net of a "valuation allowance". The valuation allowance is provided for that portion of the asset, for which it is deemed more likely than not, that it will not be realized. Accordingly, the Company has recorded a deferred tax asset at December 31, 1996, 1995 and 1994 as follows: DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Federal net operating loss carryforward .... $ 3,441 $ 3,563 $ 2,072 Statutory depletion carryforward ........... 4,089 3,987 4,085 Temporary differences: Oil and gas properties .................. (680) 874 2,817 Pipeline and other facilities ........... (2,316) (1,880) (1,953) Non-oil and gas property ................ (20) 23 28 Other ................................... 898 655 724 ------- ------- ------- Total tax asset ............................ 5,412 7,222 7,773 Valuation allowance ........................ -- (1,760) (2,311) ------- ------- ------- Net tax asset .............................. $ 5,412 $ 5,462 $ 5,462 ======= ======= ======= F-10 At December 31, 1996, the Company had, for tax reporting purposes, operating loss carryforwards ("NOL") of $9.8 million which expire in 2000 through 2011. Approximately $4.7 million of such carryovers are subject to limitations on utilization as a result of ownership changes which occurred in CPOC's common stock prior to the Consolidation and ownership changes as a result of the Consolidation. Additionally, the Company had available for tax reporting purposes $11.7 million in statutory depletion deductions which can be carried forward for an indefinite period. The provision for income taxes at the Company's effective tax rate differed from the provision for income taxes at the statutory rate as follows: DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Computed expense (benefit) at the expected statutory rate ................................ $ 1,910 $ 369 $ (110) Change in valuation allowance ................. (1,760) (551) (94) Other ......................................... (100) 182 4 ------- ------- ------- Income tax expense (benefit) .................. $ 50 $ -- $ (200) ======= ======= ======= 4. ACQUISITIONS On September 14, 1994, (with an effective date of September 16, 1994) the unitholders of CCP, stockholders of CPOC, and the partners of CN completed the Consolidation as described in Note 1. Net assets purchased (excluding cash of $3,989,000) was $13,847,000 of which oil and gas property, including pipeline facilities, and debt amounted to $24,506,000 and $11,436,000, respectively. Such amounts represent non-cash transactions and therefore are not included in the Consolidated Statements of Cash Flows. On December 29, 1995, CPOC purchased a 66.67% working interest in Chandeleur Block 40 (the "CB 40 Acquisition") from Amerada Hess Corporation and, in a simultaneous transaction under a pre-existing agreement, sold one-third of the acquired interest to an industry partner. The Company's net purchase price of $6 million was funded from existing cash on hand. The following information represents unaudited pro forma results of the Company for the years ended December 31, 1995 and 1994 and includes both the purchase of CN and the CB 40 Acquisition, presented as if the purchase of CN had occurred at the beginning of 1994 and the CB 40 Acquisition presented as if it had occurred at the beginning of 1995 and 1994. PRO FORMA (UNAUDITED) 1995 1994 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues..................................... $ 25,207 $ 29,132 Net income before cumulative effect of change in accounting principle............................. $ 804 $ 3,703 Net income per common share........................ $ 0.14 $ 0.64 Weighted average shares outstanding................ 5,755 5,755 F-11 Pro forma shares outstanding used in the above calculations include shares of the Company issued as a result of the Merger of CCP and the Share Exchange in addition to the shares of the Company issued in the CN Exchange. The Company, together with an industry partner, was the high bidder on 12 offshore tracts at the Outer Continental Shelf ("OCS") Lease Sale #157, held April 24, 1996 in New Orleans, Louisiana, and conducted by the U. S. Department of the Interior through its Minerals Management Service ("MMS"). The Company holds a 25% working interest in the leases and its share of the total lease costs was approximately $11.4 million. On September 25, 1996, the Company and the same industry partner submitted bids and were awarded six additional offshore leases at the OCS Lease Sale #161, held in New Orleans, Louisiana by the MMS. The Company's share of the costs was $3.8 million. The Company owns a 25% working interest in the leases. On June 26, 1997 the Company purchased an 18.8% working interest in Mobile Area Blocks 863 and 907 and a 35% working interest in Mobile Area Block 908 from Elf Exploration, Inc. The Company's net purchase price of approximately $11.8 million was funded from the Company's credit facility. 5. LONG-TERM DEBT Long-term Debt consisted of the following at: DECEMBER 31, JUNE 30, -------------------- 1997 1996 1995 ------- ------- ------- (UNAUDITED) (IN THOUSANDS) Credit Facility ......................... $18,600 $ 100 $ 100 10% Senior Subordinated Notes ........... 24,150 24,150 -- Less current portion ............... -- -- -- ------- ------- ------- $42,750 $24,250 $ 100 ======= ======= ======= Effective October 31, 1996, the Company entered into a new Credit Facility with Chase Manhattan Bank. Borrowings under the Credit Facility are secured by mortgages covering substantially all of the Company's producing oil and gas properties. The Credit Facility provides for borrowings of a maximum of the lesser of $50 million or a $30 million borrowing base ("Borrowing Base") which is adjusted periodically on the basis of a discounted present value of future net cash flows attributable to the Company's proved producing oil and gas reserves. Pursuant to the Credit Facility, depending upon the percentage of the unused portion of the Borrowing Base, the interest rate is equal to either the lender's prime rate or the lender's prime rate plus 0.50%. The Company, at its option, may fix the interest rate on all or a portion of the outstanding principal balance at either 1.00% or 1.375% above a defined "Eurodollar" rate, depending upon the percentage of the unused portion of the Borrowing Base, for periods of up to six months. The weighted average interest rate for the total debt outstanding at June 30, 1997 and December 31, 1996 was 6.70% and 8.25%, respectively. Under the Credit Facility, a commitment fee of .25% or .375% per annum on the unused portion of the Borrowing Base (depending upon the percentage of the unused portion of the Borrowing Base) is payable quarterly. The Company may borrow, pay, reborrow and repay under the Credit Facility until October 31, 2000, on which date, the Company must repay in full all amounts then outstanding. On November 27, 1996, the Company issued $24,150,000 of 10% Senior Subordinated Notes that will mature December 15, 2001. The Company used the proceeds to reduce borrowings under the Credit Facility and for other corporate purposes. Interest is payable quarterly beginning March 15, 1997. The notes are redeemable at the option of the Company, in whole or in part, on or after December 15, 1997, at F-12 100% of the principal amount thereof, plus accrued interest to the redemption date. The notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future indebtedness of the Company. On July 31, 1997 the Company issued $36,000,000 of 10.125% Senior Subordinated Notes due 2002. Interest is payable quarterly beginning September 15, 1997. The Senior Subordinated Notes were offered pursuant to a Rule 144A transaction or an applicable exemption from registration requirements. The net proceeds to the Company, after costs of the transaction, were used to repay the outstanding balance on Callon's Credit Facility and will fund a portion of the remaining capital expenditure budget. The Credit Facility and the subordinated debt contain various covenants including restrictions on additional indebtedness and payment of cash dividends as well as maintenance of certain financial ratios. This Company is in compliance with these covenants at June 30, 1997. 6. HEDGING CONTRACTS The Company hedges with third parties certain of its crude oil and natural gas production in various swap agreement contracts. The contracts are tied to published market prices for crude oil and natural gas and are settled monthly based on the differences between contract prices and the average defined market price for that month applied to the related contract volume. The Company had no open forward sales position related to this type of contract as of December 31, 1996 and June 30, 1997. As of June 30, 1997, the Company entered into an agreement with third parties whereby the Company purchased a put option guaranteeing the Company $1.80 per MMBtu for gas volumes of 500,000 MMBtu per month from May 1997 through September 1997. Also, at June 30, 1997 the Company had outstanding a call option for 250,000 Mcf per month from December 1997 through February 1998 at $3.00 per Mcf. As of December 31, 1996, the Company has open collar contracts with third parties whereby minimum floor prices and maximum ceiling prices are contracted and applied to related contract volumes. These agreements in effect for 1997 are for average oil volumes of 15,000 barrels per month at (on average) a ceiling price of $23.33 and floor of $18.00 and for average gas volumes of 583,000 Mcf per month in the first quarter of 1997 at (on average) a ceiling price of $3.36 and floor of $2.88. As of June 30, 1997, oil contracts averaged volumes of 10,000 barrels per month at (on average) a ceiling of $24.00 and a floor of $18.00 through 1997. Gas contracts included gas volumes of 34,444 Mcf per month at (on average) a ceiling price of $2.66 and a floor of $2.00 through March 1998. During 1994, the Company recognized revenue under swap agreements of $1,227,000 and $1,724,000 on Historical and Pro forma basis respectively, and $2,466,000 for the twelve months ended December 31, 1995. The Company recognized a reduction in revenue of $2,757,195 for the year ended December 31, 1996 under all contracts. During the first six months of 1997, the Company recognized an increase in revenues of $451,675 for all contracts. The calculation of the fair market value of the outstanding contracts as of December 31, 1996 indicates a $308,400 market value benefit to the Company based on market prices at that date. As of June 30, 1997 the calculation of the fair market value of the outstanding contracts indicates a $60,169 market value benefit to the Company based on market prices at that date. 7. COMMITMENTS AND CONTINGENCIES As described in Note 9, abandonment trusts (the "Trusts") have been established for future abandonment obligations of those oil and gas properties of the Company burdened by a net profits interest. The management of the Company believes the Trusts will be sufficient to offset those future abandonment liabilities; however, the Company is responsible for any abandonment expenses in excess of the Trusts' balances. As of December 31, 1996, total estimated site restoration, dismantlement and abandonment F-13 costs were approximately $23,000,000, net of expected salvage value. Substantially all such costs are expected to be funded through the Trusts' funds, all of which will be accessible to the Company when abandonment work begins. In addition as a working interest owner and/or operator of oil and gas properties, the Company is responsible for the cost of abandonment of such properties. See Note 2. Also, as part of the Consolidation, the Company entered into Registration Rights Agreements whereby the former stockholders of CPOC and NOCO are entitled to require the Company to register Common Stock of the Company owned by them with the Securities and Exchange Commission for sale to the public in a firm commitment public offering and generally to include shares owned by them, at no cost, in registration statements filed by the Company. Costs of the offering will not include discounts and commissions, which will be paid by the respective sellers of the Common Stock. 8. OIL AND GAS PROPERTIES The following table discloses certain financial data relating to the Company's oil and gas activities, all of which are located in the United States.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------- 1997 1996 1995 1994 --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) Capitalized costs incurred: Evaluated Properties- Beginning of period balance . $ 322,970 $ 304,737 $ 285,976 $ 260,971 Property acquisition costs .. 13,743 2,999 14,017 23,037 Exploration costs ........... 11,598 8,732 785 798 Development costs ........... 5,846 8,076 4,045 1,178 Sale of mineral interest .... (2,524) (1,574) (86) (8) --------- --------- --------- --------- End of period balance ....... $ 351,633 $ 322,970 $ 304,737 $ 285,976 ========= ========= ========= ========= Unevaluated Properties- Beginning of period balance . $ 26,235 $ 10,171 $ 4,919 $ 955 Additions, net of transfers to evaluated .............. 3,679 15,714 5,252 3,964 Capitalized interest ........ 849 350 -- -- --------- --------- --------- --------- End of period balance ....... $ 30,763 $ 26,235 $ 10,171 $ 4,919 ========= ========= ========= ========= Accumulated depreciation, depletion and amortization- Beginning of period balance . $ 266,716 $ 257,143 $ 246,975 $ 240,926 Provision charged to expense 7,427 9,573 10,168 6,049 --------- --------- --------- --------- End of period balance ....... $ 274,143 $ 266,716 $ 257,143 $ 246,975 ========= ========= ========= =========
Depreciation, depletion and amortization per unit-of-production (equivalent barrel of oil) amounted to $5.87, $5.95, and $5.80 for the years ended December 31, 1996, 1995 and 1994, respectively, and $5.66 and $6.02 for the six months ended June 30, 1997 and 1996, respectively. 9. NET PROFITS INTEREST Since 1989, the Constituent Entities have entered into separate agreements to purchase certain oil and gas properties with gross contract acquisition price of $170,000,000 ($150,000,000 net as of closing dates) F-14 and, in simultaneous transactions, entered into agreements to sell overriding royalty interests ("ORRI") in the acquired properties. These ORRI are in the form of net profits interests ("NPI") equal to a significant percentage of the excess of gross proceeds over production costs, as defined, from the acquired oil and gas properties. A net deficit incurred in any month can be carried forward to subsequent months until such deficit is fully recovered. The Company has the right to abandon the purchased oil and gas properties if it deems the properties to be uneconomical. The Company has, pursuant to the purchase agreements, created abandonment trusts whereby funds are provided out of gross production proceeds from the properties for the estimated amount of future abandonment obligations related to the working interests owned by the Company. The Trusts are administered by unrelated third party trustees for the benefit of the Company's working interest in each property. The Trust agreements limit their funds to be disbursed for the satisfaction of abandonment obligations. Any funds remaining in the Trusts after all restoration, dismantlement and abandonment obligations have been met will be distributed to the owners of the properties in the same ratio as contributions to the Trusts. The Trusts' assets are excluded from the Consolidated Balance Sheets of the Company because the Company does not control the Trusts. Estimated future revenues and costs associated with the NPI and the Trusts are also excluded from the oil and gas reserve disclosures at Note 12. As of June 30, 1997, December 31, 1996 and 1995 the Trusts' assets (all cash and investments) totaled $18,200,000, $18,200,000 and $16,100,000, respectively, all of which will be available to the Company to pay its portion, as working interest owner, of the restoration, dismantlement and abandonment costs discussed at Note 7. At the time of acquisition of properties by the Company, the property owners estimated the future costs to be incurred for site restoration, dismantlement and abandonment, net of salvage value. A portion of the amounts necessary to pay such estimated costs was deposited in the Trusts upon acquisition of the properties, and the remainder is deposited from time to time out of the proceeds from production. The determination of the amount deposited upon the acquisition of the properties and the amount to be deposited as proceeds from production was based on numerous factors, including the estimated reserves of the properties. The amounts deposited in the Trusts upon acquisition of the properties were capitalized by the Company as oil and gas properties. As operator, the Company receives all of the revenues and incurs all of the production costs for the purchased oil and gas properties but retains only that portion applicable to its net ownership share. As a result, the payables and receivables associated with operating the properties included in the Company's Consolidated Balance Sheets include both the Company's and all other outside owners' shares. However, revenues and production costs associated with the acquired properties reflected in the accompanying Consolidated Statements of Operations represent only the Company's share, after reduction for the NPI. At June 30, 1997, December 31, 1996 and 1995 the amounts payable to the NPI owners included in the accounts payable in the accompanying Consolidated Balance Sheets were approximately $3,900,000, $5,400,000 and $2,800,000, respectively. 10. EMPLOYEE BENEFIT PLANS The Company has adopted a series of incentive compensation plans designed to align the interest of the executives and employees with those of its stockholders. The following is a brief description of each plan: - - The Savings and Protection Plan provides employees with the option to defer receipt of a portion of their compensation and the Company may, at its discretion, match a portion of the employee's deferral with cash and Company Common Stock. The Company may also elect, at its discretion, to contribute a non-matching amount in cash and Company Common Stock to employees. The amounts held under the Savings and Protection Plan are invested in various funds maintained by a third party in accordance with the directions of each employee. An employee is fully vested immediately upon participation in the Savings and Protection Plan. The total amounts contributed by the Company, including the value of the F-15 common stock contributed, were $241,000, $176,000 and $154,000 in the years 1996, 1995 and 1994, respectively. - - The 1994 Stock Incentive Plan (the "1994 Plan") provides for 600,000 shares of Common Stock to be reserved for issuance pursuant to such plan. Under the 1994 Plan the Company may grant both stock options qualifying under Section 422 of the Internal Revenue Code and options that are not qualified as incentive stock options, as well as performance shares. No options will be granted at an exercise price of less than fair market value of the Common Stock on the date of grant. A total of 500,000 options are outstanding and all such options could be exercised as of December 31, 1996. These options have an expiration date 10 years from date of grant. - - On August 23, 1996, the Board of Directors of the Company approved and adopted the Callon Petroleum Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides for the same types of awards as the 1994 Plan and is limited to a maximum of 900,000 shares of common stock that may be subject to outstanding awards. The Company granted stock options to purchase an aggregate 530,000 shares of Common Stock under the plan, subject to stockholder approval of the 1996 Plan. All of such options were granted at an exercise price of $12 per share, the fair market value of the Common Stock on the date of grant. Terms of the plan for 450,000 options provide that 20% of the options become exercisable on January 1 of each succeeding year, beginning January 1, 1997. Non-employee director options aggregating 80,000 shares vest 25% at each succeeding annual meeting of directors following each annual stockholders' meeting, beginning in 1997. Unvested options are subject to forfeiture upon certain termination of employment events and expire 10 years from date of grant. The Company accounts for the options issued pursuant to the stock incentive plans under APB Opinion No. 25, under which no compensation cost has been recognized (see Note 2). Had compensation cost for these plans been determined consistent with FAS 123, the Company's net income and earnings per common share would have been reduced to the following pro forma amounts: YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss): As Reported........................... $ 2,663 $ 799 $ (113) Pro Forma............................. 2,411 677 (113) Primary per share: As Reported........................... 0.45 0.14 (0.03) Pro Forma............................. 0.41 0.12 (0.03) Fully diluted per share: As Reported........................... 0.43 0.14 (0.03) Pro Forma............................. 0.39 0.12 (0.03) Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Company's two stock option plans at December 31, 1996, 1995 and 1994 and changes during the years then ended is presented in the table and narrative below: F-16
1996 1995 1994 ---------------------- ------------------- ------------------ WTD AVG WTD AVG WTD AVG SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE ---------- ------ ---------- ------ -------- ------ Outstanding, beginning of year ............... 490,000 $10.01 460,000 $10.00 -- $ -- Granted .............. 550,000 12.06 30,000 10.08 460,000 10.00 Exercised ............ -- -- -- -- -- -- Forfeited ............ (10,000) 10.00 -- -- -- -- Expired .............. -- -- -- -- -- -- ---------- ------ ---------- ------ -------- ------ Outstanding, end of year ............... 1,030,000 $11.10 490,000 $10.01 460,000 $10.00 ========== ====== ========== ====== ======== ====== Exercisable, end of year ............... 500,000 $10.16 490,000 $10.01 -- $ -- ========== ====== ========== ====== ======== ====== Weighted average fair value of options granted $ 4.96 $ 4.05 $ 4.53 ========== ========== ========
The options outstanding at December 31, 1996 have exercise prices ranging from $9.75 to $13.75 with a remaining weighted average contractual life of 5.98 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for options granted during 1996, 1995 and 1994. WEIGHTED AVERAGE ASSUMPTIONS DECEMBER 31, ----------------------------------- 1996 1995 1994 ------ ------ ------ Risk-free interest rate .............. 6.5% 6.6% 6.0% Expected life (years) ................ 4.9 5.0 5.0 Expected volatility .................. 34.7% 32.0% 41.3% Expected dividends ................... -- -- -- The Company also awarded 225,000 performance shares under the 1996 Plan to the Company's Executive officers on August 23, 1996. All of the performance shares granted will vest in whole on January 1, 2001, and will be subject to forfeiture upon certain termination of employment events. Approximately $208,000 of compensation cost was charged to expense in 1996 related to the performance shares granted. The Company has no other formal benefit plans. 11. PREFERRED STOCK In November 1995, the Company sold 1,315,500 shares of $2.125 Convertible Exchangeable Preferred Stock, Series A (the "Preferred Stock"). Annual dividends are $2.125 per share and are cumulative. The net proceeds of the $.01 par value stock after underwriters discount and expense was $30,899,000. Each share has a liquidation preference of $25.00, plus accrued and unpaid dividends. Dividends on the Preferred Stock are cumulative from the date of issuance and are payable quarterly, commencing January 15, 1996. The Preferred Stock is convertible at any time, at the option of the holders thereof, unless previously redeemed, into shares of Common Stock of the Company at an initial conversion price of $11 per share of Common Stock, subject to adjustments under certain conditions. The Preferred Stock is redeemable at any time on or after December 31, 1998, in whole or in part at the option of the Company at a redemption price of $26.488 per share beginning at December 31, 1998 and at premiums declining to the $25.00 liquidation preference by the year 2005 and thereafter, plus accrued and F-17 unpaid dividends. The Preferred Stock is also exchangeable, in whole, but not in part, at the option of the Company on or after January 15, 1998 for the Company's 8.5% Convertible Subordinated Debentures due 2010 (the "Debentures") at a rate of $25.00 principal amount of Debentures for each share of Preferred Stock. The Debentures will be convertible into Common Stock of the Company on the same terms as the Preferred Stock and will pay interest semi-annually. The Company used approximately $21.5 million of the net proceeds from the sale of the Preferred Stock to repay outstanding indebtedness under its primary credit facility (See Note 5), which indebtedness was incurred to finance certain acquisitions of properties. The Company is using the excess of the net proceeds from the sale of the Preferred Stock over the amount used to repay indebtedness, together with internally generated cash flows to acquire, develop and explore oil and gas properties. 12. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) The Company's proved oil and gas reserves at December 31, 1996, 1995 and 1994 have been estimated by independent petroleum consultants in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions. There are numerous uncertainties inherent in establishing quantities of proved reserves. The following reserve data represent estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. ESTIMATED RESERVES Changes in the estimated net quantities of crude oil and natural gas reserves, all of which are located onshore and offshore in the continental United States, are as follows: RESERVE QUANTITIES YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ------- ------- ------- Proved developed and undeveloped reserves: Crude Oil (MBbls): Beginning of period ................ 4,766 4,424 2,842 Revisions to previous estimates .... (50) (441) (303) Purchase of reserves in place ...... -- 1,363 2,245 Sales of reserves in place ......... (312) (2) (3) Extensions and discoveries ......... -- 16 7 Production ......................... (585) (594) (364) ------- ------- ------- End of period ...................... 3,819 4,766 4,424 ======= ======= ======= Natural Gas (MMcf): Beginning of period ................ 29,667 24,102 14,167 Revisions to previous estimates .... (1,688) (976) (2,793) Purchase of reserves in place ...... 7,391 12,985 16,757 Sales of reserves in place ......... (228) (22) (39) Extensions and discoveries ......... 21,551 271 85 Production ......................... (6,269) (6,693) (4,075) ------- ------- ------- End of period ...................... 50,424 29,667 24,102 ======= ======= ======= F-18 Proved developed reserves: Crude Oil (MBbls): Beginning of period................. 3,890 3,309 2,084 ======= ======= ======= End of period....................... 3,385 3,890 3,309 ======= ======= ======= Natural Gas (MMcf): Beginning of period................. 20,408 20,582 11,366 ======= ======= ======= End of period....................... 49,491 20,408 20,582 ======= ======= ======= STANDARDIZED MEASURE The following tables present the Company's standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves and were computed using reserve valuations based on regulations prescribed by the SEC. These regulations provide that the oil, condensate and gas price structure utilized to project future net cash flows reflects current prices at each date presented and have been escalated only when known and determinable price changes are provided by contract and law. Future production, development and net abandonment costs are based on current costs without escalation. In 1995 and 1994, no future income taxes were provided on the future net inflows as tax credits (including carryovers) and other permanent differences were expected to be higher than the estimated future income taxes calculated using the appropriate statutory rates. The resulting net future cash flows have been discounted to their present values based on a 10% annual discount factor. STANDARDIZED MEASURE DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- (IN THOUSANDS) Future cash inflows ..................... $ 285,727 $ 157,240 $ 115,659 Future costs - Production ........................... (59,584) (50,236) (43,579) Development and net abandonment ...... (9,989) (11,274) (12,603) --------- --------- --------- Future net inflows before income taxes .. 216,154 95,730 59,477 Future income taxes ..................... (49,438) -- -- --------- --------- --------- Future net cash flows ................... 166,716 95,730 59,477 10% discount factor ..................... (36,547) (31,966) (18,094) --------- --------- --------- Standardized measure of discounted future net cash flows ................ $ 130,169 $ 63,764 $ 41,383 ========= ========= ========= F-19 CHANGES IN STANDARDIZED MEASURE
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Standardized measure - beginning of period...... $ 63,764 $ 41,383 $ 22,554 Sales and transfers, net of production costs .... (18,202) (12,477) (9,815) Net change in sales and transfer prices, net of production costs ................................ 32,268 11,519 1,368 Exchange and sale of in place of reserves ....... (877) (23) (48) Purchases, extensions, discoveries, and improved recovery, net of future production and development costs .............................. 79,983 28,204 26,376 Revisions of quantity estimates ................. (3,907) (4,242) (6,297) Accretions of discount .......................... 6,376 2,963 1,488 Net change in income taxes ...................... (30,000) -- -- Changes in production rates, timing and other ... 764 (3,563) 5,757 -------- -------- -------- Standardized measure - end of period............ $130,169 $ 63,764 $ 41,383 ======== ======== ========
F-20 CALLON PETROLEUM COMPANY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS INTRODUCTION The following unaudited pro forma financial statements present the results of operations of Callon Petroleum Company (the "Company"). Such unaudited pro forma information is based on the historical results of operations of Callon Petroleum Company after giving effect to the acquisition described below. On June 26, 1997, Callon Petroleum Operating Company, a wholly owned subsidiary of the Company, purchased an 18.8% working interest in the Mobile Area Block 864 Unit from Elf Exploration, Inc. The Company's net purchase price of $11.8 million was funded from the credit facility of the Company. See Note 1 in the Notes to Unaudited Pro Forma Consolidated Financial Statements for the basis of presentation of the above described event. F-21 CALLON PETROLEUM COMPANY PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) ADJUSTMENTS ------------- HISTORICAL MAB 864 PRO FORMA COMPANY ACQUISITION AS ADJUSTED ---------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Oil and gas sales.................. $ 25,764 $ 4,455 (a) $ 30,219 Interest and other................. 946 -- 946 ---------- -------- ---------- Total revenues.................. 26,710 4,455 31,165 ---------- -------- ---------- Costs and Expenses: Lease operating expenses........... 7,562 245 (a) 7,807 Depreciation, depletion and amortization.......................... 9,832 1,518 (d) 11,350 General and administrative......... 3,495 -- 3,495 Interest........................... 313 1,138 (b) 1,451 ---------- -------- ---------- Total costs and expenses........ 21,202 2,901 24,103 ---------- -------- ---------- Income from operations................ 5,508 1,554 7,062 Income tax expense.................... 50 544 (c) 594 ---------- -------- ---------- Net income............................ 5,458 1,010 6,468 Preferred stock dividends............. 2,795 -- 2,795 ---------- -------- ---------- Net income available to common shares. $ 2,663 $ 1,010 $ 3,673 ========== ======== ========== Net income per common share: Primary............................ $ 0.45 $ 0.62 ========== ========== Assuming full dilution............. $ 0.43 $ 0.60 ========== ========== Shares used in computing net income per common share: Primary............................ 5,952 5,952 ========== ========== Assuming full dilution............. 6,135 6,135 ========== ========== See Notes to Pro Forma Consolidated Financial Statements F-22 CALLON PETROLEUM COMPANY PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) ADJUSTMENTS ------------- HISTORICAL MAB 864 PRO FORMA COMPANY ACQUISITION AS ADJUSTED ---------- ------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Oil and gas sales................. $ 20,844 $ 1,813 (a) $ 22,657 Interest and other................ 695 -- 695 ---------- ------- ---------- Total revenues................. 21,539 1,813 23,352 ---------- ------- ---------- Costs and expenses: Lease operating expenses.......... 4,164 (69) (a) 4,095 Depreciation, depletion and amortization......................... 7,581 931 (d) 8,512 General and administrative........ 2,382 -- 2,382 Interest.......................... 210 487 (b) 697 ---------- ------- ---------- Total costs and expenses....... 14,377 1,349 15,686 ---------- ------- ---------- Income from operations............... 7,202 464 7,666 Income tax expense................... 2,311 162 (c) 2,473 ---------- ------- ---------- Net income........................... 4,891 302 5,193 Preferred stock dividend............. 1,398 -- 1,398 ---------- ------- ---------- Net income available to common shares $ 3,493 $ 302 $ 3,795 ========== ======= ========== Net income per common share: Primary........................... $ 0.55 $ 0.60 ========== ========== Assuming full dilution............ $ 0.52 $ 0.56 ========== ========== Shares used in computing net income per common share: Primary........................... 6,307 6,307 ========== ========== Assuming full dilution............ 9,318 9,318 ========== ========== See Notes to Pro Forma Consolidated Financial Statements F-23 CALLON PETROLEUM COMPANY NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION On June 26, 1997, Callon Petroleum Operating Company, a wholly owned subsidiary of Callon Petroleum Company (the "Company"), purchased an 18.8% working interest in the Mobile Area Block 864 Unit from Elf Exploration, Inc. (the "MAB 864 Acquisition"). The Company's net purchase price of $11.8 million was funded from the credit facility of the Company. The accompanying Pro Forma Consolidated Statements of Operations of the Company for the year ended December 31, 1996 and the six months ended June 30, 1997 give effect to the purchase of the MAB 864 Acquisition as if the transaction occurred at the beginning of each of the periods presented. The Pro Forma Consolidated Statements of Operations are based on the assumptions set forth in the Notes to such statements. Such pro forma information should be read in conjunction with the related financial information of the Company and is not necessarily indicative of the results which would actually have occurred had the transaction been in effect on the date or for the period indicated or which may occur in the future. 2. PRO FORMA ADJUSTMENTS Pro Forma entries necessary to adjust the historical financial statements of the Company are as follows: (a) To reflect the purchase of the MAB 864 Acquisition and the related results of operations as described in Note 1. (b) Reflects an increase of interest expense related to the purchase of the MAB 864 Acquisition as if the transaction had occurred at the beginning of the periods for the year ended December 31, 1996 and for the six months ended June 30, 1997. The interest rate used was 8.25%. A one-eighth change in this estimated rate would affect interest expense by $17,200 and $3,900 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. (c) To record a provision for Federal income taxes at a corporate statutory rate of 35% on pro forma income as a result of the acquisition. (d) To adjust depletion for the combined full cost pool based on the purchase of the MAB 864 Acquisition as described in Note 1. F-24 Report of Independent Auditors Stockholders and Board of Directors Callon Petroleum Company We have audited the accompanying statement of revenues and direct operating expenses of the working interest in Mobile Area Block 864 Unit (the "Property") acquired by Callon Petroleum Operating Company (the "Company"), a wholly owned subsidiary of Callon Petroleum Company, from Elf Exploration, Inc. (see Note 1 to the accompanying statement) for the year ended December 31, 1996. This statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenues and direct operating expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of revenues and direct operating expenses. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of revenues and direct operating expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and is not intended to be a complete presentation of revenues and expenses of the Property. In our opinion, the statement of revenues and direct operating expenses referred to above presents fairly, in all material respects, the revenues and direct operating expenses of the Property for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP July 24, 1997 F-25 Statement of Revenues and Direct Operating Expenses of the Property SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 (UNAUDITED) ---------- ---------- (IN THOUSANDS) Oil and gas revenues ................ $ 4,455 $ 1,813 Direct operating expenses ........... 245 (69) ---------- ---------- Revenues in excess of direct operating expenses ................ $ 4,210 $ 1,882 ========== ========== SEE ACCOMPANYING NOTES. F-26 Notes to Statement of Revenues and Direct Operating Expenses of the Property (continued) Notes to Statement of Revenues and Direct Operating Expenses of the Property December 31, 1996 1. BASIS OF PRESENTATION Callon Petroleum Operating Company (the "Company"), a wholly owned subsidiary of Callon Petroleum Company, acquired a working interest in Mobile Area Block 864 Unit (the "Property") from Elf Exploration, Inc. (the "Seller"). The closing date of the acquisition was June 26, 1997, and the net purchase price was $11.8 million. The accompanying statement of revenues and direct operating expenses, which is prepared on the accrual basis of accounting, relates only to the working interest in the producing oil and gas property acquired and may not be representative of future operations. The statement includes revenues and direct operating expenses, including production and ad valorem taxes, for the entire period presented. The statement does not include federal and state income taxes, interest, depletion, depreciation and amortization, or general and administrative expenses because such amounts would not be indicative of those expenses which would be incurred by the Company. Presentation of complete historical financial statements for the year ended December 31, 1996 and the six months ended June 30, 1997 is not practicable because the Property was not accounted for as a separate entity; therefore, such statements are not available. Revenues in the accompanying statement of revenues and direct operating expenses are recognized on the entitlement method. The preparation of the statement of revenues and direct operating expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the statement and accompanying notes. Actual results could differ from those estimates. The unaudited statement of revenues and direct operating expenses for the six-month period ended June 30, 1997, in the opinion of management, was prepared on a basis consistent with the audited statement of revenues and direct operating expenses and includes all adjustments necessary to present fairly the results of the period. F-27 Notes to Statement of Revenues and Direct Operating Expenses of the Property (continued) 2. SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production and timing of development expenditures. Therefore, actual production, revenues, and development and operating expenses may not occur as estimated. The reserve data are estimates only, are subject to many uncertainties, and are based on data gained from production histories and on assumptions as to geologic formations and other matters. Actual quantities may differ materially from the amounts estimated. The following reserve data, prepared by the Company, represents estimates of proved natural gas reserves of the Property, which is located in the United States. There are no oil reserves associated with the Property. 1996 -------- NATURAL GAS (MMCF) Proved reserves: Beginning of period ........ 11,842 Production ................. 1,795 -------- End of period .............. 10,047 ======== Proved developed reserves: Beginning of period ........ 11,842 End of period .............. 10,047 The estimated standardized measure of discounted future net cash flows relating to proved reserves of the Property at December 31, 1996 is shown below and should not be construed as the current market value. No deductions were made for general overhead, depletion, depreciation and amortization, debt service, or any indirect costs. Since the Property is not a separate tax-paying entity, the standardized measure of discounted future net cash flows for the Property is presented before deduction of income taxes. F-28 Notes to Statement of Revenues and Direct Operating Expenses of the Property (continued) 2. SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) 1996 ------------ (IN THOUSANDS) Future cash inflows .......................................... $ 38,680 Future production costs ...................................... (3,241) ------------ Future net cash flows before income taxes .................... 35,439 10% annual discount for estimated timing of cash flows ....... (10,186) ------------ Standardized measure of discounted future net cash flows relating to proved reserves before income taxes ............................... $ 25,253 ============ Changes in the standardized measure of discounted future net cash flows relating to proved reserves of the Property are shown below. 1996 ------------ (IN THOUSANDS) Balance at beginning of period ............................. $ 16,643 Increase (decrease) in discounted future net cash flows: Sales and transfers of natural gas produced, net of production costs ...................... (4,210) Accretion of discount .................................... 1,419 Net change in sales price and production costs ........... 11,401 ------------ Balance at end of period ................................... $ 25,253 ============ The weighted average prices of natural gas at December 31, 1995 and 1996 used in the calculation of the standardized measure of discounted future net cash flows were $2.28 and $3.85 per Mcf, respectively. F-29 ================================================================================ No dealer, salesperson or any other person has been authorized to give any information or to make any representations not contained in this Offering Memorandum in connection with the offer contained herein and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Initial Purchaser. This Offering Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, the Notes offered hereby by anyone in any jurisdiction in which such offer is not authorized, or in which the person making such offer is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Offering Memorandum nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS PAGE Available Information......... 6 Prospectus Summary............ 7 Risk Factors.................. 18 The Company................... 25 The Exchange Offer............ 26 Use of Proceeds............... 35 Capitalization................ 36 Selected Financial Data....... 37 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 39 Business and Properties....... 45 Management.................... 62 Principal Stockholders........ 74 Description of the Exchange Notes...................... 77 Description of the Outstanding Notes...................... 96 Certain Federal Income Tax Consequences............... 96 Description of Outstanding Securities and Debt Instruments................ 99 Plan of Distribution.......... 102 Legal Matters................. 103 Experts....................... 104 Glossary...................... 105 Index to Financial Statements. F-1 $36,000,000 [GRAPHIC OMITTED] CALLON PETROLEUM COMPANY 10.125% SENIOR SUBORDINATED NOTES DUE 2002 ______________ -------------- PROSPECTUS ______________ -------------- September , 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law ("Delaware Law") permits, subject to certain conditions, a corporation to indemnify its directors, officers, employees and agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director, officer, employee or agent in connection with threatened, pending or completed actions, suits and proceeding (other than actions by or in the right of the corporation) in or to which any of such persons is a party or is threatened to be made a party. Article 12 of the Company's Amended and Restated Certificate of Incorporation and Article VI, Section 2 of the Company's Third Amended and Restated Bylaws provide that Callon may indemnify its directors, officers, employees and agents to the fullest extent permitted by Delaware Law. The Company currently maintains a policy insuring, subject to certain exceptions, its directors and officers and the directors and officers of its subsidiaries against liabilities that may be incurred by such persons acting in such capacities. Pursuant to indemnification agreements, the Company has agreed to indemnify its directors and certain officers against all costs, charges and expenses incurred by reason of being a director or officer of the Company, provided that indemnification is not prohibited in whole or in part under applicable law. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES EXHIBIT NUMBER AND DESCRIPTION (3) (i) Articles of Incorporation (ii) Bylaws 3.1 Certificate of Incorporation of the Company, as amended (incorporated by reference from Exhibit 3.1 of the Company's Registration Statement on Form S-4, Reg. No. 33-82408) 3.2 Certificate of Merger of Callon Consolidated Partners, L.P. with and into the Company dated September 16, 1994 (incorporated by reference from Exhibit 3.2 of the Company's Report of Form 10-K for the fiscal year ended December 31, 1994) 3.3 Bylaws of the Company (incorporated by reference from Exhibit 3.2 of the Company's Registration Statement on Form S-4, Reg. No, 33-82408) (4) Instruments defining the rights of security holders, including indentures 4.1 Indenture dated July 31, 1997 between the Company and the Trustee* 4.2 Form of Note (included in Exhibit 4.1) II-1 (5) Opinion re legality 5.1 Opinion of Butler & Binion, L.L.P.* (8) Opinion re tax matters 8.1 Opinion of Bulter & Binion, L.L.P. (included in the prospectus that forms a part hereof) (10) Material Contracts 10.1 Registration Agreement* 10.2 Exchange Agent Agreement* 10.3 Letter of Transmittal* (21) Subsidiaries of the Registrant 21.1 Subsidiaries of the Company (incorporated by reference from Exhibit 21.1 of the Company's Registration Statement on Form 8-B filed October 3, 1994) (23) Consents of experts and counsel 23.1 Consent of Butler & Binion, L.L.P. (included in its opinion filed as Exhibit 5.1) 23.2 Consent of Ernst & Young, L.L.P.* 23.3 Consent of Arthur Andersen LLP* 23.4 Consent of Huddleston & Co., Inc.* (24) Power of attorney (included on the signature page hereof) (25) Statement of Eligibility of Trustee* * filed herewith FINANCIAL STATEMENT SCHEDULES None. ITEM 22. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form S-4, within one business day or receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Natchez, State of Mississippi, on September 25, 1997. CALLON PETROLEUM COMPANY By: /S/ FRED L. CALLON Fred L. Callon President and Chief Executive Officer II-4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Fred L. Callon and John S. Weatherly, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any and all amendments (including amendments that register additional securities of the same class to be declared effective in accordance with Rule 462(b) promulgated under the Securities Act of 1933 and post-effective amendments) to this Registration Statement, and to file the same, with all exhibits hereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE /S/ JOHN S. CALLON Chairman of the Board, September 25, John S. Callon Director 1997 /S/ FRED L. CALLON President, Chief September 25, Fred L. Callon Executive Officer, 1997 Director (Principal Executive Officer) /S/ DENNIS W. CHRISTIAN Chief Operating Officer, September 25, Dennis W. Christian Senior Vice President, 1997 Director Senior Vice President, Chief Financial /S/ JOHN S. WEATHERLY Officer and Treasurer September 25, John S. Weatherly (Principal Financial 1997 Officer) /S/ JAMES BASSI Controller and September 25, James Bassi Principal Accounting 1997 Officer (Principal Accounting Officer) _______________________ Director September , Robert A. Stanger 1997 _______________________ Director September , John C. Wallace 1997 /S/ B. F. WEATHERLY Director September 25, B. F. Weatherly 1997 /S/ RICHARD O. WILSON Director September 25, Richard O. Wilson 1997 II-5 EX-4.1 2 EXHIBIT 4.1 CALLON PETROLEUM COMPANY AND AMERICAN STOCK TRANSFER & TRUST COMPANY Trustee ---------------- INDENTURE Dated as of July 31, 1997 ---------------- $36,000,000 10.125% Series A Senior Subordinated Notes due 2002 10.125% Series B Senior Subordinated Notes due 2002 RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939, AS AMENDED AND INDENTURE DATED AS OF JULY 31, 1997 Trust Indenture Act Indenture Section Section Section 310 (a)(1)..............................608 (a)(2)........................608 (a)(3)........................Inapplicable (a)(4)........................Inapplicable (b)...........................605, 608, 609, 613 Section 311.....................................605, 614 Section 312 (a).................................701, 702 (b)...........................702 (c)...........................702 Section 313 (a).................................703 (b)(1)........................703 (b)(2)........................703 (c)...........................703 (d)...........................703 Section 314 (a).................................704, 1011 (b)...........................Inapplicable (c)(1)........................102 (c)(2)........................102 (c)(3)........................Inapplicable (d)...........................Inapplicable (e)...........................102 Section 315 (a).................................601, 603 (b)...........................602 (c)...........................601 (d)...........................601, 603 (e)...........................603, 607 Section 316 (a)(1)(A)...........................512 (a)(1)(B).....................513 (a)(2)........................Inapplicable (b)...........................508 (c)...........................104 Section 317 (a)(1)..............................503 (a)(2)........................504 (b)...........................1003 Section 318 (a).................................108 - -------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION..................................................................1 Section 101. Definitions...................................................1 Section 102. Compliance Certificates and Opinions.........................13 Section 103. Form of Documents Delivered to Trustee.......................13 Section 104. Acts of Holders..............................................14 Section 105. Notices, etc, to Trustee and Company.........................15 Section 106. Notice to Holders of Notes; Waiver...........................16 Section 107. Language of Notices..........................................16 Section 108. Conflict with Trust Indenture Act............................16 Section 109. Effect of Headings and Table of Contents.....................16 Section 110. Successors and Assigns.......................................16 Section 111. Severability Clause..........................................16 Section 112. Benefits of Indenture........................................17 Section 113. Governing Law................................................17 Section 114. Legal Holidays...............................................17 Section 115. Counterparts.................................................17 Section 116. Indenture and Notes Solely Corporate Obligations.............17 Section 117. No Adverse Interpretations of Other Agreements...............18 ARTICLE TWO FORM OF NOTES.................................................18 Section 201. Forms Generally..............................................18 ARTICLE THREE THE NOTES...................................................18 Section 301. Execution, Authentication, Delivery and Dating...............18 Section 302. Temporary Notes..............................................19 Section 303. Registration, Transfer and Exchange..........................19 Section 304. Mutilated, Destroyed, Lost and Stolen Notes..................19 Section 305. Payment of Interest, Rights to Interest Preserved............20 Section 306. Persons Deemed Owners........................................21 Section 307. Cancellation.................................................22 Section 308. Computation of Interest......................................22 ARTICLE FOUR SATISFACTION AND DISCHARGE...................................22 Section 401. Satisfaction and Discharge of Indenture......................22 Section 402. Application of Trust Money...................................23 ARTICLE FIVE REMEDIES.....................................................24 Section 501. Events of Default............................................24 Section 502. Acceleration of Maturity; Rescission and Annulment...........25 Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee..............................................27 Section 504. Trustee May File Proofs of Claim.............................27 Section 505. Trustee May Enforce Claims Without Possession of Notes.......28 Section 506. Application of Money Collected...............................28 Section 507. Limitation on Suits..........................................29 Section 508. Unconditional Right of Holders to Receive Principal Premium and Interest....................................29 Section 509. Restoration of Rights and Remedies...........................29 Section 510. Rights and Remedies Cumulative...............................30 Section 511. Delay or Omission Not Waiver.................................30 Section 512. Control by Holders...........................................30 Section 513. Waiver of Past Defaults......................................30 Section 514. Undertaking for Costs........................................31 i Section 515. Waiver of Stay, Extension or Usury Laws......................31 ARTICLE SIX THE TRUSTEE...................................................31 Section 601. Certain Duties and Responsibilities..........................31 Section 602. Notice of Defaults...........................................32 Section 603. Certain Rights of Trustee....................................32 Section 604. Not Responsible for Recitals or Issuance of Notes............33 Section 605. May Hold Notes...............................................34 Section 606. Money Held in Trust..........................................34 Section 607. Compensation and Reimbursement...............................34 Section 608. Corporate Trustee Required; Eligibility......................35 Section 609. Resignation and Removal; Appointment of Successor............35 Section 610. Acceptance of Appointment by Successor.......................36 Section 611. Merger, Conversion, Consolidation or Succession to Business..37 Section 612. Appointment of Authentication Agent..........................37 Section 613. Conflicting Interests........................................38 Section 614. Preferential Collection of Claims Against Company............38 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY..................................................39 Section 701. Company to Furnish Trustee Names and Addresses of Holders....39 Section 702. Preservation of Information; Communications to Holders.......39 Section 703. Reports by Trustee...........................................39 Section 704. Reports by Company...........................................40 ARTICLE EIGHT CONSOLIDATION, MERGER AND SALES.............................41 Section 801. Company May Consolidate, Etc., Only on Certain Terms.........41 Section 802. Successor Person Substituted for Company.....................41 ARTICLE NINE SUPPLEMENTAL INDENTURES......................................42 Section 901. Supplemental Indentures Without Consent of Holders...........42 Section 902. Supplemental Indentures with Consent of Holders..............43 Section 903. Execution of Supplemental Indentures.........................43 Section 904. Effect of Supplemental Indentures............................43 Section 905. Reference in Notes to Supplemental Indentures................44 Section 906. Effect on Senior Indebtedness................................44 Section 907. Record Date..................................................44 ARTICLE TEN COVENANTS.....................................................44 Section 1001. Payment of Principal and Interest...........................44 Section 1002. Maintenance of Office or Agency.............................45 Section 1003. Money for Note Payments to be Held in Trust.................45 Section 1004. Corporate Existence.........................................46 Section 1005. Maintenance of Properties...................................47 Section 1006. Restrictions on Dividends, Redemption and Other Payments....47 Section 1007. Limitations on Indebtedness for Money Borrowed..............48 Section 1008. Limitation Liens............................................48 Section 1009. Insurance...................................................49 Section 1010. Payment of Taxes and Other Claims...........................49 Section 1011. Statement by Officers as to Default.........................49 Section 1012. Waiver of Certain Covenants.................................49 Section 1013. Limitation on Ranking of Future Indebtedness................50 Section 1014. Limitations on Restricting Subsidiary Dividends.............50 Section 1015. Limitation on Transactions with Affiliates..................51 Section 1016. Purchase of Notes upon Certain Events.......................51 ARTICLE ELEVEN REDEMPTION OF NOTES.........................................53 Section 1101. Right of Redemption.........................................53 ii Section 1102. Election to Redeem; Notice to Trustee.......................53 Section 1103. Selection by Trustee of Notes to be Redeemed................53 Section 1104. Notice of Redemption........................................54 Section 1105. Deposit of Redemption Price.................................55 Section 1106. Notes Payable on Redemption Date............................55 Section 1107. Notes Redeemed in Part......................................55 Section 1108. Purchase of Notes...........................................56 ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE.........................56 Section 1201. Company's Option to Effect Defeasance or Covenant Defeasance..............................................56 Section 1202. Defeasance and Discharge....................................56 Section 1203. Covenant Defeasance.........................................56 Section 1204. Conditions to Defeasance or Covenant Defeasance.............57 Section 1205. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions................58 Section 1206. Reinstatement...............................................59 ARTICLE THIRTEEN SUBORDINATION OF NOTES....................................59 Section 1301. Notes Subordinate to Senior Indebtedness....................59 Section 1302. Payment over of Proceeds upon Dissolution, etc..............59 Section 1303. Suspension of Payment When Senior Indebtedness in Default...60 Section 1304. Payment Permitted If No Default.............................61 Section 1305. Subrogation to Rights of Holders of Senior Indebtedness.....61 Section 1306 Provisions Solely to Define Relative Rights..................62 Section 1307. Trustee to Effectuate Subordination.........................62 Section 1308. No Waiver of Subordination Provision........................62 Section 1309. Notice to Trustee...........................................63 Section 1310. Reliance on Judicial Order or Certificate of Liquidating Agent Bank..................................64 Section 1311. Rights of Trustee as a Holder of Senior Indebtedness: Preservation of Trustee's Rights........................64 Section 1312. Article Applicable to Paying Agents.........................64 Section 1313. No Suspension of Remedies...................................64 Section 1314. Trust Money Not Subordinated................................64 Appendix A Provisions Relating to Initial Notes and Exchange Notes Exhibit 1 to Appendix A Form of Initial Notes Exhibit 2 to Appendix A Form of Exchange Notes iii THIS INDENTURE, dated as of July 31, 1997 (the "Indenture"), is between CALLON PETROLEUM COMPANY, a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company"), having executive offices located at 200 North Canal Street, Natchez, Mississippi 39120 and AMERICAN STOCK TRANSFER & TRUST COMPANY, a corporation duly organized and existing under the laws of the State of New York (hereinafter called the "Trustee"), having its principal corporate trust office at 40 Wall Street, 46th Floor, New York, New York 10005. RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its 10.125% Series A Senior Subordinated Notes due 2002 (hereinafter called the "Initial Notes") and, if and when issued pursuant to a registered exchange for the Initial Notes, the Company's 10.125% Series B Senior Subordinated Notes due 2002 (the "Exchange Notes" and together with the Initial Notes, the "Notes"), to be issued in such amount and to have such provisions as are hereinafter set forth. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders (as hereinafter defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders from time to time of the Notes, as follows, without preference of one series of the Notes over the other: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101.DEFINITIONS. Except as otherwise expressly provided in this Indenture or unless the context otherwise requires, for all purposes of this Indenture: (1) the terms defined in this Article or in Article I of Appendix A hereto have the meanings assigned to them in this Article or in Article I of Appendix A hereto and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act (as hereinafter defined), either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (4) the words "herein", "hereof", "hereto" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; 2 (5) the word "or" is always used inclusively (for example, the phrase "A or B" means "A or B or both", not "either A or B but not both"); (6) the masculine gender includes the feminine and the neuter; and (7) references to agreements and other instruments include subsequent amendments and waivers but only to the extent not prohibited by this Indenture. Certain terms used principally in certain Articles hereof are defined in those Articles. "ACQUIRED INDEBTEDNESS" means Indebtedness for Money Borrowed of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with the acquisition by the Company or a Restricted Subsidiary of assets from such Person, and not incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Restricted Subsidiary. "ACT", when used with respect to any Holder, has the meaning specified in Section 104. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "AUTHENTICATING AGENT" means any Person authorized by the Trustee pursuant to Section 612 to act on behalf of the Trustee to authenticate Notes. "AUTHORIZED NEWSPAPER" means a newspaper, in an official language of the place of publication or in the English language, customarily published on each day that is a Business Day in the place of publication, whether or not published on days that are Legal Holidays in the place of publication, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any day that is a Business Day in the place of publication. "AVERAGE LIFE" means, with respect to any Indebtedness for Money Borrowed, as at any date of determination, the quotient obtained by dividing (a) the sum of the products of (i) the number of years (and any portion thereof) from the date of determination to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund or mandatory redemption payment requirements) of such Indebtedness for Money Borrowed multiplied by (ii) the amount of each such principal payment by (b) the sum of all such principal payments. 3 "BOARD OF DIRECTORS" means the board of directors of the Company or any duly authorized committee of that board. "BOARD RESOLUTION" means a copy of one or more resolutions, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "BUSINESS DAY", with respect to any Place of Payment or other location, means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a Legal Holiday in such Place of Payment or other location. "CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as capital lease obligations on a balance sheet of such Person under GAAP and, for purposes of this Indenture, the amount of such obligations at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "COMMISSION" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "COMPANY" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "COMPANY NOTICE" has the meaning set forth in Section 1016. "COMPANY REQUEST" and "COMPANY ORDER" mean, respectively, a written request or order, as the case may be, signed in the name of the Company by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President, a Vice President, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, or by another officer of the Company duly authorized to sign by a Board Resolution, and delivered to the Trustee. "CONSOLIDATED" when used in conjunction with any other defined term means the aggregate amount of the items included within the defined term of the Company and its Restricted Subsidiaries on a Consolidated basis, eliminating inter-company items. "CONSOLIDATED EBITDA" means, for any period, determined in accordance with GAAP on a Consolidated basis for the Company and its Restricted Subsidiaries, the sum of Consolidated Net Income, plus depreciation, depletion, amortization and other non-cash charges, income tax expense, and interest expense for such period, each as deducted in determining such Consolidated Net Income. "CONSOLIDATED INTEREST EXPENSE" means, for any period, the interest expense for such period which is required to be shown as such on the financial statements of the Company and its Restricted Subsidiaries, on a Consolidated basis, prepared in accordance with GAAP. 3 "CONSOLIDATED NET INCOME" means, for any period, the amount of Consolidated net income (loss) of the Company and its Restricted Subsidiaries for such period, determined in accordance with GAAP; PROVIDED, HOWEVER, that there shall be included in Consolidated Net Income any net extraordinary gains or losses for such period (less all fees and expenses related thereto); and, PROVIDED, FURTHER, that there shall not be included in Consolidated Net Income (1) any net income (loss) of a Restricted Subsidiary for any portion of such period during which it was not a Consolidated Subsidiary, (2) any net income (loss) of businesses, properties or assets acquired or disposed of (by way of merger, consolidation, purchase, sale or otherwise) by the Company or any Restricted Subsidiary for any portion of such period prior to the acquisition thereof or subsequent to the disposition thereof, or (3) any net income for such period resulting from transfers of assets received by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary. "CONSOLIDATED SUBSIDIARY" means a Restricted Subsidiary the financial statements of which are Consolidated with the financial statements of the Company. "CONVERTIBLE DEBENTURES" means the Company's 8.5% Convertible Subordinated Debentures due 2010 issuable in exchange for the Company's Series A Preferred Stock. "CORPORATE TRUST OFFICE" means the principal corporate trust office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at 40 Wall Street, 46th Floor, New York, New York 10005. "CORPORATION" includes corporations, associations, companies, joint stock companies, limited liability companies or business trusts. "CREDIT FACILITY" means that certain Amended and Restated Credit Agreement, dated as of October 31, 1996, among the Company, Callon Petroleum Operating Company, a Delaware corporation and wholly owned Subsidiary of the Company ("Operating"), Callon Offshore Production, Inc., a Mississippi corporation and wholly owned Subsidiary of Operating, the several banks and other financial institutions from time to time parties thereto (the "Banks"), and The Chase Manhattan Bank, as agent for the Banks, as the same may be amended, modified, supplemented, extended, restated, replaced, renewed or refinanced from time to time. "DEFAULT" means any event that is or with the passage of time or giving notice or both would be an Event of Default. "DEFAULTED INTEREST" has the meaning specified in Section 305. "DEPOSITORY" means The Depository Trust Company, its nominees and their respective successors. "EVENT OF DEFAULT" has the meaning specified in Section 501. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor act thereto. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles board of the American 4 Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board in effect on the date of this Indenture. "GLOBAL NOTE" has the meaning specified in Appendix A. "GOVERNMENT OBLIGATIONS" means direct obligations of the United States of America, or any Person controlled or supervised by and acting as an agency or instrumentality of such government, in each case where the payment or payments thereunder are unconditionally guaranteed as a full faith and credit obligation by such government and which are not callable or redeemable at the option of the issuer or issuers thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of or other amount with respect to any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of or other amount with respect to the Government Obligation evidenced by such depository receipt. "HOLDER", when used with respect to the Notes, means the Person in whose name such Note is registered in the Note Register. "INDEBTEDNESS FOR MONEY BORROWED" means any of the following obligations of the Company or any Restricted Subsidiary: (1) any obligations, contingent or otherwise, for borrowed money or for the deferred purchase price of property, assets, securities or services (including, without limitation, any interest accruing subsequent to an event of default), (2) all obligations (including the Notes) evidenced by bonds, notes, debentures or other similar instruments, (3) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), except any such obligation that constitutes a trade payable and an accrued liability arising in the ordinary course of business, if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet prepared in accordance with GAAP, (4) all Capitalized Lease Obligations, (5) liabilities of the Company actually due and payable under bankers acceptances and letters of credit, (6) all indebtedness of the type referred to in clause (1), (2), (3), (4) or (5) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or security interest in property of the Company or any Restricted Subsidiary (including, without limitation, accounts and contract rights), even though the Company or any Restricted Subsidiary has not assumed or become liable for the payment of such indebtedness, and (7) any guarantee or endorsement (other than for collection or deposit in the ordinary course of business) or discount with recourse of, or other agreement, contingent or otherwise, to purchase, repurchase, or otherwise acquire, to supply, or advance funds or become liable with respect to, any indebtedness or any obligation of the type referred to in any of the foregoing clauses (1) through (6), regardless of whethr such obligation would appear on a balance sheet; PROVIDED, HOWEVER, that Indebtedness for Money Borrowed shall not include (i) Production Payments and Reserve Sales, (ii) any liability for gas balancing incurred in the ordinary course of business, (iii) accounts payable or other obligations of the Company or a Restricted Subsidiary in the ordinary course of business in connection with the obtaining of goods or services, and (iv) any liability under any and 5 all (A) employment or consulting agreements or employee benefit plans or arrangements and (B) futures contracts, forward contracts, swap, cap or collar contracts, option contracts, or other similar derivative agreements. "INDENTURE" means this instrument as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "INDEPENDENT PUBLIC ACCOUNTANTS" means a nationally recognized firm of accountants that, with respect to the Company, are Independent Public Accountants within the meaning of the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Commission thereunder, who may be the Independent Public Accountants regularly retained by the Company or who may be other Independent Public Accountants. Such accountants or firm shall be entitled to rely upon any Opinion of Counsel as to the interpretation of any legal matters relating to the Indenture or certificates required to be provided hereunder. "INSOLVENCY OR LIQUIDATION PROCEEDING" means, with respect to any Person, (a) an insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or similar case or proceeding in connection therewith, relative to such Person or its creditors, as such, or its assets or (b) any liquidation, dissolution or other winding-up of such Person, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy or (c) any assignment for the benefit of creditors or any other marshaling of assets or liabilities of such Person. "INTEREST COVERAGE RATIO" means, for any date of determination, the ratio of (1) Consolidated EBITDA for the immediately preceding four fiscal quarters of the Company to (2) Consolidated Interest Expense for such immediately preceding four fiscal quarters. "INTEREST PAYMENT DATE" when used with respect to any Note, means the Stated Maturity of an installment of interest on such Note. "ISSUE DATE" when used with respect to any Note, means the earliest date on which any Note is originally issued in accordance with the terms of this Indenture. "LEGAL HOLIDAY" with respect to any Place of Payment or other location, means a Saturday, a Sunday or a day on which banking institutions or trust companies in such Place of Payment or other location are not authorized or obligated to be open. "LIEN" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance or similar agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any agreement to give or grant a Lien or any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing) upon or with respect to any property of any kind. A Person shall be deemed to own subject to a Lien any property which such Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "MATERIAL SUBSIDIARY" means any Restricted Subsidiary whose assets or revenues comprise at least five percent (5%) of the assets or revenues of the Company and the 6 Restricted Subsidiaries on a Consolidated basis as of the end of, or for the, Company's most recently completed fiscal quarter, as determined from time to time. "MATURITY" when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as provided in this Indenture, whether at the Stated Maturity or by declaration of acceleration, notice of redemption, and includes any Redemption Date. "MONEY", with respect to any payment, deposit or other transfer pursuant to or contemplated by the terms hereof, means United States dollars or other equivalent unit of legal tender for payment of public or private debts in the United States of America. "NON-PAYMENT EVENT OF DEFAULT" means any event (other than a Payment Event of Default), the occurrence of which (with or without notice or the passage of time) entitles one or more Persons to accelerate the maturity of any Specified Senior Indebtedness. "NOTE" or "NOTES" means any note or notes, as the case may be, authenticated and delivered under this Indenture. "NOTE REGISTER" and "NOTE REGISTRAR" have the respective meanings specified in Section 303. "OFFICE OR AGENCY" means an office or agency of the Company maintained or designated in a Place of Payment for the Notes pursuant to Section 1002 or any other office or agency of the Company maintained or designated for, the payment or surrender of the Notes pursuant to Section 1002 or, to the extent designated or required by Section 1002 in lieu of such office or agency, the Corporate Trust Office of the Trustee. "OFFICERS' CERTIFICATE" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and is delivered to the Trustee. "OPINION OF COUNSEL" means a written opinion of counsel, who may be an employee of or counsel for the Company or other counsel who shall be reasonably acceptable to the Trustee. "OUTSTANDING", when used with respect to any Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (1) any Note theretofore canceled by the Trustee or the Note Registrar or delivered to the Trustee or the Note Registrar for cancellation; (2) any Note or portion thereof for whose payment at the Maturity thereof Money in the necessary amount has been theretofore deposited pursuant hereto with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes, provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; 7 (3) any Note, except to the extent provided in Sections 1202 and 1203, with respect to which the Company has effected legal defeasance or covenant defeasance as provided in Article Twelve; and (4) any Note which has been paid pursuant to Section 304 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, unless there shall have been presented to the Trustee proof satisfactory to it that such Note is held by a bona fide purchaser in whose hands such Note is a valid obligation of the Company; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making any such determination or relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which shall have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee (a) the pledgee's right so to act with respect to such Notes and (b) that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor. "PARI PASSU INDEBTEDNESS" means any Indebtedness for Money Borrowed of the Company that is PARI PASSU in right of payment to the Notes and shall include, without limitation, the 2001 Notes. "PAYING AGENT" means any Person authorized by the Company to pay the principal of (or premium, if any, on) or interest on any Note on behalf of the Company. "PAYMENT BLOCKAGE NOTICE" has the meaning specified in Section 1303. "PAYMENT BLOCKAGE PERIOD" has the meaning specified in Section 1303. "PAYMENT EVENT OF DEFAULT" means any default in the payment or required prepayment of principal of (or premium, if any) or interest on any Specified Senior Indebtedness when due (whether at final maturity, upon scheduled installment, upon acceleration or otherwise). "PERMITTED INDEBTEDNESS" means any of the following: (i) Indebtedness for Money Borrowed outstanding on the date of this Indenture (and not repaid or defeased with the proceeds of the offering of the Notes); (ii) Indebtedness for Money Borrowed of the Company to a Restricted Subsidiary and Indebtedness for Money Borrowed of a Restricted Subsidiary to the Company or a Restricted Subsidiary; PROVIDED, HOWEVER, that upon any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness for Money Borrowed (except to the Company or a Restricted Subsidiary), such Indebtedness for Money Borrowed shall be deemed, in each case, to be 8 incurred and shall be treated as an incurrence for purposes of Section 1007 at the time the Restricted Subsidiary in question ceased to be a Restricted Subsidiary; (iii) any guarantee of Senior Indebtedness incurred in compliance with Section 1007 by a Restricted Subsidiary or the Company; and (iv) any renewals, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") by the Company or a Restricted Subsidiary of any Indebtedness for Money Borrowed incurred pursuant to clause (i) of this definition, including any successive refinancings by the Company or such Restricted Subsidiary, so long as (A) any such new Indebtedness for Money Borrowed shall be in a principal amount that does not exceed the principal amount (or, if such Indebtedness for Money Borrowed being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness for Money Borrowed refinanced or the amount of any premium reasonably determined by the Company or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of the Company or such Restricted Subsidiary incurred in connection with such refinancing, and (B) in the case of any refinancing of Indebtedness for Money Borrowed of the Company that is not Senior Indebtedness, such new Indebtedness for Money Borrowed is either PARI PASSU with the Notes or subordinated to the Notes at least to the same extent as the Indebtedness being refinanced and (C) such new Indebtedness for Money Borrowed has an Average Life equal to or longer than the Average Life of the Indebtedness for Money Borrowed being refinanced and a final Stated Maturity equal to or later than the final Stated Maturity of the Indebtedness for Money Borrowed being refinanced. "PERMITTED JUNIOR SECURITIES" means any equity securities or subordinated debt securities of the Company or any successor obligor with respect to the Senior Indebtedness provided for by a plan of reorganization or readjustment that, in the case of any such subordinated debt securities, are subordinated in right of payment to all Senior Indebtedness that may at the time be outstanding to substantially the same degree as, or to a greater extent than, the Notes are so subordinated as provided in this Indenture. "PERMITTED LIENS" means any of the following types of Liens: (a) Liens existing as of the date the Notes are first issued (except to the extent such Liens secure any Pari Passu Indebtedness or Subordinated Indebtedness that is repaid or defeased with proceeds of the offering of the Notes), and any renewal, extension or refinancing of any such Lien provided that thereafter such Lien extends only to the properties that were subject to such Lien prior to the renewal, extension or refinancing thereof; (b) Liens securing the Notes; and (c) Liens in favor of the Company. 9 "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "PLACE OF PAYMENT" has the meaning set forth in Section 1001. "PREDECESSOR NOTE" of a Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 304 in exchange for or in lieu of a lost, destroyed, mutilated or stolen Note shall be deemed to evidence the same debt as the lost, destroyed, mutilated or stolen Note. "PRODUCTION PAYMENTS AND RESERVE SALES" means the grant or transfer to any Person of a royalty, overriding royalty, net profits interest, production payment (whether volumetric or dollar denominated), master limited partnership interest or other interest in oil and gas properties, reserves the right to receive all or a portion of the production or the proceeds from the sale of production attributable to such properties where the holder of such interest has recourse solely to such production or proceeds of production, subject to the obligation of the grantor or transferor to operate and maintain, or cause the subject interests to be operated and maintained, in a reasonably prudent manner or other customary standard or subject to the obligation of the grantor or transferor to indemnify for environmental matters. "PROPERTY" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, capital stock in any other Person. "PURCHASE PRICE" has the meaning set forth in Section 1016. "REDEMPTION DATE", with respect to any Note or portion thereof to be redeemed, means the date fixed for such redemption pursuant to Article Eleven of this Indenture. "REDEMPTION PRICE", with respect to any Note or portion thereof to be redeemed, means the price at which it is to be redeemed pursuant to Article Eleven of this Indenture. "REGULAR RECORD DATE" for the interest payable on any Note on any Interest Payment Date therefor means the date, if any, specified in or pursuant to this Indenture as the "Regular Record Date". "REPURCHASE DATE" has the meaning set forth in Section 1016. "REPURCHASE EVENT" has the meaning set forth in Section 1016. "REPURCHASE EVENT DATE" has the meaning set forth in Section 1016. "REPURCHASE OFFER" has the meaning set forth in Section 1016. "RESPONSIBLE OFFICER" means any officer of the Trustee in its Corporate Trust Department and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. 10 "RESTRICTED PAYMENT" has the meaning specified in Section 1006. "RESTRICTED SUBSIDIARY" means any Subsidiary, whether existing on or after the date of this Indenture, unless such Subsidiary is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary pursuant to the terms of this Indenture. "SENIOR EVENT OF DEFAULT" has the meaning specified in Section 1301. "SENIOR INDEBTEDNESS" means the principal amount of (and premium, if any), and interest on and all other amounts due on or in connection with, (1) any Indebtedness for Money Borrowed of the Company, whether now outstanding or hereafter created, incurred, assumed or guaranteed, unless in the instrument creating or evidencing such Indebtedness for Money Borrowed or pursuant to which such Indebtedness for Money Borrowed is outstanding it is provided that such indebtedness is subordinate in right of payment or in rights upon liquidation to any other Indebtedness for Money Borrowed of the Company and (2) all renewals, extensions and refundings of any such indebtedness. "SERIES A PREFERRED STOCK" means the Company's $2.125 Convertible Exchangeable Preferred Stock, Series A. "SPECIAL RECORD DATE" for the payment of any Defaulted Interest on any Note means a date fixed by the Trustee pursuant to Section 305. "SPECIFIED SENIOR INDEBTEDNESS" means (a) all Senior Indebtedness of the Company in respect of the Credit Facility and any renewals, amendments, extensions, supplements, modifications, deferrals, refinancings, or replacements (each, for purposes of this definition, a "refinancing") thereof by the Company, including any successive refinancings thereof by the Company and (b) any other Senior Indebtedness and any refinancings thereof by the Company having a principal amount of at least $5 million as of the date of determination and provided that the agreements, indentures or other instruments evidencing such Senior Indebtedness or pursuant to which such Senior Indebtedness was issued specifically designates such Senior Indebtedness as "Specified Senior Indebtedness" for purposes of this Indenture. For purposes of this definition, a refinancing of any Specified Senior Indebtedness shall be treated as a Specified Senior Indebtedness only if the Senior Indebtedness issued in such refinancing ranks or would rank PARI PASSU with the Specified Senior Indebtedness refinanced and only if the Senior Indebtedness issued in such refinancing is permitted by Section 1007. "STATED MATURITY" with respect to any Note or any installment of principal thereof or interest thereon means the date established by this Indenture as the fixed date on which the principal of such Note or such installment of principal or interest is due and payable, and, when used with respect to any other Indebtedness for Money Borrowed or any installment of interest thereon, means the date specified in the instrument evidencing or governing such Indebtedness for Money Borrowed as the fixed date on which the principal of such Indebtedness for Money Borrowed or such installment of interest is due and payable. "SUBORDINATED INDEBTEDNESS" means Indebtedness for Money Borrowed of the Company which is expressly subordinated in right of payment to the Notes, including, without limitation, the Convertible Debentures. 11 "SUBSIDIARY" means any Corporation of which at the time of determination the Company or one or more Subsidiaries owns or controls directly or indirectly more than 50% of the shares of Voting Stock. "TOTAL CONSOLIDATED ASSETS" means the total assets of the Company and its Restricted Subsidiaries on a consolidated basis as of the date of the Company's most recent quarterly balance sheet prepared in accordance with GAAP. "TRANSACTION" has the meaning specified in Section 1015. "TRUST INDENTURE ACT" means the United States Trust Indenture Act of 1939, as in force at the date as of which this instrument was executed, except as provided in Sections 901 and 902; PROVIDED, HOWEVER, that in the event the United States Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the United States Trust Indenture Act of 1939 as so amended. "TRUSTEE" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean each Person who is then a Trustee hereunder. "2001 INDENTURE" means that certain Indenture dated as of November 27, 1996 between the Company and American Stock Transfer & Trust Company, as Trustee, as the same may have been amended or supplemented from time to time prior to the date hereof. "2001 NOTES" means the Company's 10% Senior Subordinated Notes due 2001, issued pursuant to the 2001 Indenture. "UNITED STATES", except as otherwise provided herein, means the United States of America (including the states thereof and the District of Columbia), its territories and possessions and other areas subject to its jurisdiction. "UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that at the time of determination will be designated an Unrestricted Subsidiary by the Board of Directors as provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary as an Unrestricted Subsidiary so long as neither the Company nor any Restricted Subsidiary is directly or indirectly liable pursuant to the terms of any Indebtedness for Money Borrowed of such Subsidiary or has any assets or properties which are subject to any Lien securing any Indebtedness for Money Borrowed of such Subsidiary. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing a Board Resolution with the Trustee giving effect to such designation. The Board of Directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation, (i) no Event of Default shall have occurred and be continuing and (ii) the Company could occur $1.00 of additional Indebtedness for Money Borrowed (other than Permitted Indebtedness) under Section 1007. "VICE PRESIDENT", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "Vice President". 12 "VOTING STOCK" means stock, interests, participations, rights in or other equivalents in the equity interests (however designated) with respect to a Corporation having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Corporation; provided that, for the purposes hereof, stock which carries only the right to vote conditionally on the happening of an event shall not be considered Voting Stock whether or not such event shall have happened. SECTION 102.COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents or any of them is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such condition or covenant has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103.FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate of counsel or Opinion of Counsel or representation of counsel may be based, insofar as it relates to 13 factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture or any Note, they may, but need not, be consolidated and form one instrument. SECTION 104.ACTS OF HOLDERS (1) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Note, shall be sufficient for any purpose of this Indenture and (subject to Section 315 of the Trust Indenture Act) conclusive in favor of the Trustee and the Company and any agent of the Trustee or the Company, if made in the manner provided in this Section. Without limiting the generality of this Section, unless otherwise provided in or pursuant to this Indenture, a Holder, including a Depository that is a Holder of a Global Note, may make, give or take, by a proxy, or proxies, duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other action provided in or pursuant to this Indenture to be made, given or taken by Holders, and a Depository that is a Holder of a Global Note may provide its proxy or proxies to the beneficial owners of interests in any such Global Note through such Depository's standing instructions and customary practices. The Trustee shall fix a record date for the purpose of determining the Persons who are beneficial owners of interests in any permanent Global Note held by a Depository entitled under the procedures of such Depository to make, give or take, by a proxy or proxies duly appointed in writing, any request, demand, authorization, direction, notice, consent, waiver or other action provided in or pursuant to this Indenture to be made, given or taken by Holders. If such a record date is fixed, the Holders on such record date or their duly appointed proxy or proxies, and only such Persons, shall be entitled to make, give or take such request, demand, authorization, direction, notice, consent, waiver or other action, whether or not such Holders remain Holders after such record date. No such request, demand, authorization, direction, notice, consent, waiver or other action shall be valid or effective if made, given or taken more than 90 days after such record date. (2) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his 14 individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (3) The ownership, principal amount and serial numbers of Notes held by any Person, and the date of the commencement and the date of the termination of holding the same, shall be proved by the Note Register. (4) If the Company shall solicit from the Holders of any Notes any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may at its option (but is not obligated to), by Board Resolution, fix in advance a record date for the determination of Holders of Notes entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after such record date, but only the Holders of Notes of record at the close of business on such record date shall be deemed to be Holders for the purpose of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Outstanding Notes shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders of Notes on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. (5) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee, any Note Registrar, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 105.NOTICES, ETC, TO TRUSTEE AND COMPANY. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (1) the Trustee by any Holder or the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing and delivered in person or mailed by certified or registered mail (return receipt requested) to or with the Trustee at its Corporate Trust Office, or (2) the Company by the Trustee or any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and delivered in person or mailed by certified or registered mail (return receipt requested), to the Company addressed to the attention of its Chief Financial Officer at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. 15 SECTION 106.NOTICE TO HOLDERS OF NOTES; WAIVER. Except as otherwise expressly provided in this Indenture, where this Indenture provides for notice to Holders of Notes of any event, such notice shall be sufficiently given to Holders of Notes if in writing and mailed, first-class postage prepaid, to each Holder of a Note affected by such event, at such Holder's address as it appears in the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders of Notes is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Note shall affect the sufficiency of such notice with respect to other Holders of Notes. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given or provided. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Notes shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 107.LANGUAGE OF NOTICES. Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language. SECTION 108.CONFLICT WITH TRUST INDENTURE ACT. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with any duties under any required provision of the Trust Indenture Act imposed hereon by Section 318(c) thereof, such required provision shall control. SECTION 109.EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein, the Reconciliation and Tie Chart and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 110.SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 111.SEVERABILITY CLAUSE. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, either wholly or partially, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and such provisions shall be given effect to the fullest extent permitted by law. 16 SECTION 112.BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any Note Registrar, any Paying Agent, any Authenticating Agent and their respective successors hereunder, the Holders of Notes and the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 113.GOVERNING LAW. This Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made or instruments entered into and, in each case, performed in said state. SECTION 114.LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, Repurchase Date, or Stated Maturity of any Note shall be a Legal Holiday at any Place of Payment, then (notwithstanding any other provision of this Indenture) payment need not be made at such Place of Payment on such date, but may be made on the next succeeding day that is a Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, Redemption Date, Repurchase Date, or at the Stated Maturity, and no interest shall accrue on the amount payable on such date or at such time for the period from and after such Interest Payment Date, Redemption Date, Repurchase Date, or Stated Maturity, as the case may be. SECTION 115.COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 116.INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No recourse under or upon any obligation, covenant or agreement of this Indenture, any supplemental indenture, or of any Note, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporation, shareholder, officer, employee, director or Affiliate, as such, past, present or future, of the Company or of any successor corporation or Person, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, shareholders, officers, employees, directors or Affiliates, as such, of the Company or of any successor corporation or Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or any of the Notes or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, shareholder, officer, employee, director or Affiliate, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in 17 this Indenture or in any of the Notes or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Notes. SECTION 117.NO ADVERSE INTERPRETATIONS OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. ARTICLE TWO FORM OF NOTES SECTION 201.FORMS GENERALLY. The Initial Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 1 to Appendix A which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit 2 to Appendix A, which is hereby incorporated in and expressly made a part of this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Note shall be dated the date of its authentication. The terms of the Notes set forth in Exhibit 1 to Appendix A and Exhibit 2 to Appendix A are part of the terms of this Indenture. The Initial Notes and the Exchange Notes will be treated as a single class of Notes under this Indenture. ARTICLE THREE THE NOTES SECTION 301. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. Notes shall be executed on behalf of the Company by its Chairman of the Board, one of its Vice Chairmen of the Board, its Chief Executive Officer, its President, its Treasurer or one of its Vice Presidents under its corporate seal impressed, imprinted or reproduced thereon and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes, executed by the Company, to the Trustee for authentication and, provided that a Company Order for the authentication and delivery of such Notes has been delivered to the Trustee, the Trustee, in accordance with the Company Order and subject to the provisions hereof, shall authenticate and deliver such Notes. 18 Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Note a certificate of authentication substantially in the form provided for in Appendix A or Section 612 executed by or on behalf of the Trustee by the manual signature of one of its authorized signatories or by an Authenticating Agent. Such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. SECTION 302.TEMPORARY NOTES. Pending the preparation of definitive Notes, the Company may execute and deliver to the Trustee and, upon Company Order, the Trustee shall authenticate and deliver temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued, in registered form and with such appropriate insertions, omissions, substitutions and other variations as the officers of the Company executing such Notes may determine, as conclusively evidenced by their execution of such Notes. Such temporary Notes may be in global form. Except in the case of temporary Notes in global form, which shall be exchanged in accordance with the provisions thereof, if temporary Notes are issued, the Company shall cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, such temporary Notes shall be exchangeable for such definitive Notes upon surrender of such temporary Notes at an Office or Agency for such Notes, without charge to any Holder thereof. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Unless otherwise provided in or pursuant to this Indenture with respect to a temporary Global Note, until so exchanged the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 303.REGISTRATION. The Company shall cause to be kept a register (herein sometimes referred to as the "Note Register") at an Office or Agency maintained pursuant to Section 1002 in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of the Notes and of transfers of the Notes. The Trustee is hereby initially appointed as Note Registrar for the Notes. In the event that the Trustee shall cease to be Note Registrar it shall have the right to examine the Note Register at all reasonable times. SECTION 304.MUTILATED, DESTROYED, LOST AND STOLEN NOTES. If any mutilated Note is surrendered to the Trustee, subject to the provisions of this Section, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Note containing identical terms and of like principal amount and bearing a number not contemporaneously outstanding. If there be delivered to the Company and to the Trustee (1) evidence to their satisfaction of the destruction, loss or theft of any Note, and (2) such indemnity as may be 19 required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser (or any equivalent person under any applicable statute, rule or regulation or interpretation then in effect), the Company shall execute and, upon the Company's request the Trustee shall authenticate and deliver, in exchange for or in lieu of any such destroyed, lost or stolen Note, a new Note of the same series containing identical terms and of like principal amount and bearing a number not contemporaneously outstanding. Notwithstanding the foregoing provisions of this Section, in case any mutilated, destroyed, lost or stolen Note has become or is about to become due and payable or redeemed by the Company pursuant to Article Eleven hereof, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an additional original contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section, as amended or supplemented pursuant to this Indenture, shall be exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 305.PAYMENT OF INTEREST, RIGHTS TO INTEREST PRESERVED. Any interest on any Note which shall be payable and is punctually paid or duly provided for on any Interest Payment Date shall be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered as of the close of business on the Regular Record Date for such interest. Any interest on any Note which shall be payable, but shall not be punctually paid or duly provided for, on any Interest Payment Date for such Note (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder thereof on the relevant Regular Record Date by virtue of having been a Holder on such date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below. (1) The Company may elect to make payment of any Defaulted Interest to the Person in whose name such Note (or a Predecessor Note thereof) shall be registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on such Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of Money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the 20 Trustee for such deposit on or prior to the date of the proposed payment, such Money when so deposited to be held in trust for the benefit of the Person entitled to such Defaulted Interest as in this Clause provided. Thereupon, the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to the Holder of such Note (or a Predecessor Note thereof) at such Holder's address as it appears in the Note Register not less than 10 days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the Company cause a similar notice to be published at least once in an Authorized Newspaper of general circulation in each Place of Payment, but such publication shall not be a condition precedent to the establishment of such Special Record Date and the failure of a Holder to observe such published notice shall not entitle such Holder to additional benefits or interest with respect to such Holder's Notes. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Person in whose name such Note (or a Predecessor Note thereof) shall be registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such payment shall be deemed practicable by the Trustee. At the option of the Company, Defaulted Interest may be paid (i) by mailing a check to the address of the Person entitled thereto as such address shall appear in the Note Register, in the case of any certificated Note, or (ii) by wire transfer to an account maintained by the Person entitled thereto as specified in the Note Register. Subject to the foregoing provisions of this Section, Section 303 and Appendix A, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. SECTION 306.PERSONS DEEMED OWNERS. Prior to due presentment of a Note for registration of transfer or exchange, the Company, the Trustee, the Note Registrar, and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered in the Note Register as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 303 and 305) interest on such Note and for all other purposes whatsoever, whether or not any payment with respect to such Note shall be overdue, and neither the Company, nor the Trustee, the Note Registrar, or any agent of the Company or the Trustee shall be affected by notice to the contrary. No holder of any beneficial interest in any Global Note held on its behalf by a Depository shall have any rights under this Indenture with respect to such Global Note, and such Depository may be treated by the Company, the Trustee, and any agent of the 21 Company or the Trustee as the owner of such Global Note for all purposes whatsoever. None of the Company, the Trustee, any Paying Agent or the Note Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. SECTION 307.CANCELLATION. All Notes surrendered for payment, redemption, repurchase, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Notes, as well as Notes surrendered directly to the Trustee for any such purpose, shall be canceled promptly by the Trustee. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be canceled promptly by the Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be disposed of as directed by a Company Order or in accordance with the Trustee's usual practice; provided, however, that the Trustee shall not be required to destroy canceled Notes. SECTION 308.COMPUTATION OF INTEREST. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401.SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Notes, as expressly provided for in this Indenture) as to all Outstanding Notes, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (a) either (1) all Notes theretofore authenticated and delivered (other than (i) Notes which have been mutilated, destroyed, lost or stolen and which have been replaced or paid as provided in Section 304 and (ii) Notes for whose payment Money or Government Obligations have theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (2) all such Notes not theretofore delivered to the Trustee for cancellation 22 (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of clause (2)(i), (2)(ii) or (2)(iii) above, has irrevocably deposited or caused to be deposited with the Trustee Money in an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be, together with instructions from the Company irrevocably directing the Trustee to apply such Money to the payment thereof at maturity or redemption, as the case may be; (b) the Company has paid or caused to be paid all other sums then due and payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent herein relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607, the obligations of the Trustee to any Authenticating Agent under Section 612 and, if Money and/or Government Obligations shall have been deposited with the Trustee pursuant to this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402.APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 1003, all Money and Government Obligations deposited with the Trustee pursuant to Section 401 and all Money received by the Trustee in respect of Government Obligations deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such Money has or Government Obligations have been deposited with or received by the Trustee. 23 ARTICLE FIVE REMEDIES SECTION 501.EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or be effected by operation of law pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest on any Note when such interest becomes due and payable, and continuance of such default for a period of 30 days, whether or not such payment is prohibited by the provisions of Article Thirteen; or (2) default in the payment of the principal of or premium, if any, on any Note when it becomes due and payable at its Maturity, whether or not such payment is prohibited by the provisions of Article Thirteen; or (3) default in the performance, or breach, of any covenant or agreement of the Company in this Indenture or the Notes (other than a covenant or warranty a default in the performance or the breach of which is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Notes a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) default in the payment at Stated Maturity of any Indebtedness for Money Borrowed of the Company or any Restricted Subsidiary in principal amount due at Stated Maturity in excess of $2,500,000, and such default shall continue, without being cured or waived to and without such Indebtedness for Money Borrowed being discharged, for a period of 30 days beyond any applicable period of grace; or (5) the occurrence of an event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness for Money Borrowed of the Company or any Restricted Subsidiary (or the payment of which is guaranteed by the Company), whether such Indebtedness for Money Borrowed now exists or shall hereafter be created, PROVIDED, HOWEVER, that no such event of default shall constitute an Event of Default hereunder unless the effect of such event of default is to cause the acceleration of such Indebtedness for Money Borrowed prior to its Stated Maturity, which together with the principal amount of any such other Indebtedness for Money Borrowed so caused to be accelerated, aggregates $2,500,000 or more at any one point in time and such default shall not have been cured or waived and such acceleration shall not have been rescinded or annulled within a period of 30 days from the occurrence of such acceleration; or (6) the entry by a court or agency or supervisory authority having competent jurisdiction of: (a) a decree or order for relief in respect of the Company or any Material Subsidiary in an involuntary proceeding under any applicable bankruptcy, 24 insolvency, reorganization or other similar law and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) a decree or order adjudging the Company or any Material Subsidiary to be insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of the Company or any Material Subsidiary and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (c) a decree or order appointing any Person to act as a custodian, receiver, liquidator, assignee, trustee or other similar official of the Company or any Material Subsidiary or of any substantial part of the Property of the Company or any Material Subsidiary, as the case may be, or ordering the winding up or liquidation of the affairs of the Company or any Material Subsidiary and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company or any Material Subsidiary of a voluntary proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law or of a voluntary proceeding seeking to be adjudicated insolvent or the consent by the Company or any Material Subsidiary to the entry of a decree or order for relief in an involuntary proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law or to the commencement of any insolvency proceedings against it, or the filing by the Company or any Material Subsidiary of a petition or answer or consent seeking reorganization or relief under any applicable law, or the consent by the Company or any Material Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or similar official of the Company or any Material Subsidiary or any substantial part of the Property of the Company or any Material Subsidiary or the making by the Company or any Material Subsidiary of an assignment for the benefit of creditors, or the taking of corporate action by the Company or any Material Subsidiary in furtherance of any such action; or (8) a final judgment, judicial decree or order for the payment of money in excess of $2,500,000 shall be rendered against the Company or any Material Subsidiary and such judgment, decree or order shall continue unsatisfied for a period of 30 days without a stay of execution; or (9) failure by the Company to give the Company Notice in accordance with Section 1016. SECTION 502.ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If any Event of Default (other than an Event of Default specified in Section 501(6) or 501(7)) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes then Outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes shall, by a notice in writing to the Company, declare all unpaid principal of, premium, if any, and accrued and unpaid interest on all the Notes to be due and payable immediately, upon which declaration all amounts payable in respect of the Notes shall be immediately due and payable. If an Event of Default specified in Section 501(6) or 501(7) occurs and is continuing, the amounts described above shall become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. 25 At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Notes Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (a) the Company has paid or deposited with the Trustee a sum sufficient to pay, (1) all overdue interest on all Outstanding Notes, (2) all unpaid principal of (and premium, if any, on) any Outstanding Notes which have become due otherwise than by such declaration of acceleration, including any Notes required to have been purchased on a Repurchase Date pursuant to a Repurchase Offer, and interest on such unpaid principal at the rate borne by the Notes, (3) to the extent that payment of such interest is lawful, interest on overdue interest and overdue principal at the rate borne by the Notes (without duplication of any amount paid or deposited pursuant to clauses (1) and (2) above), and (4) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (b) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction as certified to the Trustee by the Company; and (c) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any) or interest on Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the foregoing, if an Event of Default specified in Section 50l(4) or 501(5) shall have occurred and be continuing, such Event of Default and any consequential acceleration shall be automatically rescinded if the Indebtedness for Money Borrowed that is the subject of such Event of Default has been repaid, or if the default relating to such Indebtedness is waived or cured and if such Indebtedness has been accelerated, then the holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness (provided, in each case, that such repayment, waiver, cure or rescission is effected within a period of 30 days from the continuation of such default beyond the applicable grace period or the occurrence of such acceleration), and written notice of such repayment, or cure or waiver and rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Indebtedness for Money Borrowed or a trustee, fiduciary or agent for such holders or other evidence satisfactory to the Trustee of such events is provided to the Trustee, within 30 days after any such acceleration in respect of the Notes, and so long as such rescission of any such acceleration of the Notes does not conflict with any judgment or decree as certified to the Trustee by the Company. 26 SECTION 503.COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if (a) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Note at the Maturity thereof or with respect to any Note required to have been repurchased by the Company on the Repurchase Date pursuant to a Repurchase Offer, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest and overdue principal (and premium, if any), at the rate borne by the Notes (without duplication of any amount paid pursuant to the preceding clauses of this Section 503(b)), and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the money adjudged or decreed to be payable in the manner provided by law out of the Property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504.TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes, their creditors or the Property of the Company or of such other obligor, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company or such other obligor for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents and take any other actions including participation as a full member of any creditor or other committee as may be necessary or advisable in order to have the claims 27 of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) subject to Article Thirteen, to collect and receive any money or other Property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505.TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 506.APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in the case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid; FIRST: to the payment of all amounts due the Trustee under Section 607; SECOND: subject to Article Thirteen, to the payment of the amounts then due and unpaid for principal (and premium, if any) of and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: subject to Article Thirteen, the balance, if any, to the Company. 28 SECTION 507.LIMITATION ON SUITS. No Holder of any Notes shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority or more in aggregate principal amount of the Outstanding Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508.UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture (but subject to Article Thirteen), the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment, as provided herein and in such Note of the principal of (and premium, if any) and (subject to Section 305) interest on, such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption or repurchase, on the Redemption Date or Repurchase Date, as the case may be) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509.RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereunder and all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. 29 SECTION 510.RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 304, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511.DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512.CONTROL BY HOLDERS. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) the Trustee need not take any action which might involve it in personal liability or be unduly prejudicial to the Holders not joining therein. SECTION 513.WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes, by Act of such Holders, may on behalf of the Holders of all the Notes waive any existing Default or Event of Default hereunder and its consequences, except a Default or Event of Default on any Note, (a) in respect of the payment of the principal of (or premium, if any) or interest on any Note, or (b) in respect of a covenant or provision hereof which under Article Nine hereof cannot be modified or amended without the consent of the Holder of each Outstanding Note affected thereby. Upon any such waiver, such Default or Event of Default shall cease to exist for every purpose under this Indenture, but no such waiver shall extend to any subsequent or 30 other Default or Event of Default or impair any right consequent thereon. Any such waiver may (but need not) be given in connection with a tender offer or exchange offer for the Notes. SECTION 514.UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 25% in aggregate principal amount of the Outstanding Notes, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Note on or after the respective Stated Maturities expressed in such Note (or, in the case of redemption or repurchase, on or after the Redemption Date or the Repurchase Date, as the case may be). SECTION 515.WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension, or usury law or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal of (or premium, if any) or interest on the Notes as contemplated herein, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601.CERTAIN DUTIES AND RESPONSIBILITIES. (1) Except during the continuance of an Event of Default, (a) the Trustee undertakes to perform such duties, and only such duties, as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (b) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall 31 be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (2) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (3) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (a) this Subsection shall not be construed to limit the effect of Subsection (1) of this Section; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Notes, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Notes, provided such direction shall not be in conflict with any rule of law or with this Indenture; and (d) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (4) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602.NOTICE OF DEFAULTS. Within 90 days after the occurrence of any Event of Default hereunder, the Trustee shall transmit to the Holders of Notes, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, notice of such Event of Default hereunder known to the Trustee, unless such Event of Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in the case of an Event of Default in the payment of the principal of (or premium, if any) or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders of Notes. SECTION 603.CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 601 hereof: 32 (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or a Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence shall be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Notes pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, fees, expenses and liabilities which might be incurred by it, including reasonable fees of counsel, in complying with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, coupon or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine, during business hours and upon reasonable notice, the books, records and premises of the Company, personally or by agent or attorney; and (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 604.NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES. The recitals contained herein and in the Notes, except the Trustee's certificate of authentication, shall be taken as the statements of the Company and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility and Qualification on Form T-1 33 supplied to the Company are true and accurate, subject to the qualifications set forth therein. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of the Notes or the proceeds thereof. SECTION 605.MAY HOLD NOTES. The Trustee, any Authenticating Agent, any Paying Agent, any Note Registrar or any other Person that may be an agent of the Trustee or the Company, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to Sections 310(b) and 311 of the Trust Indenture Act, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar or such other agent. SECTION 606.MONEY HELD IN TRUST. Except as provided in Section 402 and Section 1003, Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any Money received by it hereunder except as otherwise agreed with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such Money shall be paid to the Company from time to time upon receipt by the Trustee of a Company Order except as otherwise provided in this Indenture. SECTION 607.COMPENSATION AND REIMBURSEMENT. The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by the Trustee hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable costs, expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to the Trustee's willful misconduct, negligence or bad faith; and (3) to indemnify the Trustee and its agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on their part, arising out of or in connection with the acceptance or administration of the trust hereunder, including the costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of their powers or duties hereunder. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a lien prior to the Notes upon all Money and other property held or collected by the Trustee as such, except Money and other property held in trust for the payment of principal of (and premium, if any) and interest on the Notes. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(6) or Section 501(7), the expenses (including the 34 reasonable compensation, expenses and disbursements of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The obligations of the Company under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee and each predecessor Trustee. SECTION 608.CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder that is a Corporation organized and doing business under the laws of the United States, authorized under such laws to exercise corporate trust powers, or any other Person permitted by the Trust Indenture Act to act as trustee under an indenture qualified under the Trust Indenture Act and that has a combined capital and surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture Act) of at least $10,000,000. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 609.RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (1) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee pursuant to Section 610. (2) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 610 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (3) The Trustee may be removed at any time by Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes delivered to the Trustee and the Company. (4) If at any time: (a) the Trustee shall fail to comply with the obligations imposed upon it under Section 310(b) of the Trust Indenture Act after written request therefor by the Company or any Holder of a Note who has been a bona fide Holder of a Note for at least six months, or (b) the Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Company or by any Holder of the Notes who has been a bona fide Holder of a Note for at least six months, or (c) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 35 then, in any such case, (i) the Company, by or pursuant to a Board Resolution, may remove the Trustee, or (ii) subject to Section 315(e) of the Trust Indenture Act, any Holder of a Note who has been a bona fide Holder of a Note for at least six months may, on behalf of such Holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (5) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 610, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of Notes and accepted appointment in the manner required by Section 610, any Holder of a Note who has been a bona fide Holder of a Note for at least six months may, on behalf of such Holder and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (6) The Company shall give notice of (i) each resignation and each removal of the Trustee and each appointment of a successor Trustee pursuant to this Section and (ii) each succession pursuant to Section 611 hereof, in each case by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Notes as their names and addresses appear in the Note Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 610.ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Upon the appointment hereunder of any successor Trustee, such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties hereunder of the retiring Trustee; but, on the request of the Company or such successor Trustee, such retiring Trustee, upon payment of all amounts due it under Section 607, shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all Money and other property held by such retiring Trustee hereunder. Upon request of any Person appointed hereunder as a successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in this Section. No Person shall accept its appointment hereunder as a successor Trustee unless at the time of such acceptance such successor Person shall be qualified and eligible under this Article. 36 SECTION 611.MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any Corporation into which the Trustee may be merged or converted or with which it may be Consolidated, or any Corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such Corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto; PROVIDED, HOWEVER, such Corporation shall notify the Company of its succession as Trustee pursuant to this Section as soon as practicable. In case any Notes shall have been authenticated but not delivered by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. SECTION 612.APPOINTMENT OF AUTHENTICATION AGENT. The Trustee, with the prior written consent of the Company and after giving notice of the appointment described in this Section 612 in the manner provided in Section 106 to all Holders of Notes, may appoint one or more Authenticating Agents with respect to the Notes which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon original issue, exchange, registration of transfer, partial redemption or pursuant to Section 304, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a Corporation (organized and doing business under the laws of the United States, authorized under such laws to act as Authenticating Agent) that would be permitted by the Trust Indenture Act to act as trustee under an indenture qualified under the Trust Indenture Act, is authorized under applicable law and by its charter to act as an Authenticating Agent and has a combined capital and surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture Act) of at least $10,000,000. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect specified in this Section. Any Corporation into which an Authenticating Agent may be merged or converted or with which it may be Consolidated, or any Corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, provided such Corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and 37 the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Notes, if any, as their names and addresses appear in the Note Register. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay each Authenticating Agent from time to time reasonable compensation for its services under this Section. If the Trustee makes such payments, it shall be entitled to be reimbursed for such payments, subject to the provisions of Section 607. The provisions of Sections 306, 604 and 605 shall be applicable to each Authenticating Agent. If an Authenticating Agent is appointed pursuant to this Section, the Notes may have endorsed thereon, in addition to or in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Notes referred to in the within mentioned Indenture. Authentication Date: __________________ _________________, Authenticating Agent By: _________________________ Authorized Signatory SECTION 613.CONFLICTING INTERESTS. The Trustee shall comply with the provisions of Section 310(b) of the Trust Indenture Act; PROVIDED, HOWEVER, there shall be excluded from the operation of Section 310(b)(1) of the Trust Indenture Act any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding (including, without limitation, the 2001 Indenture) if the requirements for such exclusion set forth in Section 310(b)(1) of the Trust Indenture Act are met. SECTION 614.PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee shall be or become a creditor of the Company (or any other obligor under the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). 38 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701.COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Company shall furnish or cause to be furnished to the Trustee (1) semi-annually no later than June 15 and December 15 of each year, a list, in each case in such form as the Trustee may reasonably require, of the names and addresses of Holders as of the preceding June 1 or December 1, as the case may be, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, PROVIDED, HOWEVER, that so long as the Trustee is the Note Registrar no such list shall be required to be furnished for Notes for which the Trustee acts as Note Registrar. SECTION 702.PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Notes contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and address of Holders of Notes received by the Trustee in its capacity as Note Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. The rights of Holders of Notes to communicate with other Holders of Notes with respect to their rights under this Indenture or under the Notes and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company, the Trustee, any Paying Agent or any Note Registrar or any agent of any of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders of Notes made pursuant to the Trust Indenture Act, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the Trust Indenture Act. SECTION 703.REPORTS BY TRUSTEE. (1) Within 60 days after May 15 of each year, if required by Section 313(a) of the Trust Indenture Act, the Trustee shall transmit, pursuant to Section 313(c) of the Trust Indenture Act, a brief report dated as of such May 15 with respect to any of the events specified in said Section 313(a) which may have occurred since the later of the immediately preceding May 15 and the date of this Indenture. (2) The Trustee shall transmit the reports required by Section 313(b) of the Trust Indenture Act at the times specified therein. (3) Reports pursuant to this Section shall be transmitted in the manner and to the Persons required by Sections 313(c) and 313(d) of the Trust Indenture Act. 39 SECTION 704.REPORTS BY COMPANY. The Company shall: (1) file with the Trustee, within 30 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then the Company shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a Note listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; provided that notwithstanding the requirements of such rules and regulations, so long as any Note is Outstanding the Company shall file with the Trustee at a minimum (a) as soon as practicable, but in any event no more than one hundred twenty (120) days, after the end of each fiscal year, copies of a balance sheet and statements of income and retained earnings of the Company as of the end of and for such fiscal year, audited by Independent Public Accountants, and (b) as soon as practicable, but in any event no more than forty-five (45) days, after the end of each quarterly fiscal period, except for the last quarterly fiscal period in each fiscal year, a summary statement (which need not be audited) of income and retained earnings of the Company for such period; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company, as the case may be, with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; (3) transmit to the Holders of Notes within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission; provided that notwithstanding the requirements of such rules and regulations, so long as any Note is Outstanding the Company shall transmit to the Holders of Notes, within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, the information, documents and other reports required to be filed by the Company pursuant to paragraph (1) of this Section; provided further that in lieu of any Annual Report on Form 10-K or Quarterly Report on Form 10-Q, the Company may transmit an annual or quarterly report, respectively, containing financial statements and an undertaking to transmit such Form 10-K or Form 10-Q, as the case may be, to any Holder upon request; and (4) furnish to the Trustee the Officers' Certificates required by Section 1011 hereof. 40 ARTICLE EIGHT CONSOLIDATION, MERGER AND SALES SECTION 801.COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. Nothing contained in this Indenture shall prevent any consolidation or merger of the Company with or into any other Person or Persons (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any conveyance, transfer or lease of the property of the Company as an entirety or substantially as an entirety, to any other Person (whether or not affiliated with the Company); PROVIDED, HOWEVER, that: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease all or substantially all its properties and assets to any Person, the entity formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, all or substantially all the properties and assets of the Company shall be a Person organized and existing under the laws of the United States and shall expressly assume, by an indenture supplemental hereto, executed by the successor Person and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Notes and the performance of every other covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no event which, after notice or lapse of time, or both, would become an Event of Default shall have occurred and be continuing; and (3) either the Company or the successor Person shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802.SUCCESSOR PERSON SUBSTITUTED FOR COMPANY. Upon any consolidation or merger or any conveyance, transfer or lease of all or substantially all the properties and assets of the Company to any Person in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; and thereafter, except in the case of a lease to another Person, the predecessor Person shall be released from all obligations and covenants under this Indenture and the Notes. 41 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901.SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holder of Notes, the Company (when authorized by or pursuant to a Board Resolution) and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, which shall conform with the requirements of the Trust Indenture Act as then in effect and be in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Notes; or (2) to add to or change any of the provisions of this Indenture to change or eliminate any restrictions on the payment of principal of (or premium, if any) or interest on Notes or to permit or facilitate the issuance of Notes in uncertificated form, provided any such action shall not adversely affect the interests of the Holders of Notes in any material respect; or (3) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not adversely affect the interests of the Holders of Notes in any material respect; or (4) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the discharge or defeasance of any Notes pursuant to Article Four or Twelve; provided that any such action shall not adversely affect the interests of any Holder of a Note in any material respect; or (5) to add to the covenants of the Company for the benefit of the Holders of the Notes (as shall be specified in such supplemental indenture or indentures) or to surrender any right or power herein conferred upon the Company; or (6) to evidence and provide acceptance of the appointment of a successor Trustee hereunder; or (7) to add any additional Events of Default; or (8) to comply with the requirements of the Commission in connection with the qualification of this Indenture under the Trust Indenture Act; or (9) to make provision with respect to the repurchase obligations of the Company pursuant to the requirements of Section 1016; or (10) to make any change that does not adversely affect the interests of any Holder of Notes. 42 SECTION 902.SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes, by Act of said Holders delivered to the Company and the Trustee, the Company (when authorized by or pursuant to a Board Resolution), and the Trustee may enter into one or more indentures supplemental hereto (which shall conform with the requirements of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Notes under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture, without the consent of the Holder of each Outstanding Note, shall (1) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount payable upon the redemption or repurchase thereof or otherwise, or reduce the rate of interest thereon, or change the Place of Payment, currency in which the principal of (or premium, if any) or interest on, is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repurchase, on or after the Redemption Date or Repurchase Date, as the case may be), or (2) reduce the percentage in aggregate principal amount of the Outstanding Notes, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, or Section 513 or Section 1012, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; or (4) modify any provisions of this Indenture relating to the relative ranking of the Notes in a manner adverse to the Holders thereof. It shall not be necessary for any Act of Holders of Notes under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903.EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trust created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904.EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a 43 part of this Indenture for all purposes; and every Holder of a Note theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905.REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Notes. SECTION 906.EFFECT ON SENIOR INDEBTEDNESS. No supplemental indenture shall adversely affect the rights of the holders of Senior Indebtedness under Article Thirteen unless expressly consented to in writing by or on behalf of such holders or by any specified percentage of holders of a class of Senior Indebtedness required to consent thereto pursuant to the terms of the agreement or instrument creating, evidencing or governing such Senior Indebtedness, in which event such supplemental indenture shall be binding on all successors and assigns of such holders and on all persons who become holders of such Senior Indebtedness issued after the date of such amendment or modification. SECTION 907.RECORD DATE. If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any supplemental indenture, agreement or instrument or any waiver, and shall promptly notify the Trustee of any such record date. If a record date is fixed those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such supplemental indenture, agreement or instrument or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. The record date shall be a date no more than 30 days prior to the first solicitation of Holders generally in connection therewith and no later than the date such solicitation is completed. No such consent shall be valid or effective for more than six months after such record date. Subject to applicable law, until any supplemental indenture, agreement, instrument or waiver becomes effective, or a consent to it by a Holder of a Note shall cease to be valid and effective as set forth in the preceding sentence, such consent is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note. ARTICLE TEN COVENANTS SECTION 1001. PAYMENT OF PRINCIPAL AND INTEREST. The principal of (and premium, if any) and interest on the Notes shall be payable at the Office or Agency of the Company in New York, New York ("Place of Payment") 44 maintained for such purposes pursuant to Section 1002; PROVIDED, HOWEVER, that, at the option of the Company, payment of interest on certificated Notes on any Interest Payment Date other than at Maturity may be made (subject to collection) by check mailed to the address of the Person entitled thereto as such address shall appear on the Note Register. Payments of principal, premium, if any, and interest at Maturity shall be made against presentation of Notes at such Office or Agency. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms thereof and this Indenture. Principal, premium, if any, and interest shall be considered paid on the date due if by 11:00 a.m., Eastern time, on such date the Trustee or Paying Agent (other than the Company or its Affiliates) holds in accordance with this Indenture Money sufficient to pay all principal, premium, if any, and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such Money to the Holders of Notes on that date pursuant to the terms of this Indenture. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain in each Place of Payment an Office or Agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration, transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such Office or Agency. The Company hereby initially designates the Corporate Trust Office of the Trustee as its Office or Agency for each of the foregoing purposes. If at any time the Company shall fail to maintain any such required Office or Agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other Offices or Agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other Office or Agency. SECTION 1003. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent, it shall, on or before each due date of the principal of (and premium, if any) or interest on the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum of Money sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it shall, on or prior to each due date of the principal of (and premium, if any) or interest on the Notes, deposit with any Paying Agent a sum of Money sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. 45 The Company shall cause each Paying Agent other than the Trustee or the Company to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent shall: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as provided in this Indenture; (2) give the Trustee notice of any Event of Default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest on the Notes; and (3) at any time during the continuance of any such Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent for payment in respect of the Notes. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. The Trustee and each Paying Agent shall promptly pay to the Company upon Company Request any Money held by them (other than pursuant to Article Twelve) at any time in excess of amounts required to pay principal of, premium, if any, or interest on the Notes. Any Money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Note and remaining unclaimed for one year after such principal (and premium, if any) or interest shall have become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust Money, and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense of the Company cause to be published once, in an Authorized Newspaper published in The City of New York, notice that such Money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such Money then remaining will be repaid to the Company. SECTION 1004. CORPORATE EXISTENCE. Subject to Article Eight, the Company shall do or cause to be done all things reasonably necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and its Material Subsidiaries; PROVIDED, HOWEVER, that the foregoing shall not obligate the Company to preserve any such right or franchise if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Material Subsidiaries, 46 taken as a whole, and that the loss thereof is not disadvantageous in any material respect to the Holders of the Notes. SECTION 1005. MAINTENANCE OF PROPERTIES. The Company will cause its properties and the properties of its Material Subsidiaries (other than properties obtained by the Company or any Material Subsidiary through foreclosure or other resolution of any loan) used or held for use in the conduct of the business of the Company and its Material Subsidiaries to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted), all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that the foregoing shall not prevent the Company or a Material Subsidiary from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Material Subsidiary and not disadvantageous in any material respect to the Holders of the Notes. SECTION 1006. RESTRICTIONS ON DIVIDENDS, REDEMPTIONS AND OTHER PAYMENTS. (a) The Company shall not, either directly or indirectly through any Restricted Subsidiary, (i) declare or pay any dividend, either in cash or property, on any shares of its capital stock (except dividends or other distributions payable solely in shares of capital stock of the Company), (ii) purchase, redeem or retire any shares of its capital stock or any warrants, rights or options to purchase or acquire any shares of its capital stock or (iii) make any other payment or distribution, in respect of the Company's capital stock (such dividends, purchases, redemptions, retirements, payments and distributions being herein collectively called "Restricted Payments") if, after giving effect thereto, (1) an Event of Default would have occurred; or (2) (A) the sum of (i) such Restricted Payments plus (ii) the aggregate amount of all Restricted Payments made during the period after the date of this Indenture would exceed (B) the sum of (i) $5 million plus (ii) 25% of the Company's Consolidated Net Income subsequent to March 31, 1997 (with 100% reduction for a loss). (b) Notwithstanding paragraph (a) above, the Company may take the following actions (so long as no Event of Default shall have occurred and be continuing): (i) the payment of dividends on any of the shares of the Series A Preferred Stock of the Company outstanding on the date of this Indenture; (ii) the payment of any dividend on any other Capital Stock of the Company or any Restricted Subsidiary within 60 days after the date of declaration thereof, if at such declaration date such declaration complied with the provisions of paragraph (a) above (and such payment shall be deemed to have been paid on such date of declaration for purposes of any calculation required by the provisions of paragraph (a) above); and (iii) the repurchase, redemption or other acquisition or retirement of (A) the Series A Preferred Stock of the Company outstanding on the date of this Indenture and (B) any shares of any class of capital stock of the Company or any Restricted Subsidiary, in exchange for, or out of the aggregate net cash proceeds of a substantially concurrent 47 issue and sale (other than to a Restricted Subsidiary) of shares of common stock of the Company. The actions described in clauses (i), (ii) and (iii) of this paragraph (b) shall be Restricted Payments that shall be permitted to be taken in accordance with this Section and shall not reduce the amount that would otherwise be available for Restricted Payments under clause (2) of paragraph (a). For purposes of this Section 1006, the amount of any Restricted Payment payable in property shall be deemed to be the fair market value of such property as determined by the Board of Directors of the Company. SECTION 1007. LIMITATIONS ON INDEBTEDNESS FOR MONEY BORROWED. (a) The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume, guarantee or become liable (collectively "incur") with respect to any Indebtedness for Money Borrowed (including Acquired Indebtedness but excluding Permitted Indebtedness) if, immediately after giving effect to any such creation, incurrence, assumption or guarantee (including giving effect to the retirement of any existing Indebtedness for Money Borrowed from the proceeds of such additional Indebtedness for Money Borrowed): (i) The ratio of (a) the aggregate amount of the outstanding Indebtedness for Money Borrowed of the Company and its Restricted Subsidiaries at the end of the immediately preceding fiscal quarter of the Company, as determined on a Consolidated basis in accordance with GAAP, to (b) the Consolidated EBITDA for the immediately preceding four fiscal quarter of the Company, would exceed 10.0 to 1.0; or (ii) The Interest Coverage Ratio would have been at least 2.4 to 1.0. (b) The Company will not permit any Restricted Subsidiary to incur any Indebtedness for Money Borrowed (except Indebtedness for Money Borrowed to the Company or another Restricted Subsidiary) that is expressly subordinate in right of payment to any other Indebtedness for Money Borrowed of such Restricted Subsidiary. SECTION 1008. LIMITATION LIENS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind, except for Permitted Liens, upon any of their respective assets or properties, whether now owned or acquired after the date of this Indenture, or any income or profits therefrom to secure any Pari Passu Indebtedness or Subordinated Indebtedness, unless prior to or contemporaneously therewith the Notes are directly secured equally and ratably, provided that (1) if such secured indebtedness is Pari Passu Indebtedness, the Lien securing such Pari Passu Indebtedness shall be subordinate and junior to, or PARI PASSU with, the Lien securing the Notes and (2) if such secured indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated Indebtedness shall be subordinate and junior to the Lien securing the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes. The foregoing covenant will not apply to any Lien securing Acquired Indebtedness, provided that any such Lien extends only to the properties or assets that were subject to such Lien prior to the related acquisition by the Company or such Restricted Subsidiary and was not created, incurred or assumed in contemplation of such transaction. 48 SECTION 1009. INSURANCE. The Company shall carry and maintain, and cause each of its Restricted Subsidiaries to carry and maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by similarly-situated companies engaged in similar operations and owning similar properties in similar geographic areas in which the Company or such Restricted Subsidiary operates, provided that such insurance is generally available at commercially reasonable rates, and provided further that the Company or any Restricted Subsidiary may self-insure, or insure through captive insurers or insurance cooperatives to the extent consistent with prudent business practices. SECTION 1010. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or property of the Company or any Restricted Subsidiary and (2) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that the Company and its Restricted Subsidiaries shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made in accordance with GAAP. SECTION 1011. STATEMENT BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company and within 45 days after the end of each of the first, second and third quarters of each fiscal year of the Company, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof (one of whom shall be the principal executive officer, the principal financial officer or the principal accounting officer of the Company) the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder), and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. In addition, the Company shall deliver to the Trustee, forthwith upon any of its officers becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 1012. WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1005 through 1011 and 1013 through 1015 if, before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of the Outstanding Notes, by Act of such Holders, either shall waive such compliance in such instance or generally shall have waived compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver 49 shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1013. LIMITATION ON RANKING OF FUTURE INDEBTEDNESS. The Company will not incur (as such term is defined in Section 1007(a)) or permit to remain outstanding any Indebtedness for Money Borrowed (including Acquired Indebtedness and Permitted Indebtedness) which is expressly subordinate in right of payment to any Senior Indebtedness, other than Subordinated Indebtedness or Pari Passu Indebtedness. For purposes of this Section 1013, the incurrence of Senior Indebtedness which is unsecured shall not, because of its unsecured status, be deemed to be subordinate in right of payment to any Senior Indebtedness which is secured. SECTION 1014. LIMITATIONS ON RESTRICTING SUBSIDIARY DIVIDENDS. The Company shall not and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause to become effective any encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends in cash or make any other distribution on its capital stock to the Company or any other Restricted Subsidiary, (b) pay any indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans, advances, or capital contributions to the Company or any other Restricted Subsidiary, or (d) transfer any of its properties or assets to the Company or another Restricted Subsidiary, except in each instance (i) as set forth in the instrument evidencing or the agreement governing Acquired Indebtedness of any acquired Person which becomes a Restricted Subsidiary, provided, that any restriction or encumbrance under such instrument or agreement existed at the time of acquisition, was not put in place in anticipation of such acquisition, and is not applicable to any Person, other than the Person or property or assets of the Person so acquired; (ii) customary provisions of any lease or license of the Company or any Restricted Subsidiary relating to the property covered thereby and entered into in the ordinary course of business; (iii) any encumbrance or restriction arising under applicable law; (iv) any encumbrance or restriction arising under this Indenture, the Credit Facility, or other indebtedness or other agreements existing on the Issue Date; (v) any restrictions with respect to a Restricted Subsidiary imposed pursuant to an agreement that has been entered into for the sale or disposition of the stock, business, assets or properties of such Restricted Subsidiary; (vi) any encumbrance or restriction arising under the terms of purchase money obligations, but only to the extent such purchase money obligations restrict or prohibit the transfer of the property so acquired; (vii) any encumbrance or restriction arising under customary non-assignment provisions in installment purchase contracts; (viii) any encumbrance or restriction on the ability of any Restricted Subsidiary to transfer any of its property acquired after the date of this Indenture to the Company or any other Restricted Subsidiary that is required by a lender to, or purchaser of any indebtedness of, such Restricted Subsidiary in connection with a financing of the acquisition of such property (including with respect to the purchase of asset portfolios and pursuant to the underwriting or origination of mortgage loans) by such Restricted Subsidiary; and (ix) any encumbrance or restriction pursuant to any agreement that extends, refinances, renews or replaces any agreement described in the foregoing clauses (i) through (viii); and except with respect to clause (d) only, restrictions in the form of Liens which are not prohibited under Section 1008 and which contain customary limitations on the transfer of collateral. 50 SECTION 1015. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any transaction (or series of related transactions), including, without limitation, the sale, purchase, lease or exchange of any property or the rendering of any service (a "Transaction"), involving payments in excess of $50,000, with any Affiliate of the Company (other than the Company or a Restricted Subsidiary), on terms and conditions less favorable to the Company or such Restricted Subsidiary, as the case may be, than would be available at such time in a comparable Transaction in arm's length dealings with an unrelated Person as determined by the Board of Directors, such approval to be evidenced by a Board Resolution. The provisions of the immediately preceding paragraph will not apply to: (1) Restricted Payments otherwise permitted under Section 1006; (2) fees and compensation (including amounts paid pursuant to employee benefit plans) paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Restricted Subsidiary, as determined by the Board of Directors or the senior management thereof in the exercise of their reasonable business judgment; or (3) payments for goods and services purchased in the ordinary course of business on an arm's length basis. SECTION 1016.PURCHASE OF NOTES UPON CERTAIN EVENTS (a) In the event that Senior Indebtedness of the Company and its Restricted Subsidiaries is not less than the greater of $50 million and 45% of Total Consolidated Assets for at least 30 consecutive days during any consecutive 12-month period after August 1, 1997 (such event is referred to as a "Repurchase Event" and the last day of such 12-month period is referred to as the "Repurchase Event Date"), each Holder of Notes shall have the right to require the Company to purchase such Holder's Notes, in whole or in part, in a principal amount that is an integral multiple of $1,000, pursuant to the offer described in Section 1016(b) hereof (the "Repurchase Offer") at a purchase price (the "Purchase Price") in cash equal to (i) if the Repurchase Event Date is on or before July 31, 2000, 104% of the aggregate principal amount thereof, (ii) if the Repurchase Event Date is after July 31, 2000 and on or before July 31, 2001, 102% of the aggregate principal amount thereof or (iii) if the Repurchase Event Date is after July 31, 2001, 100% of the aggregate principal amount thereof, in each case plus accrued and unpaid interest, if any, thereon to the date of purchase (the "Repurchase Date"). Solely for purposes of this Section 1016 only, "SENIOR INDEBTEDNESS" means the principal amount of (and premium, if any), and interest on and all other amounts due on or in connection with, (1) any Indebtedness for Money Borrowed of the Company and its Restricted Subsidiaries, whether now outstanding or hereafter created, incurred, assumed or guaranteed, unless in the instrument creating or evidencing such Indebtedness for Money Borrowed or pursuant to which such Indebtedness for Money Borrowed is outstanding it is provided that such indebtedness is subordinate in right of payment or in rights upon liquidation to any other Indebtedness for Money Borrowed of the Company or its Restricted Subsidiaries, as applicable, and (2) all renewals, extensions and refundings of any such indebtedness. 51 (b) Within 30 calendar days after any Repurchase Event Date, the Company, or within 15 days after such occurrence, the Trustee at the request and expense of the Company, shall send to each Holder, in the manner provided in Section 106 a notice (the "Company Notice") prepared by the Company stating: (1) that a Repurchase Event has occurred and a Repurchase Offer is being made pursuant to this Section 1016, and that all Notes that are timely tendered will be accepted for payment; (2) the Purchase Price and the Repurchase Date, which date shall be a Business Day 45 days subsequent to the date such notice is mailed; (3) that any Notes or portions thereof not tendered or accepted for payment will continue to accrue interest; (4) that, unless the Company defaults in the payment of the Purchase Price with respect thereto, all Notes or portions thereof accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest from and after the Repurchase Date; (5) that any Holder electing to have any Notes or portions thereof purchased pursuant to a Repurchase Offer will be required to surrender such Notes, with the form to elect purchase by the Company pursuant to this Section 1016 completed, to the Paying Agent at the address specified in the notice, prior to the close of business on the third Business Day preceding the Repurchase Date; (6) that any Holder shall be entitled to withdraw such election if the Paying Agent receives, not later than the close of business on the second Business Day preceding the Repurchase Date, a facsimile transmission or letter, setting forth the name of the Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing such Holder's election to have such Notes or portions thereof purchased pursuant to the Repurchase Offer; (7) that any Holder electing to have Notes purchased pursuant to the Repurchase Offer must specify the principal amount that is being tendered for purchase, which principal amount must be $1,000 or an integral multiple thereof; (8) if certificated Notes have been issued pursuant to this Indenture, that any Holder of certificated Notes whose certificated Notes are being purchased only in part will be issued new certificated Notes equal in principal amount to the unpurchased portion of the certificated Notes surrendered, which unpurchased portion will be equal in principal amount to $1,000 or an integral multiple thereof; and (9) any other information necessary to enable any Holder to tender Notes and to have such Notes purchased pursuant to this Section 1016. (c) On the Repurchase Date, the Company shall, to the extent lawful, (i) accept for payment all Notes or portions thereof properly tendered pursuant to the Repurchase Offer, (ii) irrevocably deposit with the Paying Agent, by 11:00 a.m., Eastern time, on such date, in immediately available funds, an amount equal to the Repurchase Price in respect of all Notes or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate 52 principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent shall promptly send, in the manner provided in Section 106, to each Holder of Notes or portions thereof so accepted for payment the Purchase Price for such Notes or portions thereof. The Company shall publicly announce the results of the Repurchase Offer on or as soon as practicable after the Repurchase Date. For purposes of this Section 1016, the Trustee shall act as the Paying Agent. (d) Upon surrender and cancellation of a certificated Note that is purchased in part pursuant to the Repurchase Offer, the Company shall promptly issue and the Trustee shall authenticate and deliver to the surrendering Holder of such certificated Note a new certificated Note equal in principal amount to the unpurchased portion of such surrendered certificated Note; provided that each such new certificated Note shall be in a principal amount of $1,000 or an integral multiple thereof. (e) The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that a Repurchase Offer occurs and the Company is required to purchase Notes as described in this Section 1016. To the extent that the provisions of any securities laws or regulations conflict with the provisions relating to the Repurchase Offer, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 1016 by virtue thereof. ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. RIGHT OF REDEMPTION. The Notes shall not be redeemable at the option of the Company prior to September 15, 2000. The Company may, at its option, redeem all or any part of the Notes at any time on or after September 15, 2000, at the Redemption Prices (expressed as percentages of principal amount) specified in the form of the Initial Note and the form of the Exchange Note, together with interest accrued to the Redemption Date. Redemption of Notes at the option of the Company as permitted hereby shall be made in accordance with the terms of such Notes and this Article. SECTION 1102. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Notes shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company of less than all of the Notes (including any such redemption affecting only a single Note), the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed. Any election to redeem Notes shall be revocable until the Company gives a notice of redemption pursuant to Section 1104 to the Holders of Notes to be redeemed. SECTION 1103. SELECTION BY TRUSTEE OF NOTES TO BE REDEEMED. If less than all the Notes are to be redeemed (unless such redemption affects only a single Note), the particular Notes to be redeemed shall be selected not less than 30 days 53 prior to the Redemption Date by the Trustee from the Outstanding Notes, by lot or such other method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal amount of Notes; PROVIDED, HOWEVER, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than the minimum denomination for a Note established herein. The Trustee shall promptly notify the Company and the Note Registrar (if other than itself) in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Note, whether such Note is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Note shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Note. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal of such Notes which has been or is to be redeemed. SECTION 1104. NOTICE OF REDEMPTION. Notice of redemption shall be given in the manner provided in Section 106, not less than 30 nor more than 60 days prior to the Redemption Date, to the Holders of Notes to be redeemed. Failure to give notice by mailing in the manner herein provided to the Holder of any Notes designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other Notes or portion thereof. Any notice that is mailed to the Holder of any Notes in the manner herein provided shall be conclusively presumed to have been duly given, whether or not such Holder receives the notice. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if fewer than all Outstanding Notes consisting of more than a single Note are to be redeemed, the identification (and, in the case of partial redemption of any such Notes, the principal amounts) of the particular Notes to be redeemed and, if less than all the Outstanding Notes consisting of a single Note are to be redeemed, the principal amount of the particular Note to be redeemed, (4) that, on the Redemption Date, the Redemption Price shall become due and payable upon each such Note or portion thereof to be redeemed and that interest thereon shall cease to accrue on and after said date, (5) the place or places where such Notes are to be surrendered for payment of the Redemption Price, and 54 (6) the CUSIP number of such Notes, if any (or any other numbers used by a Depository to identify such Notes). Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1105. DEPOSIT OF REDEMPTION PRICE. On or before 11:00 a.m., Eastern time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) Money in an amount sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) any accrued interest on, all the Notes or portions thereof which are to be redeemed on that date. Upon Company Order, the Paying Agent shall promptly return to the Company any Money so deposited which is not required for such purpose. SECTION 1106. NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with any accrued interest to the Redemption Date; PROVIDED, HOWEVER, that installments of interest on Notes whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the Regular Record Dates therefor according to their terms and the provisions of Section 305. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any), until paid, shall bear interest from the Redemption Date at the rate prescribed therefor in the Note. SECTION 1107. NOTES REDEEMED IN PART. Any Note which is to be redeemed only in part shall be surrendered at the Office or Agency for such Note indicated in the notice of redemption (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. 55 SECTION 1108. PURCHASE OF NOTES. The Company shall have the right at any time and from time to time to purchase Notes in the open market or otherwise at any price. ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Section 1202 or Section 1203 be applied to all Outstanding Notes upon compliance with the conditions set forth below in this Article Twelve. SECTION 1202. DEFEASANCE AND DISCHARGE. Upon the Company's exercise under Section 1201 of the option applicable to this Section 1202, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Section 1204 hereof are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed (i) to have paid and discharged its obligations under the Outstanding Notes; PROVIDED, HOWEVER, that the Notes shall continue to be deemed to be "Outstanding" for purposes of Section 1205 and the other Sections of this Indenture referred to in clauses (A) and (B) below, and (ii) to have satisfied all their other obligations with respect to such Notes and this Indenture (and the Trustee, at the expense and direction of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Section 1204 hereof and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any) and interest on such Notes when such payments are due (or at such time as the Notes would be subject to redemption at the option of the Company in accordance with this Indenture), (B) the obligations of the Company under Sections 301, 302, 303, 304, 607, 609, 610, 1002, and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and (D) the obligations of the Company under this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of its option under Section 1203 with respect to the Notes. SECTION 1203. COVENANT DEFEASANCE. Upon the Company's exercise under Section 1201 of the option applicable to this Section 1203, (i) the Company shall be released from its obligations under any covenant contained in Article Eight, in Sections 1005 through 1015 and any covenant added to this Indenture pursuant to Section 901(2), and (ii) the occurrence of any event specified in Section 501(3) (with respect to any of Article Eight, Sections 1005 through 1015, and any covenant added to this Indenture pursuant to Section 901(2)), 501(4), 501(5), or 501(8)) shall be deemed not to be or result in an Event of Default, in each case with respect to the Outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent, declaration or other 56 action of any Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section (to the extent so specified in the case of Section 50l(3) hereof) whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 1204. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of either Section 1202 or Section 1203 hereof to the Outstanding Notes: (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 608 hereof who shall agree to comply with the provisions of this Article Twelve applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) Money in an amount, or (B) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, Money in an amount, or (C) a combination thereof, sufficient, in the opinion of a firm of Independent Public Accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of (and premium, if any) and interest on the Outstanding Notes on the Stated Maturity thereof (or Redemption Date, if applicable), provided that the Trustee shall have been irrevocably instructed in writing by the Company to apply such Money or the proceeds of such Government Obligations to said payments with respect to the Notes. Before such a deposit, the Company may give to the Trustee, in accordance with Section 1102, a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Article Eleven, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. (b) No Default or Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as Section 501(6) or 501(7) is concerned, at any time during the period ending on the 91st day after the date of such deposit. (c) Such legal defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest under this Indenture or the Trust Indenture Act with respect to any securities of the Company. (d) Such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which the Company is a party or by which it is bound, as evidenced to the Trustee in an Officers' Certificate delivered to the Trustee concurrently with such deposit. (e) In the case of an election under Section 1202 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has 57 received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of this Indenture there has been a change in the applicable federal income tax laws, in either case providing that the Holders of the Outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred (it being understood that (x) such Opinion of Counsel shall also state that such ruling or applicable law is consistent with the conclusions reached in such Opinion of Counsel and (y) the Trustee shall be under no obligation to investigate the basis or correctness of such ruling). (f) In the case of an election under Section 1203 hereof, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (g) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, which, taken together, state that all conditions precedent provided for relating to either the legal defeasance under Section 1202 hereof or the covenant defeasance under Section 1203 (as the case may be) have been complied with. SECTION 1205. DEPOSITED MONEY AND GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 1003 hereof, all Money and Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such Money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 1204 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Notes. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any Money or Government Obligations held by it as provided in Section 1204 which, in the opinion of a firm of Independent Public Accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent legal defeasance or covenant defeasance as applicable, in accordance with this Article. 58 SECTION 1206. REINSTATEMENT. If the Trustee or any Paying Agent is unable to apply any Money in accordance with Section 1205 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 1204 until such time as the Trustee or Paying Agent is permitted to apply all such Money in accordance with Section 1205; PROVIDED, HOWEVER, that if the Company makes any payment of principal of (or premium, if any) or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE THIRTEEN SUBORDINATION OF NOTES SECTION 1301. NOTES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company covenants and agrees, and each Holder of a Note, by his acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Senior Indebtedness, that, to the extent and in the manner hereinafter set forth in this Article, the indebtedness represented by the Notes and the payment of the principal of (and premium, if any) and interest on each and all of the Notes are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full of all Senior Indebtedness, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed or guaranteed; PROVIDED, HOWEVER, that the Notes, the indebtedness represented thereby and the payment of the principal of (and premium, if any) and interest on the Notes in all respects shall rank equally with, or prior to, all existing and future unsecured indebtedness (including, without limitation, Indebtedness for Money Borrowed) of the Company that is subordinated to Senior Indebtedness. This Article Thirteen shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and any one or more of them may enforce such provisions. SECTION 1302. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. Upon any distribution of Properties of the Company or payment on behalf of the Company with respect to the Notes in the event of any Insolvency or Liquidation Proceeding with respect to the Company: (a) the holders of Senior Indebtedness shall be entitled to receive payment in full of such Senior Indebtedness, or provision must be made for such payment, before the Holders of the Notes are entitled to receive any direct or indirect payment or distribution of any kind or character, whether in cash, property or securities (other than Permitted Junior Securities) on account of principal of (or premium, if any, on) or interest on the Notes or on account of the purchase or redemption or other acquisition of Notes; and 59 (b) any direct or indirect payment or distribution of Properties of the Company of any kind or character, whether in cash, property or securities (other than a payment or distribution in the form of Permitted Junior Securities), by set-off or otherwise, to which the Holders or the Trustee, on behalf of the Holders, would be entitled but for the provisions of this Article shall be paid by the Company or by any liquidating trustee or agent or other Person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Note shall have received any payment or distribution of Properties of the Company of any kind or character, whether in cash, property or securities, by set-off or otherwise, in respect of principal of (and premium, if any) or interest on the Notes before all Senior Indebtedness is paid or provided for in full, then and in such event such payment or distribution (other than a payment or distribution in the form of Permitted Junior Securities) shall be received and held in trust for and shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all its Properties to another Person or group of Affiliated Persons pursuant to, and in compliance with, the terms and conditions set forth in Article Eight hereof shall not be deemed an Insolvency or Liquidation Proceeding (requiring the repayment of all Senior Indebtedness in full as a prerequisite to any payments being made to the Holders) for the purposes of this Section. SECTION 1303. SUSPENSION OF PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (a) Upon (1) the occurrence of a Payment Event of Default and (2) receipt by the Trustee of written notice of such occurrence, then no payment or distribution of any Properties of the Company of any kind or character (other than Permitted Junior Securities) shall be made by the Company on account of principal of (or premium, if any) or interest on the Notes or on account of the purchase or redemption or other acquisition of Notes unless and until such Payment Event of Default shall have been cured or waived in writing or shall have ceased to exist or such Specified Senior Indebtedness shall have been paid in full or otherwise discharged, after which (unless otherwise prohibited by Section 1302) the Company shall resume making any and all required payments in respect of the Notes, including any missed payments. (b) Upon (1) the occurrence of a Non-payment Event of Default with respect to any Specified Senior Indebtedness and (2) receipt by the Trustee and the Company of written notice of such occurrence from one or more of the holders of such Specified Senior Indebtedness (or their representative), then no payment or distribution of any 60 Properties of the Company of any kind or character (other than Permitted Junior Securities) shall be made by the Company on account of any principal of (or premium, if any) or interest on the Notes or on account of the purchase or redemption or other acquisition of Notes for the period specified below (the "Payment Blockage Period"). The Payment Blockage Period will commence upon the earlier of the dates of receipt by the Trustee or the Company of such notice (the "Payment Blockage Notice") from one or more of the holders of such Specified Senior Indebtedness (or their representative) and shall end on the earliest of (i) 179 days thereafter, (ii) the date, as set forth in a written notice from the holders of the Specified Senior Indebtedness (or their representative) to the Company or the Trustee, on which such Non-payment Event of Default is cured, waived in writing or ceases to exist or such Specified Senior Indebtedness is discharged or (iii) the date on which such Payment Blockage Period shall have been terminated by written notice to the Company or the Trustee from one or more of the holders (or their representative) initiating such Payment Blockage Period, after which the Company will resume (unless otherwise prohibited pursuant to the immediately preceding paragraph or Section 1302) making any and all required payments in respect of the Notes, including any missed payments. In any event, not more than one Payment Blockage Period may be commenced during any period of 360 consecutive days. No Non-payment Event of Default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee will be, or can be, made the basis for the commencement of a subsequent Payment Blockage Period. (c) In the event that the Trustee or any Holder receives any payment with respect to the Notes at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by the foregoing provisions of this Section 1303, then and in such event such payment shall be paid over and delivered forthwith to the Company. SECTION 1304.PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this Article or elsewhere in this Indenture or in any of the Notes shall prevent the Company, at any time except during the pendency of any Insolvency or Liquidation Proceeding referred to in Section 1302 or under the conditions described in Section 1303, from making payments at any time of principal of (and premium, if any) or interest on the Notes. SECTION 1305. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. After the payment in full of all Senior Indebtedness, the Holders of the Notes shall be subrogated (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to Senior Indebtedness to substantially the same extent as the Notes are so subordinated and which is entitled to like rights of subrogation as a result of the payments made to the holders of Senior Indebtedness) to the rights of the holders of Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to Senior Indebtedness until all amounts owing on the Notes shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness by or on behalf of the Company or by or on behalf of the Holders by virtue of this Article which otherwise would have been made to the Holders shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 61 SECTION 1306. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article are, and are intended solely, for the purpose of defining the relative rights of the Holders of the Notes on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall (a) impair, as between the Company and the Holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Notes the principal of (and premium, if any) and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Notes and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Note from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness. SECTION 1307. TRUSTEE TO EFFECTUATE SUBORDINATION. Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee as his attorney-in-fact for any and all such purposes, including, in the event of any Insolvency or Liquidation Proceeding with respect to the Company, the immediate filing of a claim for the unpaid balance of his Notes pursuant to this Indenture in the form required in said proceedings and the causing of said claim to be approved. SECTION 1308. NO WAIVER OF SUBORDINATION PROVISION. (a) No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act by any such holder, or by any non-compliance by the Company with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. (b) Without in any way limiting the generality of paragraph (a) of this Section, the holders of any Senior Indebtedness, in accordance with the terms of the instrument or agreement evidencing their Senior Indebtedness, may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination or other benefits provided in this Article, or the obligations hereunder of the Holders of the Notes to the holders of Senior Indebtedness, do any one or more of the following: (1) change the manner, place or terms of payment or extend the time of payment of, or renew, exchange, amend, increase or alter, Senior Indebtedness or the terms of any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding or any liability of any obligor thereon (unless such change, extension, amendment, increase or other alteration results in such Indebtedness no longer being Senior Indebtedness as defined in this Indenture); (2) sell, exchange, release or otherwise deal with any Property pledged, mortgaged or otherwise securing Senior Indebtedness; (3) settle or compromise any Senior Indebtedness or any liability of any obligor thereon or release any Person liable in any manner for the collection of Senior Indebtedness; and (4) exercise or refrain from exercising any rights against the Company and any other Person. 62 SECTION 1309. NOTICE TO TRUSTEE. (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Notes, unless and until the Trustee shall have received written notice thereof from the Company or one or more of the holders of Senior Indebtedness (or their representative), with respect to a Payment Default, or one or more of the holders of Specified Senior Indebtedness (or their representative), with respect to a Non-payment Event of Default, or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to Sections 315(a) through 315(d) of the Trust Indenture Act, shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Trustee shall not have received the notice provided for in this Section prior to 11:00 a.m. Eastern time on the date which is two Business Days prior to the date upon which by the terms hereof any Money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such Money and to apply the same to the purpose for which such Money was received and shall not be affected by any notice to the contrary which may be received by it on or after 11:00 a.m. Eastern time two Business Days prior to such payment date. (b) Subject to Sections 315(a) through 315(d) of the Trust Indenture Act, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefore) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. 63 SECTION 1310. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT BANK. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to Sections 315(a) through 315(d) of the Trust Indenture Act, and the Holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such Insolvency or Liquidation Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 1311. RIGHTS OF TRUSTEE AS A HOLDER OF SENIOR INDEBTEDNESS: PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness, which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1312. ARTICLE APPLICABLE TO PAYING AGENTS. In case at any time a Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; PROVIDED, HOWEVER, that Section 1311 hereof shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 1313. NO SUSPENSION OF REMEDIES. Nothing contained in this Article shall limit the right of the Trustee or the Holders of Notes to take any action to accelerate the maturity of the Notes pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1314. TRUST MONEY NOT SUBORDINATED. Notwithstanding anything contained herein to the contrary, payments from cash or the proceeds of Government Obligations held in trust under Article Twelve hereof by the Trustee (or other qualifying trustee) and which were deposited in accordance with the terms of Article Twelve and not in violation of Section 1302 or 1303 for the payment of principal of (and premium, if any) and interest on the Notes shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article Thirteen, and none of the Holders shall be obligated to pay over any such 64 amount to the Company or any holder of Senior Indebtedness or any other creditor of the Company. 65 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. CALLON PETROLEUM COMPANY By /s/ H. MICHAEL TATUM Name: H. Michael Tatum Title: Vice President and Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ HERBERT J. LEMMER Name: Herbert J. Lemmer Title: Vice President 66 APPENDIX A PROVISIONS RELATING TO INITIAL NOTES AND EXCHANGE NOTES ARTICLE I. DEFINITIONS SECTION 1.1 DEFINITIONS. For the purposes of this Appendix A the following terms shall have the meanings indicated below: "DEFINITIVE NOTE" means a certificated Initial Note bearing the restricted securities legend set forth in Section 2.3 (d) and which is held by an IAI or QIB in accordance with Section 2.1(c). "DEPOSITORY" means The Depository Trust Company, its nominees and their respective successors. "EXCHANGE NOTES" means the 10.125% Series B Senior Subordinated Notes due 2002 to be issued pursuant to this Indenture in connection with a Registered Exchange Offer pursuant to the Registration Agreement. "IAI" means an institutional "accredited investor" as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "INITIAL PURCHASER" means Morgan Keegan & Company, Inc. "INITIAL NOTES" means the 10.125% Series A Senior Subordinated Notes due 2002, issued under this Indenture on or about the date hereof. "NOTES" means the Initial Notes and the Exchange Notes, treated as a single class. "PURCHASE AGREEMENT" means the Purchase Agreement dated as of July 31, 1997, among the Company and the Initial Purchaser, as such may be amended from time to time. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "REGISTERED EXCHANGE OFFER" means the offer by the Company, pursuant to the Registration Agreement, to certain Holders of Initial Notes, to issue and deliver to such Holders, in exchange for the Initial Notes, a like aggregate principal amount of Exchange Notes registered under the Securities Act. "REGISTRATION AGREEMENT" means the Registration Agreement dated as of July 31, 1997, between the Company and the Initial Purchaser, as such may be amended from time to time. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITIES CUSTODIAN" means the custodian with respect to a Global Note (as appointed by the Depository), or any successor person thereto and shall initially be the Trustee. "SHELF REGISTRATION STATEMENT" means the registration statement issued by the Company in connection with the offer and sale of Initial Notes pursuant to the Registration Agreement. "TRANSFER RESTRICTED NOTES" means Definitive Notes and Notes that bear or are required to bear the legend set forth in Section 2.3(d) hereto. SECTION 1.2 OTHER DEFINITIONS. Certain other capitalized terms are defined in the Indenture. ARTICLE II. THE NOTES SECTION 2.1 FORM AND DATING. The Initial Notes are being offered and sold by the Company pursuant to the Purchase Agreement. (A) GLOBAL NOTES. Initial Notes offered and sold to a QIB in reliance on Rule 144A under the Securities Act ("Rule 144A") as provided in the Purchase Agreement, shall be issued initially in the form of one or more permanent Global Notes in definitive, fully registered form without interest coupons with the Global Notes legend and restricted securities legend set forth in Exhibit 1 hereto (each, a "Global Note"), which shall be deposited on behalf of the purchasers of the Initial Notes represented thereby with the Trustee, as custodian for the Depository (or with such other custodian as the Depository may direct), and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as provided in the Indenture. Exchange Notes shall be issued initially in the form of one or more permanent Global Notes, substantially in the form set forth in Exhibit 2 hereto, deposited with the Trustee, as custodian for the Depository (or with such other custodian as the Depository may direct), and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as provided in the Indenture and shall bear the Global Notes legend set forth in Exhibit 2 hereto. The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee as hereinafter provided. (B) BOOK-ENTRY PROVISIONS. This Section 2.1(b) shall apply only to a Global Note deposited with or on behalf of the Depository. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(b) and pursuant to an order of the Company, authenticate and deliver initially one or more Global Notes that (i) shall be registered in the name of the Depository for such Global Note or Global Notes or the nominee of such Depository and (ii) shall be delivered by the Trustee to such Depository or pursuant to such Depository's instructions or held by the Trustee as custodian for the Depository. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or by the Trustee as the custodian of the Depository, or under any Global 2 Note, and the Depository or its nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or shall impair, as between the Depository and its Agent Members, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Note. Ownership of beneficial interests in any Global Note will be shown on, and transfers thereof will be effected only through, records maintained by the Depository or its nominee (with respect to interests of Agent Members) and the records of Agent Members (with respect to interests of Persons other than Agent Members). (C) DEFINITIVE NOTES. Except as provided in this Section 2.1 or Sections 2.3 or 2.4, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of certificated Notes. Purchasers of Initial Notes who are IAIs and are not QIBs or QIBs who request to receive Definitive Notes will receive Definitive Notes; provided, however, that upon transfer of such Definitive Notes to a QIB, such Definitive Notes will, unless the Global Note has previously been exchanged, be exchanged for an interest in a Global Note pursuant to the provisions of Section 2.3. SECTION 202.AUTHENTICATION. The Trustee shall authenticate and deliver: (1) Initial Notes for original issue in an aggregate principal amount of $36,000,000 and (2) Exchange Notes for issue only in a Registered Exchange Offer pursuant to the Registration Agreement, for a like principal amount of Initial Notes, upon a Company Order. Such Company Order shall specify the amount of the Notes to be authenticated and the date on which the original issue of Notes is to be authenticated and whether the Notes are to be Initial Notes or Exchange Notes. Subject to the provisions of Section 304, the aggregate principal amount of Notes Outstanding at any time may not exceed $36,000,000. SECTION 2.3 TRANSFER AND EXCHANGE. (A) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When Definitive Notes are presented to the Note Registrar or a co-registrar with a request: (x) to register the transfer of such Definitive Notes; or (y) to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Note Registrar or co-registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Notes surrendered for transfer or exchange: (i) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Note Registrar or co-registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and 3 (ii) are being transferred or exchanged pursuant to an effective registration statement under the Securities Act, pursuant to Section 2.3(b) or pursuant to clause (A), (B) or (C) below, and are accompanied by the following additional information and documents, as applicable: (A) if such Definitive Notes are being delivered to the Note Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Definitive Notes are being transferred to the Company, a certification to that effect; or (C) if such Definitive Notes are being transferred pursuant to an exemption from registration in accordance with Rule 144, (i) a certification to that effect (in the form set forth on the reverse of the Note) and (ii) if the Company or Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the legend set forth in Section 2.3(d)(i). (B) RESTRICTIONS ON TRANSFER OF DEFINITIVE NOTES FOR A BENEFICIAL INTEREST IN A GLOBAL NOTE. A Definitive Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (i) certification, in the form set forth on the reverse of the Note, that such Definitive Note is being transferred (A) to a QIB in accordance with Rule 144A, or (B) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (ii) written instructions directing the Trustee to make, or to direct the Securities Custodian to make, an adjustment on its books and records with respect to such Global Note to reflect an increase in the aggregate principal amount of the securities represented by the Global Note, such instructions to contain information regarding the Depository account to be credited with such increase, then the Trustee shall cancel such Definitive Note and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian, the aggregate principal amount of securities represented by the Global Note to be increased by the aggregate principal amount of the Definitive Note to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the principal amount of the Definitive Note so canceled. If no Global Notes are then outstanding and the Global Note has not been previously exchanged pursuant to Section 2.4, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of a Company Order, a new Global Note in the appropriate principal amount. 4 (C) TRANSFER AND EXCHANGE OF GLOBAL NOTES. (i) The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor. A transferor of a beneficial interest in a Global Note shall deliver to the Note Registrar a written order given in accordance with the Depository's procedures containing information regarding the participant account of the Depository to be credited with a beneficial interest in the Global Note. The Note Registrar shall, in accordance with such instructions, instruct the Depository to credit to the account of the Person specified in such instructions a beneficial interest in the Global Note and to debit the account of the Person making the transfer the beneficial interest in the Global Note being transferred. (ii) Notwithstanding any other provisions of this Appendix A (other than the provisions set forth in Section 2.4), a Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (iii) In the event that a Global Note is exchanged for Notes in definitive registered form pursuant to Section 2.4 prior to the consummation of a Registered Exchange Offer or the effectiveness of a Shelf Registration Statement with respect to such Notes, such Notes may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Notes intended to ensure that such transfers comply with Rule 144A or Regulation S, as the case may be) and such other procedures as may from time to time be adopted by the Company. (D) LEGEND. (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Note certificate evidencing the Global Notes and the Definitive Notes (and all Notes issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form: "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO LATER OF THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR NOTE HERETO) AND THE LAST DATE THE COMPANY OR ANY AFFILIATE SOLD THIS NOTE (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM 5 THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE ON THE REVERSE OF THIS NOTE), (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE, WHICH MAY BE OBTAINED FROM THE TRUSTEE, IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF THEHOLDER'S PROPERTY BE AT ALL TIMES WITHIN ITS CONTROL AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT." Each Definitive Note will also bear the following additional legend: "IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS." 6 (ii) Upon any sale or transfer of a Transfer Restricted Note (including any Transfer Restricted Note represented by a Global Note) pursuant to Rule 144 under the Securities Act: (A) in the case of any Transfer Restricted Note that is a Definitive Note, the Note Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a Definitive Note that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Note; and (B) in the case of any Transfer Restricted Note that is represented by a Global Note, the Note Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a Definitive Note that does not bear the legend set forth above and rescind any restriction on the transfer of such Transfer Restricted Note, in either case, if the Holder certifies in writing to the Note Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Initial Note). (iii) After a transfer of any Initial Notes during the period of the effectiveness of a Shelf Registration Statement with respect to such Initial Notes, all requirements pertaining to legends on such Initial Note will cease to apply, the requirements requiring any such Initial Note issued to certain Holders be issued in global form will cease to apply, and an Initial Note in certificated or global form without legends will be available to the transferee of the Holder of such Initial Notes upon exchange of such transferring Holder's certificated Initial Note. Upon the occurrence of any of the circumstances described in this paragraph, the Company will deliver a Company Order to the Trustee instructing the Trustee to issue Notes without legends. (iv) Upon the consummation of a Registered Exchange Offer with respect to the Initial Notes pursuant to which certain Holders of such Initial Notes are offered Exchange Notes in exchange for their Initial Notes, all requirements pertaining to such Initial Notes that Initial Notes issued to certain Holders be issued in global form will cease to apply and certificated Initial Notes with the restricted securities legend set forth in Exhibit 1 hereto will be available to Holders of such Initial Notes that do not exchange their Initial Notes, and Exchange Notes in certificated or global form will be available to Holders that exchange such Initial Notes in such Registered Exchange Offer. Upon the occurrence of any of the circumstances described in this paragraph, the Company will deliver a Company Order to the Trustee instructing the Trustee to issue Notes without legends. (E) CANCELLATION OR ADJUSTMENT OF GLOBAL NOTE. At such time as all beneficial interests in a Global Note have either been exchanged for certificated or Definitive Notes, redeemed, repurchased or canceled, such Global Note shall be returned to the Depository for cancellation or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for certificated or Definitive Notes, repurchased or canceled, the principal amount of Notes represented by such Global Note shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Note) with 7 respect to such Global Note, by the Trustee or the Securities Custodian, to reflect such reduction. (F) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF NOTES. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate certificated Notes, Definitive Notes and Global Notes at the Note Registrar's or co-registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith other than exchanges pursuant to Section 302, 905 or 1107 of this Indenture not involving any transfer. (iii) The Note Registrar or co-registrar shall not be required (1) to register the transfer of or exchange of any Note for a period beginning 15 days before the mailing of a notice of an offer to repurchase Notes or 15 days before an interest payment date, or (2) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except in the case of any Note to be redeemed in part, the portion thereof not to be redeemed. (iv) Prior to the due presentation for registration of transfer of any Note, the Company, the Trustee, the Paying Agent, the Notes Registrar or any co-registrar may deem and treat the person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Company, the Trustee, the Paying Agent, the Notes Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Notes issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Notes surrendered upon such transfer or exchange. (vi) Upon surrender for registration of transfer of any Note at the Office or Agency of the Company, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes, denominated as authorized in this Indenture, of a like aggregate principal amount bearing a number not contemporaneously outstanding and containing identical terms and provisions. (vii) At the option of the Holder, Notes may be exchanged for other Notes, in any authorized denominations, and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such Office or Agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. 8 (viii) Every Note presented or surrendered for registration of transfer or for exchange or redemption shall (if so required by the Company or the Note Registrar for such Note) be duly endorsed by, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Note Registrar duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing. (G) NO OBLIGATION OF THE TRUSTEE. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Note, a member of, or a participant in, the Depository or other Person with respect to the accuracy of the records of the Depository or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Notes. All notices and communications to be given to the Holders and all payments to be made to Holders under the Notes shall be given or made only to or upon the order of the registered Holders (which shall be the Depository or its nominee in the case of a Global Note). The rights of beneficial owners in any Global Note shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Notes (including any transfers between or among Depository participants, members or beneficial owners in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4. CERTIFICATED NOTES. (a) A Global Note deposited with the Depository or with the Trustee as custodian for the Depository pursuant to Section 2.1 shall be transferred to the beneficial owners thereof in the form of certificated Notes in an aggregate principal amount equal to the principal amount of such Global Note, in exchange for such Global Note, only if such transfer complies with Section 2.3 and (i) the Depository notifies the Company that it is unwilling or unable to continue as a depository for such Global Note or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act, and a successor depository is not appointed by the Company within 90 days, (ii) the 9 Company executes and delivers to the Trustee a notice that such Global Note shall be so transferable, registrable and exchangeable, and such transfer shall be registrable or (iii) there shall have occurred and be continuing an Event of Default or an event which, with the giving of notice or lapse of time or both, would constitute an Event of Default with respect to the securities represented by such Global Note. (b) Any Global Note that is exchangeable for certificated Notes pursuant to Section 2.4 will be transferred to, and registered and exchanged for, certificated Notes in authorized denominations and registered in such names as the Depository or its nominee holding such Global Note may direct. Subject to the foregoing, a Global Note is not exchangeable, except for a Global Note of like denomination to be registered in the name of the Depository or its nominee. In the event that a Global Note becomes exchangeable for certificated Notes, (i) certificated Notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (ii) payment of principal, premium, any repurchase price, and interest on the certificated Notes will be payable, and the transfer of the certificated Notes will be registrable, at the office or agency of the Company maintained for such purposes and (iii) no service charge will be made for any issuance of the certificated Notes, but the Company may require payment of a sum sufficient to cover any transfer tax, assessment or similar governmental charge payable in connection therewith. In addition, such certificates will bear the legend set forth in Section 2.3(d) (unless the Company determines otherwise in accordance with applicable law) subject, with respect to such Notes, to the provisions of such legend. Holders of certificated Notes may only transfer their Notes (i) to the Company or (ii) to a QIB; provided, however, that the agreement of such holder is subject to any requirement of law that the disposition of such holder's property shall at all times be and remain within its control. (c) Subject to the provisions of Section 2.4(b), the registered Holder of a Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. (d) In the event of the occurrence of either of the events specified in Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to the Trustee a reasonable supply of certificated Notes in definitive, fully registered form without interest coupons. 10 Exhibit 1 to Appendix A [FORM OF FACE OF INITIAL NOTE] CALLON PETROLEUM COMPANY No._____ CUSIP No.__________ [Global Notes Legend]: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS GLOBAL NOTE IS EXCHANGEABLE FOR NOTES IN DEFINITIVE, FULLY REGISTERED FORM, WITHOUT INTEREST COUPONS, IF (A) DTC NOTIFIES THE COMPANY THAT IT IS UNWILLING OR UNABLE TO CONTINUE AS DEPOSITORY FOR THIS GLOBAL NOTE OR IF AT ANY TIME DTC CEASES TO BE A "CLEARING AGENCY" REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND A SUCCESSOR DEPOSITORY IS NOT APPOINTED BY THE COMPANY WITHIN 90 DAYS OF SUCH NOTICE, (B) THE COMPANY EXECUTES AND DELIVERS TO THE TRUSTEE A NOTICE THAT THIS GLOBAL NOTE SHALL BE TRANSFERABLE, REGISTRABLE AND EXCHANGEABLE, AND SUCH TRANSFER SHALL BE REGISTRABLE, OR (C) AN EVENT OF DEFAULT (AS HEREINAFTER DEFINED) HAS OCCURRED AND IS CONTINUING WITH RESPECT TO THE NOTES. [Restricted Notes Legend]: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED 11 (X) PRIOR TO THE LATER OF THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR NOTE HERETO) AND THE LAST DATE THE COMPANY OR ANY AFFILIATE SOLD THIS NOTE (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE ON THE REVERSE OF THIS NOTE), (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501 (A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE, WHICH MAY BE OBTAINED FROM THE TRUSTEE, IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE, (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITEIS ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE SUBJECT TO THE REQUIREMENT OF LAW THAT THE DISPOSITION OF THE HOLDER'S PROPERTY BE AT ALL TIMES WITHIN ITS CONTROL AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS NOTE AGREES IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS HOLDING THIS NOTE FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT. [IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO 12 CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.](1) GLOBAL NOTE Representing 10.125% Series A Senior Subordinated Notes due 2002. CALLON PETROLEUM COMPANY, a Delaware corporation, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum indicated on Schedule A hereof, on September 15, 2002. Interest Payment Dates: December 15, March 15, June 15 and September 15, commencing September 15, 1997. Record Dates: December 1, March 1, June 1 and September 1. Additional provisions of this Note are set forth on the other side of this Note. IN WITNESS WHEREOF, CALLON PETROLEUM COMPANY has caused this instrument to be duly executed under its corporate seal. Dated: CALLON PETROLEUM COMPANY [CORPORATE SEAL] By: _______________________ Name: Title: Attest: ___________________________ Secretary By: _______________________ Name: Title: - ---------- (1) Include on a Definitve Note to be held by an institutional "accredited investor" (as defined in Rule 501(a)(1)(2),(3) or (7) under the Securities Act) who is not a Qualified Institutional Buyer. 13 TRUSTEE'S CERTIFICATE OF AUTHENTICATION AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee, certifies that this is one of the Notes referred to in the Indenture. By: ___________________________ Authorized Signatory 14 [FORM OF REVERSE SIDE OF INITIAL NOTE] 10.125% Series A Senior Subordinated Note due 2002 1. Interest (a) General. Callon Petroleum Company, a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest quarterly on March 15, June 15, September 15, and December 15 of each year. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. (b) Special Interest. The holder of this Note is entitled to the benefits of a Registration Agreement, dated as of July 31, 1997, among the Company and the Initial Purchaser named therein (as such may be amended from time to time, the "Registration Agreement"). Capitalized terms used in this subsection (b) but not defined herein have the meanings assigned to them in the Registration Agreement. In the event that (i) neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Commission on or prior to October 1, 1997, (ii) the Exchange Offer Registration Statement has not been declared effective on or prior to November 15, 1997 (iii) neither the Registered Exchange Offer has been consummated nor the Shelf Registration Statement has been declared effective on or prior to December 31, 1997, or (iv) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, such Registration Statement thereafter ceases to be effective or usable in connection with resales of the Notes at any time that the Company is obligated to maintain the effectiveness thereof pursuant to the Registration Agreement (each such event referred to in clauses (i) through (iv) above being referred to herein as a "Registration Default"), additional interest ("Special Interest") will accrue on this Note (in addition to the interest described in subsection (a) above) from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Special Interest shall accrue at a rate of 0.50% per annum during the 90-day period immediately following the occurrence of any Registration Default and shall increase by 0.25% per annum at the end of each subsequent 90-day period, but in no event shall Special Interest accrue at a rate in excess of 1.50% per annum. Special Interest will be payable to the holder hereof in the same manner as interest under subsection (a) above. 2. Method of Payment. The Company will pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on March 1, June 1, September 1 or December 1 immediately preceding the interest payment date even if Notes are canceled after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Notes represented by a Global Note (including principal, 15 premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company, but, at the option of the Company, interest may be paid by check mailed to the registered Holders at their registered addresses. The Company will make all payments in respect of a certificated Note (including principal, premium and interest), by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Notes, 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 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar. Initially, American Stock Transfer & Trust Company ("Trustee"), a New York corporation, will act as Paying Agent and Note Registrar. The Company may appoint and change any Paying Agent, Note Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Restricted Subsidiaries may act as Paying Agent, Note Registrar or co-registrar. 4. Indenture. The Company issued the Notes under an Indenture dated as of July 31, 1997 (as such may be amended from time to time, the "Indenture"), between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. The Notes are unsecured senior subordinated obligations of the Company limited to $36,000,000 aggregate principal amount at any one time Outstanding. This Note is one of the Initial Notes referred to in the Indenture. The Notes include the Initial Note and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture. The Initial Notes and the Exchange Notes are treated as a single class of Notes under the Indenture. 5. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 (or in the case of Definitive Notes sold to institutional accredited investors as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, minimum denominations of $250,000, unless the Company otherwise consents) and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the Note Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Note Registrar need not register the transfer of or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or to transfer or exchange any Notes for a period of 15 days prior to a selection of Notes to be redeemed or 15 days before an interest payment date. 6. Subordination. The indebtedness of the Company evidenced by the Notes, including the principal thereof and interest thereon (including post-default interest), is expressly subordinated, to the extent and to the manner set forth in the Indenture, in right 16 of payment to the prior payment in full of all of the Company's obligations to holders of Senior Indebtedness. Each Holder of Notes, by acceptance thereof, (a) agrees to and shall be bound by such provisions of the Indenture and all other provisions of the Indenture; (b) authorizes and directs the Trustee to take such action on such Holder's behalf as may be necessary or appropriate to effectuate the subordination of the Notes as provided in the Indenture; and (c) appoints the Trustee as such Holder's attorney-in-fact for any and all such purposes. 7. Optional Redemption. The Notes may not be redeemed by the Company prior to September 15, 2000. The Notes are subject to redemption, at the option of the Company, in whole or in part, at any time on or after September 15, 2000, upon not less than 30 or more than 60 days' notice at the following Redemption Prices (expressed as percentages of principal amount) set forth below if redeemed during the 12-month period beginning September 15 of the years indicated below: Redemption Year Price ---- ----- 2000............................................ 102% 2001 and thereafter............................. 100% together in the case of any such redemption with accrued and unpaid interest, if any, to the Redemption Date, all as provided in the Indenture. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to Holders of such Notes, or one or more Predecessor Notes. Notes (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or purchase of this Note in part only, a new Note or Notes for the unredeemed or unpurchased portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If fewer than all Notes are redeemed, the Trustee will select the Notes to be redeemed by lot or such other method as the Trustee may deem fair and appropriate. 8. Notice of Redemption. Notice of redemption shall be given to the Holders of Notes to be redeemed by mailing a notice of such redemption not less than 30 or more than 60 days prior to the Redemption Date at their addresses as they shall appear on the Note Register, all as provided in the Indenture. If this Note (or a portion hereof) is duly called for redemption and funds for payment are duly provided, this Note (or such portion hereof) shall cease to bear interest from and after such Redemption Date. Interest installments whose Stated Maturity is on the Redemption Date will be payable to the Holders of such Notes, or one or more Predecessor Notes, of record at the close of business on the relevant Regular Record Date referred to on the face hereof, all as provided in the Indenture. In the event of redemption or repayment of this Note in part only, a new Note or Notes for the unredeemed or unrepaid portion hereof shall be issued in the name of the Holder hereof upon the surrender hereof. 17 9. Defaults and Remedies. Except as may be provided in the Indenture, if an Event of Default with respect to the Notes shall occur and be continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of all the Notes due and payable in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration and its consequences may, in certain events, be annulled by the Holders of a majority in aggregate principal amount of the Outstanding Notes. 10. Discharge and Defeasance. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Note and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Note. 11. Amendment and Waiver. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Notes under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. Without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder. 12. Obligations Absolute. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, places and rate, and in the coin or currency, herein prescribed. 13. No Recourse Against Others. A director, officer, employee, incorporator, shareholder or Affiliate of the Company, as such, past, present or future shall not have any personal liability under this Note or the Indenture by reason of his or its status as such director, officer, employee, incorporator, shareholder or Affiliate, or any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Note, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Note. 14. Persons Deemed Owners. Prior to the due presentment of this Note for registration of transfer or exchange, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. 18 15. Definitions. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 16. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identifying information printed hereon. 17. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. 18. Holder's Compliance with Registration Agreement. Each Holder of a Note, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. Each Holder of a Note covenants and agrees by such Holder's acceptance thereof to comply with and be bound by the foregoing provisions. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 200 North Canal Street, Natchez, Mississippi 39120. 19 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to ______________________________________________________ (Print or type assignee's name, address and zip code) ______________________________________________________ (Insert assignee's social security or tax I.D. No.) and irrevocably appoint _______________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Dated: ______________________________ Your Signature: ____________________________________ Sign exactly as your name appears on the other side of this Note. In connection with any transfer of any of the Notes evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being transferred in accordance with its terms: CHECK ONE BOX BELOW (1) [ ] to the Company; or (2) [ ] pursuant to an effective registration statement under the Securities Act of 1933; or (3) [ ] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act; or (4) [ ] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act; or 20 (5) [ ] to an institutional "accredited investor" (as defined in Schedule 501(a)(1), (2), (3) or (7) under the Securities Act) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (6) [ ] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act. Unless one of the boxes is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (4), (5) or (6) is checked, the Trustee may require, prior to registering any such transfer of the Notes, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, such as the exemption provided by Rule 144 under such Act. __________________________ Signature Signature Guarantee: __________________________ Signature must be guaranteed Signature Notice: Signature(s) must be guaranteed by an institution which is a participant in the Notes Transfer Agent Medallion Program ("STAMP") or similar program. TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. __________________________ (signature of executive officer) Dated:____________________ 21 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE A SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The initial principal amount at maturity of this Global Note shall be $__________. The following increases or decreases in this Global Note have been made:
Principal Amount of Amount of decrease Amount of increase this Global Note Signature of authorized Date of in principal amount in principal amount following such signatory of Trustee a Exchange of this Global Note of this Global Note increase or decrease Securities Custodian - -------- ------------------- ------------------- -------------------- --------------------
22 EXHIBIT 2 TO APPENDIX A [FORM OF FACE OF EXCHANGE NOTE] CALLON PETROLEUM COMPANY No._____ CUSIP No.__________ [Global Notes Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. THIS GLOBAL NOTE IS EXCHANGEABLE FOR NOTES IN DEFINITIVE, FULLY REGISTERED FORM, WITHOUT INTEREST COUPONS, IF (A) DTC NOTIFIES THE COMPANY THAT IT IS UNWILLING OR UNABLE TO CONTINUE AS DEPOSITORY FOR THIS GLOBAL NOTE OR IF AT ANY TIME DTC CEASES TO BE A "CLEARING AGENCY" REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND A SUCCESSOR DEPOSITORY IS NOT APPOINTED BY THE COMPANY WITHIN 90 DAYS OF SUCH NOTICE, (B) THE COMPANY EXECUTES AND DELIVERS TO THE TRUSTEE A NOTICE THAT THIS GLOBAL NOTE SHALL BE TRANSFERABLE, REGISTRABLE AND EXCHANGEABLE, AND SUCH TRANSFER SHALL BE REGISTRABLE, OR (C) AN EVENT OF DEFAULT (AS HEREINAFTER DEFINED) HAS OCCURRED AND IS CONTINUING WITH RESPECT TO THE NOTES. GLOBAL NOTE Representing 10.125% Series B Senior Subordinated Notes due 2002 CALLON PETROLEUM COMPANY, a Delaware corporation, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum indicated on Schedule A hereof, on September 15, 2002. 23 Interest Payment Dates: December 15, March 15, June 15 and September 15, commencing September 15, 1997. Record Dates: December 1, March 1, June 1 and September 1. Additional provisions of this Note are set forth on the other side of this Note. IN WITNESS WHEREOF, CALLON PETROLEUM COMPANY has caused this instrument to be duly executed under its corporate seal. Dated: CALLON PETROLEUM COMPANY [CORPORATE SEAL] By: _________________________ Name: ____________________ Title: ___________________ Attest: _____________________ Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee, certifies that this is one of the Notes referred to in the Indenture. By: _________________________ Authorized Signatory 24 [FORM OF REVERSE SIDE OF EXCHANGE NOTE] 10.125% Series B Senior Subordinated Note due 2002 1. Interest. Callon Petroleum Company, a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest quarterly on March 15, June 15, September 15, and December 15 of each year. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Company will pay interest on the Notes (except defaulted interest) to the Persons who are registered holders of Notes at the close of business on March 1, June 1, September 1 or December 1 immediately preceding the interest payment date even if Notes are canceled after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Notes represented by a Global Note (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company, but, at the option of the Company, interest may be paid by check mailed to the registered Holders at their registered addresses. The Company will make all payments in respect of a certificated Note (including principal, premium and interest), by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Notes may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Notes, 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 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar. Initially, American Stock Transfer & Trust Company, a New York corporation ("Trustee"), will act as Paying Agent and Note Registrar. The Company may appoint and change any Paying Agent, Note Registrar or co-registrar without notice. The Company or any of its domestically incorporated Wholly Owned Restricted Subsidiaries may act as Paying Agent, Note Registrar or co-registrar. 4. Indenture. The Company issued the Notes under an Indenture dated as of July 31, 1997 (as such may be amended from time to time, the "Indenture"), between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Act for a statement of those terms. 25 The Notes are unsecured senior subordinated obligations of the Company limited to $36,000,000 aggregate principal amount at any one time Outstanding . This Note is one of the Exchange Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture. The Initial Notes and the Exchange Notes are treated as a single class of Notes under the Indenture. 5. Denominations; Transfer; Exchange. The Notes are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or to transfer or exchange any Notes for a period of 15 days prior to a selection of Notes to be redeemed or 15 days before an interest payment date. 6. Subordination. The indebtedness of the Company evidenced by the Notes, including the principal thereof and interest thereon (including post-default interest), is expressly subordinated, to the extent and to the manner set forth in the Indenture, in right of payment to the prior payment in full of all of the Company's obligations to holders of Senior Indebtedness. Each Holder of Notes, by acceptance thereof, (a) agrees to and shall be bound by such provisions of the Indenture and all other provisions of the Indenture; (b) authorizes and directs the Trustee to take such action on such Holder's behalf as may be necessary or appropriate to effectuate the subordination of the Notes as provided in the Indenture; and (c) appoints the Trustee as such Holder's attorney-in-fact for any and all such purposes. 7. Optimal Redemption. The Notes may not be redeemed by the Company prior to September 15, 2000. The Notes are subject to redemption, at the option of the Company, in whole or in part, at any time on or after September 15, 2000, upon not less than 30 or more than 60 days' notice at the following Redemption Prices (expressed as percentages of principal amount) set forth below if redeemed during the 12-month period beginning September 15 of the years indicated below: Redemption Year Price ---- ----- 2000............................................ 102% 2001 and thereafter............................. 100% together in the case of any such redemption with accrued and unpaid interest, if any, to the Redemption Date, all as provided in the Indenture. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to Holders of such Notes, or one or more Predecessor Notes. Notes (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption or purchase of this Note in part only, a new Note or Notes for the unredeemed or unpurchased portion hereof shall be 26 issued in the name of the Holder hereof upon the cancellation hereof. If fewer than all Notes are redeemed, the Trustee will select the Notes to be redeemed by lot or such other method as the Trustee may deem fair and appropriate. 8. Notice of Redemption. Notice of redemption shall be given to the Holders of Notes to be redeemed by mailing a notice of such redemption not less than 30 or more than 60 days prior to the Redemption Date at their addresses as they shall appear on the Note Register, all as provided in the Indenture. If this Note (or a portion hereof) is duly called for redemption and funds for payment are duly provided, this Note (or such portion hereof) shall cease to bear interest from and after such Redemption Date. Interest installments whose Stated Maturity is on the Redemption Date will be payable to the Holders of such Notes, or one or more Predecessor Notes, of record at the close of business on the relevant Regular Record Date referred to on the face hereof, all as provided in the Indenture. In the event of redemption or repayment of this Note in part only, a new Note or Notes for the unredeemed or unrepaid portion hereof shall be issued in the name of the Holder hereof upon the surrender hereof. 9. Defaults and Remedies. Except as may be provided in the Indenture, if an Event of Default with respect to the Notes shall occur and be continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes may declare the principal of all the Notes due and payable in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration and its consequences may, in certain events, be annulled by the Holders of a majority in aggregate principal amount of the Outstanding Notes. 10. Discharge and Defeasance. The Indenture contains provisions for (i) defeasance at any time of the entire indebtedness of the Company on this Note and (ii) discharge from certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Note. 11. Amendment and Waiver. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Notes under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. Without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes and to make certain other specified changes and other changes that do not adversely affect the interests of any Holder. 27 12. Obligations Absolute. No reference herein to the Indenture and no provisions of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, places and rate, and in the coin or currency, herein prescribed. 13. No Recourse Against Others. A director, officer, employee, incorporator, shareholder or Affiliate of the Company, as such, past, present or future shall not have any personal liability under this Note or the Indenture by reason of his or its status as such director, officer, employee, incorporator, shareholder or Affiliate, or any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder, by accepting this Note, waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of this Note. 14. Persons Deemed Owners. Prior to the due presentment of this Note for registration of transfer or exchange, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. 15. Definitions. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 16. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes as a convenience to the Holders thereof. No representation is made as to the accuracy of such numbers as printed on the Notes and reliance may be placed only on the other identifying information printed hereon. 17. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. 18. Holder's Compliance with Registration Agreement. Each Holder of a Note, by acceptance hereof, acknowledges and agrees to the provisions of the Registration Agreement, including, without limitation, the obligations of the Holders with respect to a registration and the indemnification of the Company to the extent provided therein. Each Holder of a Note covenants and agrees by such Holder's acceptance thereof to comply with and be bound by the foregoing provisions. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Company at 200 North Canal Street, Natchez, Mississippi 39120. 28 Assignment Form To assign this Note, fill in the form below: I or we assign and transfer this Note to ___________________________________________________________ (Print or type assignee's name, address and zip code) ___________________________________________________________ (Insert assignee's social security or tax I.D. No.) and irrevocably appoint _______________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Signature: __________________________ Date: _______________________________ Sign exactly as your name appears on the other side of this Note. Signature Guarantee: __________________________________ (Signature must be guaranteed) Notice: Signature(s) must be guaranteed by an institution which is a participant in the Securities Transfer Agent Medallion Program ("STAMP") or similar program. 29 [TO BE ATTACHED TO GLOBAL NOTES] Schedule A SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The initial principal amount at maturity of this Global Note shall be $__________. The following increases or decreases in this Global Note have been made:
Principal Amount of Amount of decrease Amount of increase this Global Note Signature of authorized Date of in principal amount in principal amount following such signatory of Trustee a Exchange of this Global Note of this Global Note increase or decrease Securities Custodian - -------- ------------------- ------------------- -------------------- --------------------
30 EX-5.1 3 EXHIBIT 5.1 September 25, 1997 Callon Petroleum Company 200 North Canal Street Natchez, Mississippi 39120 Re: Registration of $36,000,000 of 10.125% Series B Senior Subordinated Notes due 2002 of Callon Petroleum Company Gentlemen: We have acted as counsel for Callon Petroleum Company, a Delaware corporation (the "Company"), in connection with the registration and sale of $36,000,000 in 10.125% Series B Senior Subordinated Notes due 2002 ("Notes") of the Company. We have made such inquiries and examined such documents as we have considered necessary or appropriate for the purposes of giving the opinion hereinafter set forth, including the examination of executed or conformed counterparts, or copies certified or otherwise proved to our satisfaction of the following: (i) the Certificate of Incorporation of the Company, as amended, and the Certificate of Merger of Callon Consolidated Partners, L.P. with and into the Company dated September 16, 1994; (ii) the Certificate of Designations for the Company's $2.125 Convertible Exchangeable Preferred Stock, Series A, filed with the Delaware Secretary of State on November 22, 1995 and corrected by that certain Certificate of Correction filed with the Delaware Secretary of State on November 27, 1995; (iii) the Bylaws of the Company as of the date of this opinion; (iv) the Registration Statement on Form S-4 of the Company, including the related prospectus, filed with the Securities and Exchange Commission on September 25, 1997 (the "Registration Statement"); (v) the Indenture ("Indenture") dated July 31, 1997 between the Company and American Stock Transfer & Trust Company, as Trustee ("Trustee"), pursuant to which the Notes will be issued; and (vi) such other documents, corporate records, certificates and other instruments as we have deemed necessary or appropriate for the purpose of this opinion. We have assumed the genuineness and authenticity of all signatures on all original documents, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies and the due authorization, execution, delivery or recordation of all documents where due authorization, execution, delivery or recordation are prerequisites to the effectiveness thereof. Capitalized terms used herein and not otherwise defined are used as defined in the Registration Statement. Based upon the foregoing, and having regard for such legal considerations as we deem relevant, we are of the opinion that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware pursuant to the Delaware General Corporation Law; (ii) The Notes to be sold by the Company pursuant to the Registration Statement have been duly authorized for issuance, and when executed by the Company, authenticated by the Trustee and delivered and sold in accordance with the provisions of the Registration Statement, will be legally issued and binding obligations of the Company enforceable in accordance with their terms and entitled to the benefits of the Indenture (except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws now or hereafter in effect affecting the rights of creditors generally). We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the references to us under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement. Very truly yours, BUTLER & BINION, L.L.P. EX-10.1 4 EXHIBIT 10.1 Callon Petroleum Company 10.125% Senior Subordinated Notes Due 2002 Registration Agreement July 31, 1997 Morgan Keegan & Company, Inc. 50 N. Front Street, 20th Floor Memphis, Tennessee 38103 Dear Sirs: Callon Petroleum Company, a Delaware corporation (the "Company"), proposes to issue and sell to Morgan Keegan & Co., Inc. (the "Initial Purchaser") upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), $36,000,000 principal amount of its 10.125% Series A Senior Subordinated Notes due 2002 (the "Notes") (the "Initial Placement"). As an inducement to the Initial Purchaser to enter into the Purchase Agreement and in satisfaction of a condition to your obligations thereunder, the Company agrees with you, (i) for your benefit and (ii) for the benefit of the holders from time to time of the Notes (including you) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Period" means the 45 day period following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the Initial Purchaser) which is a broker-dealer, electing to exchange Notes acquired for its own account as a result of market-making activities or other trading activities, for New Notes. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. "Indenture" means the Indenture relating to the Notes and the New Notes, dated as of July 31, 1997, between the Company and American Stock Transfer and Trust Company, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Placement" has the meaning set forth in the preamble hereto. "Majority Holders" means the Holders of a majority of the aggregate principal amount of securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering. "New Notes" means the 10.125% Series B Senior Subordinated Notes due 2002 of the Company identical in all material respects to the Notes (except that the cash interest and interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued under the Indenture. "Prospectus" means the prospectus include in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Notes or the New Notes, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Notes, a like principal amount of the New Notes. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Notes or the New Notes pursuant to 2 the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Notes or New Notes, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" means the trustee with respect to the Notes under the Indenture. "Underwriter" means any underwriter of the Notes and the New Notes in connection with an offering thereof under a Shelf Registration Statement. 2. REGISTERED EXCHANGE OFFER; RESALES OF NEW NOTES BY EXCHANGING DEALERS; PRIVATE EXCHANGE. (a) The Company shall prepare and, not later than October 1, 1997, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its best efforts to cause the Exchange Offer Registration Statement to become effective under the Act no later than November 15, 1997. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Notes for New Notes (assuming that such Holder is not an Affiliate of the Company, acquires the New Notes in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the New Notes) to trade such New Notes from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Registered Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; 3 (ii) keep the Registered Exchange Offer open for not less than 30 days and not more than 45 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law); (iii) utilize the services of a depository for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; and (iv) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York City time, on the last business day on which the Exchange Offer shall remain open, by sending to the institution specified in the notice, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for exchange and a statement that such Holder is withdrawing his election to have such Notes exchanged; and (v) comply in all material respects with all applicable laws. (d) As soon as practicable after the close of the Registered Exchange Offer, the Company shall: (i) accept for exchange all Notes tendered and not validly withdrawn pursuant to the Registered Exchange Offer; (ii) deliver to the Trustee for cancellation all Notes so accepted for exchange; and (iii) cause the Trustee, promptly to authenticate and deliver to each Holder of Notes, New Notes equal in principal amount to the Notes of such Holder so accepted for exchange. (e) The Initial Purchaser and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any New Notes received by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange for Notes acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (ii) to the extent that it is notified by an Exchanging Dealer that such Exchanging Dealer intends to rely upon the procedures set forth in this Section 2(e), use its best efforts to keep the Exchange Offer 4 Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of New Notes received pursuant to the Registered Exchange Offer, as contemplated by Section 4(h)below. (f) If the Company has consummated the Registered Exchange Offer, then, subject to Section 3 (iv), (v) and (vi), the Company will have no obligation to file or to maintain the effectiveness of a Shelf Registration Statement with respect to any Notes that are not tendered in the Registered Exchange Offer. (g) The Exchange Offer shall not be subject to any conditions, other than (1) that the Exchange Offer, or the making of any exchange by a Holder, does not violate applicable law or any applicable interpretation of the staff of the Commission, (2) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency or body with respect to the Exchange Offer, (3) that there shall not have been adopted or enacted any law, statute, rule or regulation prohibiting or limiting the Exchange Offer, (4) that there shall not have been declared by United States federal, New York or Texas state authorities a banking moratorium, (5) that trading on the New York Stock Exchange or generally in the United States over-the-counter market shall not have been suspended by order of the SEC or any other governmental authority and (6) such other conditions as may be reasonably acceptable to the Initial Purchaser which, in the Company's judgment, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer. 3. SHELF REGISTRATION. If (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) if for any other reason the Registered Exchange Offer is not consummated by December 31, 1997, or (iii) if the Initial Purchaser so requests with respect to Notes not eligible to be exchanged for Exchange Notes in the Registered Exchange Offer and held by it following consummation of the Registered Exchange offer, or (iv) if any Holder (other than the Initial Purchaser) is not eligible to participate in the Registered Exchange Offer or (v) if the Initial Purchaser participates in the Registered Exchange Offer and acquires New Notes pursuant to Section 2(f) hereof, but such Initial Purchaser does not receive freely tradeable New Notes in exchange for Notes constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that the Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of New Notes acquired in exchange for such Notes shall result in such New Notes being not "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of New Notes acquired in the Registered Exchange Offer in exchange for Notes acquired as a result of market-making activities or other trading activities shall not result in such New Notes being not "freely tradeable"), the following provisions shall apply: (a) The Company shall as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3), file with the Commission and thereafter shall use its best efforts to cause to be declared 5 effective under the Act a Shelf Registration Statement relating to the offer and sale of the Notes or the New Notes, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided, that with respect to New Notes received by the Initial Purchaser in exchange for Securities constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years after the Closing Date (or until one year after such Closing Date if such Shelf Registration Statement is filed at the request of the Initial Purchaser) or such shorter period that will terminate when all the Notes or New Notes, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period "). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including, but not limited to, the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 4(k) hereof, if applicable. (c) No Holder of Notes or New Notes may included any of its Notes or New Notes in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 10 business days after receipt of a written request therefor, such information specified in Item 507 and Item 508, as applicable, of Regulation S-K under the Act or any other information required by the Act or applicable state securities laws for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. No Holder of Notes or New Notes shall be entitled to Special Interest (as defined in the Final Memorandum) unless and until such Holder shall have used its best efforts to provide all such reasonably requested information. 4. REGISTRATION PROCEDURES. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: 6 (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose. (b) The Company shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company has no obligation with respect to written information furnished to the Company by or on behalf of the Initial Purchaser or any Holder specifically for inclusion therein. (c) (i) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: A. when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and B. of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (ii) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by you or any such Holder or Exchanging Dealer, confirm such advice in writing: A. of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; B. of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and 7 C. of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules included therein, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request during such periods as the Holder continues to hold the securities covered by the Shelf Registration Statement; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto, except during such periods in which the Company has provided notice in accordance with paragraph (c)(ii) above and has not filed a post-effective amendment pursuant to Section 4(k) hereof or given the Holders notice of the lifting of any stop order or suspension. (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules included therein, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits (including those incorporated by reference). (h) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of New Notes received by it pursuant to the Registered Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid, except during such periods in which the Company has provided notice in accordance with paragraph (c)(ii) above and has 8 not filed a post-effective amendment pursuant to Section 4(k) hereof or given the Holders notice of the lifting of any stop order or suspension. (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing, cooperate with the Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (j) Unless the applicable securities shall be in book-entry only form, the Company shall cooperate with the Holders of securities to facilitate the timely preparation and delivery of certificates representing securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(ii)(C) above, the Company shall promptly prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Notes or New Notes, as the case may be, registered under such Registration Statement, and provide the applicable trustee with printed certificates for such Notes or New Notes, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (n) The Company shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner. (o) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such 9 information regarding the Holder and the distribution of such securities as the Company may from time to time reasonably require for inclusion in such Registration Statement. (p) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably request and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Notes or New Notes, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 6 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any, with respect to all parties to be indemnified pursuant to Section 6) from Holders of Notes or New Notes to the Company. (r) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which separate financial statements and financial data are, or are required to be, included 10 in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed at (A) the effectiveness of such Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) In the case of any Exchange Offer Registration Statement, the Company shall (i) make reasonably available for inspection by the Initial Purchaser, and any attorney, accountant or other agent retained by the Initial Purchaser, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Initial Purchaser or any such attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Initial Purchaser or any such attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Initial Purchaser, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Initial Purchaser and its counsel, addressed to the Initial Purchaser, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the Initial Purchaser or its counsel); (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which separate financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the Initial Purchaser, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Initial Purchaser or its counsel, including those to evidence compliance with Section 4(k) and with conditions customarily contained in underwriting agreements. The foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this Section 4(s) shall be performed at the close of the Registered Exchange Offer and the effective date of any post-effective amendment to the Exchange Offer Registration Statement. 11 5. REGISTRATION EXPENSES. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3 and 4 hereof. 6. INDEMNIFICATION AND CONTRIBUTION. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including the Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Initial Purchaser or any such Holder specifically for inclusion therein. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. The Company also agrees to indemnify or contribute to Losses of, as provided in Section 6(d), any underwriters of securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 6(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including the Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity 12 agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise timely learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 6 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received 13 by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall the Initial Purchaser or any subsequent Holder of any Note or New Note be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Note, or in the case of a New Note, applicable to the Note which was exchangeable into such New Note, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum. Benefits received by the Initial Purchaser shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Notes or New Notes, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer, employee and agent of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 6 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 6 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. 14 7. MISCELLANEOUS. (a) NO INCONSISTENT AGREEMENTS. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Notes (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of New Notes); provided that, with respect to any matter that directly or indirectly affects the rights of the Initial Purchaser hereunder, the Company shall obtain the written consent of the Initial Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) NOTICES. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 7(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Morgan Keegan & Company, Inc.; (ii) if to you, initially at the address set forth in the Purchase Agreement; and (iii) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchaser or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, 15 including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Notes and/or New Notes. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Notes and/or New Notes and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) HEADINGS. The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW. This agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in said State. (h) SEVERABILITY. In the event that any one of more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) SECURITIES HELD BY THE COMPANY, ETC. Whenever the consent or approval of Holders of a specified percentage of principal amount of Notes or New Notes is required hereunder, Notes or New Notes, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Notes or New Notes if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Notes or New Notes) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, CALLON PETROLEUM COMPANY By: Accepted and Agreed to: MORGAN KEEGAN & COMPANY, INC. By: 16 ANNEX A Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Notes where such New Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business on the 45th day after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives New Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business on the 45th day after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. The Company will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may 17 be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus meeting the requirements of the Securities Act, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 45 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. [If applicable, add information required by Regulation S-K items 507 and/or 508.] ANNEX D Rider A CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ______________________________________ Address: ______________________________________ ______________________________________ ______________________________________ Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Notes, it represents that the Notes to be exchanged for New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. 18 EX-10.2 5 EXHIBIT 10.2 EXCHANGE AGENT AGREEMENT ____________, 1997 American Stock Transfer & Trust Company, New York 40 Wall Street New York, New York Ladies and Gentlemen: Callon Petroleum Company (the "Issuer") proposes to make an offer (the "Exchange Offer") to exchange its outstanding 10.125% Series A Senior Subordinated Notes due 2002 (the "Old Notes"), of which an aggregate of $36,000,000 in principal amount is outstanding as of the date hereof, for an equal principal amount of newly issued 10.125% Series B Senior Subordinated Notes due 2002 (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"). The Old Notes and New Notes are collectively referred to herein as the "Notes." The terms and conditions of the Exchange Offer as currently contemplated are set forth in a prospectus, dated _____, 1997 (the "Prospectus"), proposed to be distributed to all record holders of the Old Notes and beneficial interests therein. Terms used and not defined herein have the meanings set forth in the Prospectus or the Letter of Transmittal (except that the term "Old Notes" shall include beneficial interests therein, held by or through participants in The Depository Trust Company (the "Book-Entry Transfer Facility") (Book-Entry Interests") and Old Notes held in definitive registered form ("Definitive Registered Notes")). The Issuer hereby appoints American Stock Transfer & Trust Company, New York to act as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. References hereinafter to "you" shall refer to American Stock Transfer & Trust Company, New York. The Exchange Offer is expected to be commenced by the Issuer on or about _______, 1997. The Letter of Transmittal accompanying the Prospectus is to be used by the holders of the Old Notes to accept the Exchange Offer, and contains certain instructions with respect to the delivery of Book-Entry Interests and Definitive Registered Notes. The Exchange Offer shall expire at 5:00 p.m., New York City time, ____________, 1997 or on such later date or time to which the Issuer may extend the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions set forth in the Prospectus, the Issuer expressly reserves the right to extend the Exchange Offer from time to time and may extend the Exchange Offer by giving oral (confirmed in writing) or written notice to you before 9:00 a.m., New York City time, on the business day following the previously scheduled Expiration Date. The Issuer expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Old Notes not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified in the Prospectus under the section "The Exchange Offer -- Conditions to the Exchange Offer." The Issuer will give oral (confirmed in writing) or written notice of any amendment, termination or nonacceptance to you as promptly as practicable. In carrying out your duties as Exchange Agent, you are to act in accordance with the following instructions: 1. You will perform such duties and only such duties as are specifically set forth in the section of the Prospectus captioned "The Exchange Offer," as specifically set forth in the Letter of Transmittal, and as specifically set forth herein and such duties which are necessarily incidental thereto; PROVIDED, HOWEVER, that in no way will your general duty to act in good faith be discharged by the foregoing. 2. You will establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of the Prospectus or, if you already have established an account with the Book-Entry Transfer Facility suitable for the Exchange Offer, you will identify such preexisting account to be used in the Exchange Offer, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of the Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into your account in accordance with the Book-Entry Transfer Facility's procedure for such transfer. 3. You are to examine each of the Letters of Transmittal, each of the certificates for Old Notes in the case of Definitive Registered Notes, or, in the case of Book-Entry Interests, confirmation of book-entry transfer into your account at the Book-Entry Transfer Facility via the Book-Entry Transfer Facility's Automated Tender Offer Program and any accompanying Agent's Message and any other documents delivered or mailed to you by or for holders of the Old Notes to ascertain whether: (i) the Letters of Transmittal and any such other documents are duly executed and properly completed in accordance with instructions set forth therein and (ii) the Old Notes have otherwise been properly tendered. In each case where the Letter of Transmittal or any other document has been improperly completed or executed, any of the certificates for Old Notes are not in proper form for transfer or some other irregularity in connection with the acceptance of the Exchange Offer exists, you will endeavor to inform the presenters of the need for fulfillment of all requirements and to take any other action as may be necessary or advisable to cause such irregularity to be corrected. 4. With the approval of the Chief Financial Officer of the Company or the Company Secretary (such approval, if given orally, to be confirmed in writing) or any other party designated by such an officer in writing, you are authorized to waive any irregularities in connection with any tender of Old Notes pursuant to the Exchange Offer. 5. Tenders of Old Notes may be made only as set forth in the section of the Prospectus captioned "The Exchange Offer -- Procedures for Tendering Outstanding Notes" or in the Letter of Transmittal, and Old Notes shall be considered properly tendered to you only when tendered in accordance with the procedures set forth therein. Notwithstanding the provisions of this Paragraph 5, Old Notes which the Chief Financial Officer of the Company or the Company Secretary or any other party designated by such an officer in writing shall approve as having been properly tendered shall be considered to be properly tendered (such approval, if given orally, shall be confirmed in writing). 6. You shall advise the Company with respect to any Old Notes delivered subsequent to the Expiration Date and accept its instructions with respect to disposition of such Old Notes. 7. You shall accept tenders: a. in cases where the Old Notes are registered in two or more names only if signed by all named holders; 2 b. in cases where the signing person (as indicated on the Letter of Transmittal) is acting in a fiduciary or a representative capacity only when proper evidence of his or her authority to so act is submitted; and c. from persons other than the registered holder of Old Notes provided that customary transfer requirements, including any applicable transfer taxes, are fulfilled. 8. Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Issuer will notify you (such notice if given orally, to be confirmed in writing) of its acceptance, promptly after the Expiration Date, of all Old Notes properly tendered; and you, on behalf of the Issuer, will exchange such Old Notes for New Notes and cause such Old Notes to be canceled. Delivery of New Notes will be made on behalf of the Issuer by you at the rate of $1,000 principal amount of New Notes for each $1,000 principal amount of the Old Notes tendered promptly after notice (such notice if given orally, to be confirmed in writing) of acceptance of said Old Notes by the Issuer; PROVIDED, HOWEVER, that in all cases, Old Notes tendered pursuant to the Exchange Offer will be exchanged only after timely receipt by you of properly endorsed Definitive Registered Notes or confirmation of book-entry transfer into your account at the Book-Entry Transfer Facility, or a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or in lieu thereof an Agent's Message, where applicable) and any other required document. You shall issue New Notes only in denominations of $1,000 or any integral multiple thereof. 9. Tenders pursuant to the Exchange Offer are irrevocable, except that, subject to the terms and upon the conditions set forth in the Prospectus and the Letter of Transmittal, Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. 10. The Issuer shall not be required to exchange any Old Notes tendered if any of the conditions set forth in the Exchange Offer are not met. Notice of any decision by the Issuer not to exchange any Old Notes tendered shall be given (such notice, if given orally, shall be confirmed in writing) by the Issuer to you. 11. If, pursuant to the Exchange Offer, the Issuer does not accept for exchange all or part of the Old Notes tendered because of an invalid tender, the occurrence of certain other events set forth in the Prospectus under the caption "The Exchange Offer -- Conditions to the Exchange Offers" or otherwise, you shall as soon as practicable after the expiration or termination of the Exchange Offer effect the appropriate book-entry transfer of the unaccepted Old Notes, and return any related required documents and the Letters of Transmittal relating thereto that are in your possession, to the persons who deposited them. 12. You are not authorized to pay or offer to pay any concessions, commission or solicitation fees to any broker, dealer, bank or other persons or to engage or utilize any person to solicit tenders. 13. As Exchange Agent hereunder you: a. will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of Old Notes, and will not be required to and will make no representations as to the validity, value or genuineness of the Exchange Offer; PROVIDED, HOWEVER, that in no way will your general duty to act in good faith be discharged by the foregoing; b. shall not be obligated to take any legal action hereunder which might in your reasonable judgment involve any expense or liability, unless you shall have been furnished with reasonable indemnity; 3 c. shall not be liable to the Issuer for any action taken or omitted by you, or any action suffered by you to be taken or omitted, without negligence, misconduct or bad faith on your part, by reason of or as a result of the administration of your duties hereunder in accordance with the terms and conditions of this Agreement or by reason of your compliance with the instructions set forth herein or with any written or oral instructions delivered to you pursuant hereto, and may reasonably rely on and shall be protected in acting in good faith in reliance upon any certificate, instrument, opinion, notice, letter, facsimile or other document or security delivered to you and reasonably believed by you to be genuine and to have been signed by the proper party or parties; d. may reasonably act upon any tender, statement, request, comment, agreement or other instrument whatsoever not only as to its due execution and validity and the effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which you shall in good faith reasonably believe to be genuine or to have been signed or represented by a proper person or persons; e. may rely on and shall be protected in acting upon written or oral instructions from any officer of the Issuer with respect to the Exchange Offer; f. shall not advise any person tendering Old Notes pursuant to the Exchange Offer as to the wisdom of making such tender or as to the market value or decline or appreciation in market value of any Old Notes; and g. may consult with your counsel and the written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by you hereunder in good faith and in accordance with such written opinion of such counsel. 14. You shall take such action as may from time to time be requested by the Issuer or its counsel (and such other action as you may reasonably deem appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the Notice of Guaranteed Delivery or such other forms as may be approved from time to time by the Issuer to all persons requesting such documents and to accept and comply with telephone requests for information relating to the Exchange Offer, provided that such information shall relate only to the procedures for accepting (or withdrawing from) the Exchange Offer. The Issuer will furnish you with copies of such documents at your request. All other requests for information relating to the Exchange Offer shall be directed to: Callon Petroleum Company 200 North Canal Street Natchez, Mississippi 39120 Attn: Corporate Secretary 15. You shall advise by facsimile transmission or telephone, and promptly thereafter, confirm in writing to: John S. Weatherly Callon Petroleum Company 200 North Canal Street Natchez, Mississippi 39120 Telephone: (601) 442-1601 Facsimile: (601) 446-1410 4 and such other person or persons as the Company may request, daily, and more frequently if reasonably requested, up to and including the Expiration Date, as to the principal amount of the Old Notes which have been tendered pursuant to the Exchange Offer and the items received by you pursuant to this Agreement, separately reporting and giving cumulative totals as to items properly received and items improperly received. In addition, you will also inform, and cooperate in making available to, the Issuer or any such other person or persons as the Issuer requests from time to time prior to the Expiration Date of such other information as they, it or he reasonably requests. Such cooperation shall include, without limitation, the granting by you to the Issuer and such persons as the Issuer may request of access to those persons on your staff who are responsible for receiving tenders in order to ensure that immediately prior to the Expiration Date, the Issuer shall have received information in sufficient detail to enable it to decide whether to extend the Exchange Offer. You shall prepare a list of persons who failed to tender or whose tenders were not accepted and the aggregate principal amount of Old Notes not tendered or Old Notes not accepted and deliver said list to the Issuer at least seven days prior to the Expiration Date. You shall also prepare a final list of all persons whose tenders were accepted, the aggregate principal amount of Old Notes tendered and the aggregate principal amount of Old Notes accepted and deliver said list to the Issuer. 16. Letters of Transmittal and Notices of Guaranteed Delivery shall be stamped by you as to the date and the time of receipt thereof and shall be preserved by you for a period of time at least equal to the period of time you preserve other records pertaining to the transfer of securities. You shall dispose of unused Letters of Transmittal and other surplus materials by returning them to the Issuer. 17. For services rendered as Exchange Agent hereunder you shall be entitled to a fee of [ ] and you shall be entitled to reimbursement of your expenses (including fees and expenses of your counsel, which fees are expected under normal circumstances to be not in excess [ ]) incurred in the connection with the Exchange Offer. 18. You hereby acknowledge receipt of the Prospectus and the Letter of Transmittal attached hereto and further acknowledge that you have examined each of them to the extent that they relate to your duties hereunder. Any inconsistency between this Agreement, on the one hand, and the Prospectus and the Letter of Transmittal (as they may be amended from time to time), on the other hand, shall be resolved in favor of the latter two documents, except with respect to the duties, liabilities and indemnification of you as Exchange Agent which shall be controlled by this Agreement. 19. The Issuer agrees to indemnify and hold you harmless in your capacity as Exchange Agent hereunder against any liability, cost or expense, including reasonable attorneys' fees, arising out or in connection with the acceptance or administration of your duties hereunder, including, without limitation, in connection with any act, omission, delay or refusal made by you in reasonable reliance upon any signature, endorsement, assignment, certificate, order, request, notice, instruction or other instrument or document reasonably believed by you to be valid, genuine and sufficient and in accepting any tender or effecting any transfer of Old Notes reasonably believed by you in good faith to be authorized, and in delaying or refusing in good faith to accept any tenders or effect any transfer of Old Notes; PROVIDED, HOWEVER, that the Issuer shall not be liable for indemnification or otherwise for any loss, liability, cost or expense to the extent arising out of your negligence, willful breach of this Agreement, willful misconduct or bad faith. In no case shall the Issuer be liable under this indemnity with respect to any claim against you unless the Issuer shall be notified by you, by letter or cable or by facsimile confirmed by letter, of the written assertion of a claim against you or of any other action commenced against you, promptly after you shall have received any such written assertion or commencement of action. The Issuer shall be entitled to participate at its own expense in the defense of any such claim or other action, and, if the Issuer so elects, the Issuer shall assume the defense of any suit brought to enforce any such claim. In the event that the Issuer shall assume the defense of any such suit, the Issuer shall not be liable for the fees and expenses of any additional counsel thereafter retained by you so long as the Issuer shall retain counsel 5 reasonably satisfactory to you to defend such suit. You shall not compromise or settle any such action or claim without the consent of the Issuer. 20. This Agreement and your appointment as Exchange Agent hereunder shall be construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, and without regard to conflicts of law principles, and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successors and assigns of each of the parties hereto. 21. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together constitute one and the same agreement. 22. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 23. This Agreement shall not be deemed or construed to be modified, amended, rescinded, canceled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of the party to be charged. This Agreement may not be modified orally. 24. Unless otherwise provided herein, all notices, requests and other communications to any party hereunder shall be in writing (including facsimile) and shall be given to such party, addressed to it, at its address or telecopy number set forth below: If to the Issuer: Callon Petroleum Company 200 North Canal Street Natchez, Mississippi 39120 Telephone: (601) 442-1601 Facsimile: (601) 446-1410 Attn: John S. Weatherly, Chief Financial Officer with a copy to: Butler & Binion, L.L.P. 1000 Louisiana, Suite 1600 Houston, TX 77002 Telephone: (713) 237-3111 Facsimile: (713) 237-3202 Attn: George G. Young If to the Exchange Agent: American Stock Transfer & Trust Company, New York 40 Wall Street New York, New York Telephone: 718-921-8206 Facsimile: 718-921-8336 6 25. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days following the Expiration Date. Notwithstanding the foregoing, Paragraphs 17 and 19 shall survive the termination of this Agreement. Upon any termination of this Agreement, you shall promptly deliver to the Issuer any funds or property (including, without limitation, Letters of Transmittal and any other documents relating to the Exchange Offer) then held by you as Exchange Agent under this Agreement except as provided in Section 16. 26. This Agreement shall be binding and effective as of the date hereof. Please acknowledge receipt of this Agreement and confirm the arrangements herein provided by signing and returning the enclosed copy. CALLON PETROLEUM COMPANY By:_____________________________________________ Name: Title: Accepted as the date first above written: AMERICAN STOCK TRANSFER & TRUST COMPANY, NEW YORK By:_______________________________________ Name: Title: 7 EX-10.3 6 EXHIBIT 10.3 LETTER OF TRANSMITTAL CALLON PETROLEUM COMPANY OFFER TO EXCHANGE ALL OUTSTANDING 10.125% SERIES A SENIOR SUBORDINATED NOTES DUE 2002 FOR 10.125% Series B Senior Subordinated Notes due 2002 Which Have Been Registered Under The Securities Act of 1933, As Amended Pursuant To The Prospectus Dated ________, 1997 The Exchange Offer Will Expire At 5:00 P.M., New York City Time, On _______________, 1997 Unless Extended ("The Expiration Date") AMERICAN STOCK TRANSFER & TRUST COMPANY, NEW YORK, Exchange Agent By Mail, Hand or Overnight Delivery: American Stock Transfer and Trust Company, New York 40 Wall Street New York, New York By Facsimile: 718-921-8336 Confirm by Telephone: 718-921-8206 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated , 1997 (the "Prospectus"), of Callon Petroleum Company, a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange, from the registered holders (the "Holders") thereof an aggregate principal amount of up to $36,000,000 of the Company's 10.125% Series B Senior Subordinated Notes due 2002 (the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is part, for a like principal amount of the issued and outstanding 10.125% Series A Senior Subordinated Notes due 2002 (the "Old Notes") of the Company. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. Accordingly, registered Holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid, from July 31, 1997. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders whose Old Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. This Letter is to be completed by a Holder of Old Notes either if certificates for such Old Notes are to be forwarded herewith or if a tender is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer -- Procedures for Tendering Outstanding Notes -- Book-Entry Transfer" section of the Prospectus and an Agent's Message is not delivered. Tenders by book-entry transfer may also be made by delivering an Agent's Message in lieu of this Letter of Transmittal. The term "Agent's Message" means a message, transmitted by the Book-Entry Transfer Facility to and received by the Exchange Agent and forming a part of a Book-Entry Confirmation (as defined below), which states that the Book-Entry Transfer Facility has received an express acknowledgment from the tendering Participant, which acknowledgment states that such Participant has received and agrees to be bound by the Letter of Transmittal and that the Company may enforce the Letter of Transmittal against such Participant. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Procedures for Tendering Outstanding Notes -- Guaranteed Delivery" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. The undersigned, by completing the box entitled "Description of 10.125% Series A Senior Subordinated Notes due 2002" below and signing this Letter, will be deemed to have tendered the Old Notes as set forth in such box below. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING THE BOXES List below the Old Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto. -2- DESCRIPTION OF 10.125% SERIES A SENIOR SUBORDINATED NOTES DUE 2002 PRINCIPAL AMOUNT AGGREGATE TENDERED PRINCIPAL (MUST NAME AND ADDRESS OF AMOUNT BE IN REGISTERED HOLDERS REPRESENTED INTEGRAL (PLEASE FILL IN IF CERTIFICATE BY MULTIPLES OF BLANK) NUMBERS(*) CERTIFICATE(S) $1,000)** ------ ---------- -------------- - --------- TOTAL * Need not be completed by book-entry holders. ** Unless indicated in the column labeled "Principal Amount Tendered," any tendering Holder of 10.125% Series A Senior Subordinated Notes due 2002 will be deemed to have tendered the entire aggregate principal amount represented by the column labeled "Aggregate Principal Amount Represented by Certificates(s)." If the space provided above is inadequate, list the certificate numbers and principal amounts on a separate signed schedule and affix the list to this Letter of Transmittal. The minimum permitted tender is $1,000 in principal amount of 10.125% Series A Senior Subordinated Notes due 2002 and all tenders must be in integral multiples of $1,000 in principal amount. |_| Check here if tendered Old Notes are enclosed herewith. |_| Check here if tendered Old Notes are being delivered by book entry transfer made to the account maintained by the Exchange Agent with DTC and complete the following (for use by eligible institutions (as hereinafter defined) only): Name of Tendering Institution Account Number Transaction Code Number |_| Check here and enclose a photocopy of the notice of guaranteed delivery if tendered Old Notes are being delivered pursuant to a notice of guaranteed delivery previously sent to the Exchange Agent and complete the following (for use by eligible institutions only): Name(s)of Registered Holder(s) Date of Execution of Notice of Guaranteed Delivery Window Ticket Number (if available) Name of Institution which Guaranteed Delivery Account Number (if delivered by book entry transfer) Transaction Code Number (if delivered by book-entry transfer) Tendering Institution (if delivered by book/entry transfer) -3- SPECIAL ISSUANCE INSTRUCTION (See Instructions 3, 4 and 5) To be completed ONLY (i) if certificates for Old Notes not tendered, or New Notes issued in exchange for Old Notes accepted for exchange, are to be issued in the name of someone for exchange, are to be issued in the name of someone other than the undersigned, or (ii) if Old Notes tendered by book-entry transfer which are not exchanged are to be returned by credit to an account maintained at The Depository Trust Company ("DTC") other than the DTC Account Number set forth above. Issued certificate(s) to: Name_______________________________________ (Please Print) Address____________________________________ ___________________________________________ (Include Zip Code) ___________________________________________ (Tax Identification or Social Security No.) Credit Old Notes not exchanged and delivered by book-entry transfer to the DTC account set forth below: ___________________________________________ DTC Account Number SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3 and 4) To be completed ONLY if certificates for Old Notes not tendered, or New Notes issued in exchange for Old Notes accepted for exchange, are to be delivered to someone other than the undersigned, or to the undersigned at an address other than that shown above. Mail to: Name_______________________________________ (Please Print) Address____________________________________ ___________________________________________ (Include Zip Code) ___________________________________________ (Tax Identification or Social Security No.) Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated below. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Company) with respect to the tendered Old Notes with full power of substitution to (i) deliver certificates for such Old Notes, or transfer ownership of such Old Notes on the account books maintained by DTC, to the Company and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Company and (ii) present such Old Notes for transfer on the books of the Company and receive all benefits and otherwise exercise all rights of beneficial ownership of such Old Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, that neither the Holder of such Old Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder of such Old Notes nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of the Company. The undersigned also acknowledges that the Exchange Offer are being made in reliance on interpretations by the staff of the Securities and Exchange Commission (the "SEC"), as set forth in no-action letters issued to third parties, that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holders' business and such Holders have no arrangement with any person to participate in a distribution of such New Notes. However, the SEC has not considered the Exchange Offer in the context of a no-action letter and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in other circumstances. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If any Holder is an affiliate of the Company, is engaged in or intends to engage in, or has any arrangement or understanding with any person to participate in, a distribution of the New Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the applicable interpretations of the staff of the SEC and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If the undersigned is a broker-dealer that will receive New Notes for its own account pursuant to the Exchange Offer, it represents that the Old Notes to be exchanged for the New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. -5- The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer --Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please issue the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address(es) shown above in the box entitled "Description of 10.125% Series A Senior Subordinated Notes due 2002." CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO Name: ________________________________ Address: ________________________________ ________________________________ ________________________________ -6- PLEASE SIGN HERE TO BE COMPLETED BY ALL TENDERING HOLDERS) (Complete accompanying Substitute W-9 on reverse side) ________________________________________ ___________________________, 1997 Date ________________________________________ ___________________________, 1997 Signature(s) of Holder(s) Date Area Code and Telephone Number: ______________________________________________ This letter must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old Notes hereby tendered or on a security position listing, or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s):____________________________________________________________________ (Please Type or Print) Capacity (Full Title):______________________________________________________ Address:____________________________________________________________________ (Including Zip Code) SIGNATURE GUARANTEE (if required by Instruction 3) Signature(s) Guaranteed by an Eligible Institution: ________________________________________________________________________________ (Authorized Signature) ________________________________________________________________________________ (Title) ________________________________________________________________________________ (Name of Firm) ________________________________________________________________________________ (Address) ________________________________________________________________________________ (Area Code and Telephone Number) Date:_________________________, 1997 -7- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER AND OLD NOTES, GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by holders of Old Notes either if certificates for such Old Notes are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer -- Procedures for Tendering Outstanding Notes -- Book Entry Transfer" section of the Prospectus and an Agent's Message is not delivered. Tenders by book-entry transfer may also be made by delivering an Agent's Message in lieu of this Letter of Transmittal. The term "Agent's Message" means a message, transmitted by the Book-Entry Transfer Facility to and received by the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the tendering Participant, which acknowledgment states that such Participant has received and agrees to be bound by the Letter of Transmittal and that the Company may enforce the Letter of Transmittal against such Participant. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter (or facsimile hereof or Agent's Message in lieu thereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Holders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer - -- Procedures for Tendering Outstanding Notes -- Guaranteed Delivery" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution; (ii) on or prior to 5:00 p.m., New York City time, on the Expiration Date, the Exchange Agent must receive from such Eligible Institution a properly completed and duly Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Notes and the amount of Old Notes tendered stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, together with a properly completed and duly executed Letter (or facsimile thereof or Agent's Message in lieu thereof) with any required signature guarantees and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, together with a properly completed and duly executed Letter (or facsimile thereof or Agent's Message in lieu thereof) with any required signature guarantees and all other documents required by this Letter, are deposited by the Eligible Institution within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of the tendering Holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Old Notes are sent by mail, it is suggested that the mailing be registered mail, properly insured, with return receipt requested, and made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. -8- Only a Holder (as defined in the Prospectus) of Old Notes may tender such Old Notes in the Exchange Offer. Any beneficial holder of Old Notes who is not the registered holder and who wishes to tender should arrange with the registered holder to execute and deliver this Letter of Transmittal on his behalf or must, prior to completing and executing this Letter of Transmittal and delivering his Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such holder's name or obtain a properly completed bond power from the registered holder. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTE HOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of 10.125% Series A Senior Subordinated Notes due 2002 -- Principal Amount Tendered." A reissued certificate representing the balance of nontendered Old Notes will be sent to such tendering holder, unless otherwise provided in the appropriate box of this Letter, promptly after the Expiration Date. All of the Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 3. SIGNATURES ON THIS LETTER, BOND POWERS AND ENDORSEMENTS, GUARANTEE OF SIGNATURES. If this Letter is signed by the Holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates or on a DTC security position listing without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all of such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this letter as there are different registrations of certificates. When this Letter is signed by the registered holder or holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. -9- If this Letter is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the [Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program] (each, an "Eligible Institution"). Signatures on this Letter need not be guaranteed by an Eligible Institution, provided the Old Notes are tendered: (i) by a registered holder of Old Notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter, or (ii) for the account of an Eligible Institution. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Note holders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter. 5. TRANSFER TAXES. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed to such tendering holder and the Exchange Agent will retain possession of an amount of New Notes with a face amount equal to the amount of such transfer taxes due by such tendering holder pending receipt by the Exchange Agent of the amount of such taxes. Except as provided in this Instruction 5, it will not be necessary for transfer tax stamps to be affixed to the Old Notes specified in this Letter. 6. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. -10- 7. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter or on Agent's Message in lieu thereof, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give any such notice. 8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. WITHDRAWAL OF TENDERS. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. For a withdrawal of a tender of Old Notes to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth above prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers (where certificates for Old Notes have been transmitted) and principal amount of such Old Notes), (iii) be signed by the holder in the same manner as the original signature on this Letter (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the trustee under the Indenture register the transfer of such Old Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such Old Notes are registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes that have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following the procedures described above at any time on or prior to 5:00 p.m., New York City time, on the Expiration Date. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus, this Letter and other related documents may be directed to the Exchange Agent, at the address and telephone number indicated above. 11. IMPORTANT TAX INFORMATION. Under current federal income tax law, a holder of New Notes is required to provide the Company (as payor) with such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9 or otherwise establish a basis for exemption from backup withholding to prevent backup withholding on any New Notes delivered pursuant to the Exchange Offer and any payments received in respect of the New Notes. If a holder of New Notes is an individual, the TIN is such holder's social security number. If the Company is not provided with the correct taxpayer identification number, a holder of New Notes may be subject to a $50 penalty imposed by the Internal Revenue Service. Accordingly, each prospective holder of New Notes to be issued pursuant to Special Issuance Instructions should complete the attached Substitute Form W-9. The Substitute Form W-9 need not be completed if the box entitled Special Issuance Instructions has not been completed. -11- Certain holders of New Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. Exempt prospective holders of New Notes should indicate their exempt status on Substitute Form W-9. A foreign individual may qualify as an exempt recipient by submitting to the Company, through the Exchange Agent, a properly completed Internal Revenue Service Form W-8 (which the Exchange Agent will provide upon request) signed under penalty of perjury, attesting to the holder's exempt status. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Company is required to withhold 31% of any payment made to the holder of New Notes or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. To prevent backup withholding on any New Notes delivered pursuant to the Exchange Offer and any payments received in respect of the New Notes, each prospective holder of New Notes to be issued pursuant to Special Issuance Instructions should provide the Company, through the Exchange Agent, with either: (i) such prospective holder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such prospective holder is awaiting a TIN) and that (A) such prospective holder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report all interest or dividends or (B) the Internal Revenue Service has notified such prospective holder that he or she is no longer subject to backup withholding; or (ii) an adequate basis for exemption. The prospective holder of New Notes to be issued pursuant to Special Issuance Instructions is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the prospective record owner of the New Notes. If the New Notes will be held in more than one name or are not held in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance regarding which number to report. To prevent backup withholding, each tendering holder of Old Notes must provide its correct TIN by completing the Substitute Form W-9 set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, or (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Old Notes is a nonresident alien or foreign entity not subject to backup withholding, such holder must give the Company a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Old Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Company within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Company. -12- TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) PAYOR'S NAME: CALLON PETROLEUM COMPANY SUBSTITUTE Form W-9 PART I -- PLEASE PROVIDE YOUR TIN IN THE TIN: BOX AT RIGHT AND CERTIFY BY SIGNING AND (Social Security Number or DATING BELOW. Employer Identification Number) DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE PART II -- TIN Applied for / / CERTIFICATION UNDER PENALTIES OF PERJURY, I CERTIFY THAT: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me); (2) I am not subject to backup withholding either because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the 'IRS') that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding; and (3) any other information provided on this form is true and correct. Signature:__________________________ Date:_______________________________, 1997 You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. -13- YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART II OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of the exchange, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. Signature:________________________________ Date:_______________________________, 1997 NOTICE OF GUARANTEED DELIVERY FOR CALLON PETROLEUM COMPANY This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Callon Petroleum Company (the "Company") made pursuant to the Prospectus, dated __________, 1997 (the "Prospectus"), if certificates for the outstanding 10.125% Series A Senior Subordinated Notes due 2002 (the "Old Notes") of the Company are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered or transmitted by telegram, telex, facsimile transmission, mail or hand delivery to American Stock Transfer & Trust Company, New York ("Exchange Agent") as set forth below. Capitalized terms not defined herein are defined in the Prospectus. AMERICAN STOCK TRANSFER & TRUST COMPANY, NEW YORK, Exchange Agent By Mail, Hand or Overnight Delivery: American Stock Transfer & Trust Company, New York 40 Wall Street New York, New York By Facsimile: 718-921-8336 Confirm by Telephone: 718-921-8206 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF THIS INSTRUMENT VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. -14- This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, the signature guarantee must appear in the applicable space provided in the signature box in the Letter of Transmittal. Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus, the undersigned hereby tenders to the Company the principal amount of Old Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer - -- Procedures for Tendering Outstanding Notes -- Guaranteed Delivery" section of the Prospectus. Principal Amount of Old Notes Tendered: $_____________________________________________ Certificate Nos. (if available): _______________________________________________ Total Principal Amount Represented by Certificate(s): $______________________________________________ If Old Notes will be delivered to Depository Trust Company, provide account number. Account Number: ______________________________ All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. PLEASE SIGN HERE _______________________________________________ _________________________, 1997 Date _______________________________________________ _________________________, 1997 Signatures of Holder(s) or Authorized Signatory Date Must be signed by the holder(s) of Old Notes as their name(s) appear(s) on certificates for Old Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. If Old Notes will be delivered by book-entry transfer to The Depository Trust Company, provide account number. Please print name(s) and address(es) Name(s):_______________________________________________________________________ Capacity:______________________________________________________________________ Address(es):___________________________________________________________________ -15- Area Code and Telephone Number:________________________________________________ Account Number:________________________________________________________________ GUARANTEE (Not to be used for signature guarantees) The undersigned, a financial institution (including most banks, savings and loan associations and brokerage houses) that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program, hereby guarantees that the undersigned will deliver to the Exchange Agent the certificates representing the Old Notes being tendered hereby in proper form for transfer or confirmation of book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company pursuant to the procedures for book-entry transfer set forth in the Prospectus, in either case, together with one or more properly completed and duly executed letters of transmittal/or facsimile thereof or Agent's Message in lieu thereof and any other documents required by the Letter of Transmittal within five NYSE trading days after the date of execution of this Notice of Guaranteed Delivery. Name of Firm:__________________________________________________________________ Address:_______________________________________________________________________ Area Code & Telephone No.:_____________________________________________________ _____________________________________ Authorized Signature _____________________________________ Name (Please Type or Print) _____________________________________ Title _______________________________, 1997 Date NOTE: DO NOT SEND CERTIFICATES OF OLD NOTES WITH THIS FORM. CERTIFICATES OF OLD NOTES SHOULD BE SENT ONLY WITH A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL. -16- EX-23.2 7 EXHIBIT 23.2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 24, 1997, with respect to the Statement of Revenues and Direct Operating Expenses of the Working Interest in Mobile Area Block 864 Unit acquired by Callon Petroleum Operating Company for the year ended December 31, 1996 included in the Registration Statement on Form S-4 and related Prospectus of Callon Petroleum Company dated September 25, 1997 to exchange up to $36,000,000 aggregate principal amount of its 10.125% Series B Senior Subordinated Notes due 2002 for a like principal amount of its outstanding 10.125% Series A Senior Subordinated Notes Due 2002. /S/ ERNST & YOUNG LLP ERNST & YOUNG LLP Houston, Texas September 24, 1997 EX-23.3 8 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated February 19, 1997 on the financial statements of Callon Petroleum Company (and to all references to our Firm) included in or made a part of this registration statement on Form S-4 of Callon Petroleum Company. /S/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP New Orleans, Louisiana September 24, 1997 EX-23.4 9 EXHIBIT 23.4 [HUDDLESTON & CO., INC. LETTERHEAD] CONSENT OF INDEPENDANT PETROLEUM AND GEOLOGICAL ENGINEERS The undersigned hereby consents to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of our reserve reports relating to the oil and gas reserves of Callon Petroleum Company at December 31, 1996. We also consent to the references to us under the headings "Risk Factors--Estimates of Oil and Gas Reserves," "Experts," and "Business Properties" and elsewhere in such Prospectus. HUDDLESTON & CO., INC. By: /s/ PETER D. HUDDLESTON Peter D. Huddleston President September 23, 1997 EX-25 10 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE AMERICAN STOCK TRANSFER & TRUST COMPANY (Exact name of trustee as specified in its charter) New York 13-3439945 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 40 Wall Street 10005 New York, New York (Zip Code) (Address of trustee's principal executive offices) CALLON PETROLEUM COMPANY (Exact name of obligor as specified in its charter) DELAWARE 64-0844345 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 200 NORTH CANAL STREET NATCHEZ, MISSISSIPPI 39120 (Address of principal executive (Zip Code) offices) 10.125% SENIOR SUBORDINATED NOTES DUE 2002 (Title of the Indenture Securities) -2- GENERAL 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The Trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. None. 3. VOTING SECURITIES OF THE TRUSTEE. Furnish the following information as to each class of voting securities of the trustee: As of SEPTEMBER 23, 1997 COL. A COL. B Title of Class Amount Outstanding Common Shares - par value $600 per share. 1,000 shares 4. TRUSTEESHIPS UNDER OTHER INDENTURES. American Stock Transfer & Trust Company is Trustee under an Indenture dated as of November 27, 1996 in terms of which $36,000,000.00 principal amount of 10% Senior Subordinated Notes due 2001, which rank PARI PASSU with the 10.125% Senior Subordinated Notes due 2002, were issued. 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR UNDERWRITERS. None. -3- 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS. None. 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS. None. 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE. None. 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE. None. 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR. None. 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR. None. 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE. None. 13. DEFAULTS BY THE OBLIGOR. None. 14. AFFILIATIONS WITH THE UNDERWRITERS. None. 15. FOREIGN TRUSTEE. Not applicable. -4- 16. LIST OF EXHIBITS. T-1.1- A copy of the Organization Certificate of American Stock Transfer & Trust Company, as amended to date including authority to commence business and exercise trust powers was filed in connection with the Registration Statement of Live Entertainment, Inc., File No. 33-54654, and is incorporated herein by reference. T-1.4- A copy of the By-Laws of American Stock Transfer & Trust Company, as amended to date was filed in connection with the Registration Statement of Live Entertainment, Inc., File No. 33-54654, and is incorporated herein by reference. T-1.6- The consent of the Trustee required by Section 312(b) of the Trust Indenture Act of 1939. Exhibit A. T-1.7- A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. - Exhibit B. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, American Stock Transfer & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 23rd day of September 1997. AMERICAN STOCK TRANSFER & TRUST COMPANY Trustee By:/s/ H. LEMMEK Vice President EXHIBIT A Securities and Exchange Commission Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321 (b) of the Trust Indenture Act of 1939, and subject to the limitations therein contained, American Stock Transfer & Trust Company hereby consents that reports of examinations of said corporation by Federal, State, Territorial or District authorities may be furnished by such authorities to you upon request therefor. Very truly yours, AMERICAN STOCK TRANSFER & TRUST COMPANY By /s/ H. LEMMEK Vice President AMERICAN STOCK TRANSFER & TRUST COMPANY 40 WALL ST. NEW YORK, NY 10005 EXHIBIT B CONSOLIDATED REPORT OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC OFFICES ONLY AND TOTAL ASSETS OF LESS THAN $100 MILLION REPORT AT CLOSE OF BUSINESS ON JUNE 30, 1997 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. SCHEDULE RC - BALANCE SHEET DOLLAR AMOUTS IN THOUSANDS - ------------------------------------------------------------------------------ ASSETS 1. Cash and balances due from depository institutions: a. Noninterest-bearing balances and currency and coin b. Interest-bearing balances......................................... 433 2. Securities: a. Held-to-maturity securities (from Schedule RC-B, column A) b. Available-for-sale securities (from Schedule RC-B, column D)...... 3,537 3. Federal funds sold and securities purchased under agreements to resell 4. Loans and lease financing receivables: a. Loans and leases, net of unearned income (from Schedule RC-C) b. LESS: Allowance for loan and lease losses c. LESS: Allocated transfer risk reserve d. Loans and leases, net of unearned income, allowance, and reserve (item 4.a minus 4.b and 4.c 5. Trading assets 6. Premises and fixed assets (including capitalized leases).............. 3,641 7. Other real estate owned (from Schedule RC-M) 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 9. Customers' liability to this bank on acceptances outstanding 10. Intangible assets (from Schedule RC-M) 11. Other asssets (from Schedule RC-F)................................... 6,678 12. a. Total assets (sum of items 1 through 11).......................... 14,289 b. Losses deferred pursuant to 12 U.S.C. 1823 (j) c.Total assets and losses deferred pursuant to 12 U.S.C. 1823 (j) (sum of items 12.a and 12.b)....................................... 14,289 SCHEDULE RC - CONTINUED - ------------------------------------------------------------------------------ DOLLAR AMOUNTS IN THOUSANDS LIABILITIES 13. Deposits: a.In domestic offices (sum of totals of columns A and C from Schedule RC-E) (1) Noninterest-bearing (2) Interest-bearing b.In foreign offices, Edge and Agreement subsidiaries, and IBFs (1) Noninterest-bearing (2) Interest-bearing 14. Federal funds purchased and securities sold under agreements to repurchase 15. a. Demand notes issued to the U.S. Treasury b. Trading liabilities 16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases): a. With a remaining maturity of one year or less b. With a remaining maturity of more than one year through three years c. With a remaining maturity of more than three years 17. Not applicable 18. Bank's liability on acceptances executed and outstanding 19. Subordinated notes and debentures 20. Other liabilities (from Schedule RC-G).............................. 1,851 21. Total liabilities (sum of items 13 through 20)...................... 1,851 22. Not applicable EQUITY CAPITAL 23. Perpetual preferred stock and related surplus 24. Common stock........................................................ 600 25. Surplus (exclude all surplus related to preferred stock)............ 9,289 26. a. Undivided profits and capital reserves........................... 2,523 b. Net unrealized holding gains (losses) on available-for-sale securities 27. Cumulative foreign currency translation adjustments 28. a. Total equity capital (sum of items 23 through 27)................ 12,438 b. Losses deferred pursuant to 12 U.S.C. 1823(j) c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items 28.a and 28.b)..................... 12,438 29. Total liabilities, equity capital, and losses deferred pursuant to 12 U.S.C.. 1823 (j) (sum of items 21 and 28.c)......................... 14,289 -----END PRIVACY-ENHANCED MESSAGE-----