SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 001-14039
CALLON PETROLEUM COMPANY
(Exact name of Registrant 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 (601) 442-1601
(Address of Principal Executive (Registrant's telephone number
Offices)(Zip Code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- ----------------------------------------- ------------------------------------
Convertible Exchangeable Preferred Stock, New York Stock Exchange
Series A, Par Value $.01 Per Share
Common Stock, Par Value $.01 Per Share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
11% Senior Subordinated Notes due 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No | |.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No.| |.
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant was approximately $78.8 million as of June 30,
2003 (based on the last reported sale price of such stock on the New York Stock
Exchange on such date of $7.12).
As of March 4, 2004, there were 13,976,411 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
Document incorporated by reference: Portions of the definitive Proxy Statement
of Callon Petroleum Company (to be filed no later than 120 days after December
31, 2003) relating to the Annual Meeting of Stockholders to be held on May 6,
2004, which is incorporated into Part III of this Form 10-K.
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PART I.
ITEM 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Callon Petroleum Company has been engaged in the exploration, development,
acquisition and production of oil and gas properties since 1950. Our properties
are geographically concentrated primarily offshore in the Gulf of Mexico and
onshore in Louisiana and Alabama. We were incorporated under the laws of the
state of Delaware in 1994 and succeeded to the business of a publicly traded
limited partnership, a joint venture with a consortium of European institutional
investors and an independent energy company owned by members of current
management. As used herein, the "Company," "Callon," "we," "us," and "our" refer
to Callon Petroleum Company and its predecessors and subsidiaries unless the
context requires otherwise.
In 1989, we began increasing our reserves through the acquisition of producing
properties that were geologically complex, had (or were analogous to fields
with) an established production history from stacked pay zones and were
candidates for exploitation. We focused on reducing operating costs and
implementing production enhancements through the application of technologically
advanced production and recompletion techniques.
Over the past eight years, we have also placed emphasis on the acquisition of
acreage with exploration and development drilling opportunities in the Gulf of
Mexico shelf and deepwater areas. At December 31, 2003 we owned working
interests in a total of 73 blocks/leases covering 157,000 net acres. We joined
with other industry partners, primarily Murphy Exploration and Production, Inc.,
to explore federal offshore blocks acquired in the Gulf of Mexico. We perform
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 data to facilitate these efforts. We continue to develop
prospects on the shelf through our 3-D seismic partnership using AVO technology.
In 1998, we began exploration in the Gulf of Mexico deepwater area (generally
900 to 5,500 feet of water). In the fourth quarter of 2003, our first two
deepwater projects, the Medusa and Habanero fields, began production. Please see
"Significant Properties" for a more detailed discussion.
We ended the year 2003 with estimated net proved reserves of 217 billion cubic
feet of natural gas equivalent ("Bcfe"). This represents a decrease of 8% from
2002 year-end estimated net proved reserves of 236 Bcfe.
The major focus of our future operations is expected to continue to be the
exploration for and development of oil and gas properties, primarily in the Gulf
of Mexico.
AVAILABILITY OF REPORTS
All of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to such reports as well as other filings we
make pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934
are available free of charge on our Internet website. The address of our
Internet website is www.callon.com. Our SEC filings are available on our website
as soon as they are posted to the EDGAR database on the SEC's website.
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BUSINESS STRATEGY
Our goal is to increase shareholder value by increasing our reserves,
production, cash flow and earnings. We seek to achieve these goals through the
following strategies:
- focus on Gulf of Mexico exploration with a balance between shelf and
deepwater areas using the latest available technology;
- aggressively explore our existing prospect inventory;
- replenish our prospect inventory with increasing emphasis on
prospect generation using AVO technology;
- achieve moderate increases in current production levels through
continued shelf exploration; and
- achieve significant increases in longer-term production levels
through development of deepwater discoveries and ongoing deepwater
exploration.
EXPLORATION AND DEVELOPMENT ACTIVITIES
Capital expenditures for exploration and development costs related to oil and
gas properties totaled approximately $50 million in 2003. We incurred
approximately $32 million in the Gulf of Mexico deepwater area primarily for
development costs at our Habanero and Medusa discoveries. Interest of
approximately $5 million and general and administrative costs allocable directly
to exploration and development projects of $8 million were capitalized in 2003.
Our Gulf of Mexico shelf area expenditures account for the remainder of the
total capital expended.
SEC INQUIRIES REGARDING RESERVE INFORMATION
Beginning in October 2002, we received a series of inquiries from the SEC
regarding our Annual Report on Form 10-K for the year ended December 31, 2001
requesting supplemental information concerning operations in the Gulf of Mexico.
The comment letters requested information about the procedures used to classify
the deepwater reserves as proved and requested that our financial statements be
restated to reflect the removal of the reserves attributable to the Boomslang
discovery as proved for all prior periods during which such reserves were
reported as proved. We have reviewed the SEC comments with our independent
petroleum reserve engineers, Huddleston & Co., Inc. of Houston, Texas. Both
Huddleston & Co. and we believe that such deepwater reserves are properly
classified as proved. We have responded to all the inquiries from the SEC.
Based on our discussions with others in the oil and gas business, we believe
that the SEC is reviewing generally the procedures used by reserve engineers to
classify oil and gas reserves as proved in the deepwater areas of the Gulf of
Mexico. In particular, the SEC appears to indicate that it is not appropriate to
classify reserves as proved without conducting a "flow test." It has not been
our practice to conduct a flow test on our deepwater properties prior to
classifying the reserves as proved. We believe, and have been advised by
Huddleston & Co., that our procedures for classifying our deepwater reserves as
proved are in accordance with SEC rules and industry practices.
RISK FACTORS
A DECREASE IN OIL AND GAS PRICES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. Our success is highly dependent on prices for oil and
gas, which are extremely volatile. Any
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substantial or extended decline in the price of oil or gas would have a material
adverse effect on us. Oil and gas markets are both seasonal and cyclical. The
prices of oil and gas depend on factors we cannot control such as weather,
economic conditions, and levels of production, actions by OPEC and other
countries and government actions. Prices of oil and gas will affect the
following aspects of our business:
- our revenues, cash flows and earnings;
- the amount of oil and gas that we are economically able to produce;
- our ability to attract capital to finance our operations and the
cost of the capital;
- the amount we are allowed to borrow under our senior secured credit
facility;
- the value of our oil and gas properties; and
- the profit or loss we incur in exploring for and developing our
reserves.
WE MAY BE REQUIRED TO RETROACTIVELY PAY ROYALTIES TO THE MINERALS MANAGEMENT
SERVICE ON ONE OF OUR PROPERTIES WHICH COULD REDUCE REVENUES AND RESERVES. Our
Medusa deepwater property is eligible for royalty suspensions pursuant to the
Deep Water Royalty Relief Act. However, the federal offshore leases covering the
property contain "price threshold" provisions for oil and gas prices. Under this
"price threshold" provision, if the average monthly New York Mercantile Exchange
(NYMEX) sales price for oil or gas during a fiscal year exceeds the price
threshold for oil or gas, respectively, then royalties on the associated
production must be paid to the Minerals Management Service (MMS) at the rate
stipulated in the lease. The price thresholds are adjusted annually by the
implicit price deflator for the GDP. The determination of whether or not
royalties are due as a result of the average NYMEX price exceeding the price
threshold is made during the first quarter of the succeeding year. Any royalty
payments due must be made shortly after this determination is made. If a royalty
payment is due for all production during a year as a result of exceeding the
price threshold, the lessee is required to make monthly royalty payments during
the succeeding fiscal year for the succeeding year's production. If at the end
of any year the average NYMEX price is below the price threshold, the lessee can
apply for a refund for any associated royalties paid during that year and the
lessee will not be required to pay royalties monthly during the succeeding year
for the succeeding year's production.
The thresholds and the average NYMEX prices are calculated by the MMS. The
average NYMEX price for 2003 was $31.08 per barrel of oil and $5.49 per MMBtu of
natural gas. For the year ended December 31, 2003 the thresholds were $32.77 per
barrel of oil and $4.10 per MMBtu of natural gas, subject to finalization of the
adjustment for the 2003 GDP implicit price deflator. As a result we will pay
royalties related to 2003 gas production for Medusa, which commenced production
in late November 2003 and will make monthly royalty payments for 2004 gas
production during 2004. Our actual liability for 2004 oil royalties, if any,
cannot be determined until after the end of 2004.
In the year succeeding the year in which any of our properties became subject to
royalties as result of the average NYMEX price exceeding the price threshold,
the portion of reserves attributable to potential future royalties would not be
included in a year-end reserve report. However, if the average NYMEX prices were
below the price thresholds in subsequent years, our reserves would be increased
to reflect reserves previously attributed to future royalties. As a result,
reported oil and gas reserves could materially increase or decrease, depending
on the relation of price thresholds versus the average NYMEX prices. The
reduction in our revenues resulting from an obligation to pay these royalties
and subsequent reduction of our proved reserves could have a material adverse
effect on our results of operations and financial condition. Our reserve report,
as of December 31, 2003, excluded gas reserves for Medusa that are subject to
MMS royalties as a result of the average 2003 NYMEX price for gas exceeding the
price threshold. Oil reserves in this reserve report were not impacted since the
2003 average NYMEX price was below the threshold.
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OUR RESERVE INFORMATION REPRESENTS ESTIMATES THAT MAY TURN OUT TO BE INCORRECT
IF THE ASSUMPTIONS UPON WHICH THESE ESTIMATES ARE BASED ARE INACCURATE. ANY
MATERIAL INACCURACIES IN THESE RESERVE ESTIMATES OR UNDERLYING ASSUMPTIONS WILL
MATERIALLY AFFECT THE QUANTITIES AND PRESENT VALUE OF OUR RESERVES. The process
of estimating oil and gas reserves is complex. It requires interpretations of
available technical data and various assumptions, including assumptions relating
to economic factors. Any significant inaccuracies in these interpretations or
assumptions could materially affect the estimated quantities and present value
of reserves shown in this annual report.
In order to prepare these estimates, we must project production rates and the
timing of development expenditures. The assumptions regarding the timing and
costs to commence production from our deepwater wells used in preparing our
reserves are often subject to revisions over time as described under "our
deepwater operations have special operational risks that may negatively affect
the value of those assets." We must also analyze available geological,
geophysical, production and engineering data, the extent, quality and
reliability of which can vary. The process also requires us to make economic
assumptions, such as oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. Therefore, estimates of
oil and gas reserves are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from our estimates. Any significant variance
could materially affect the estimated quantities and present value of reserves
shown in this report. In addition, we may adjust estimates of proved reserves to
reflect production history, results of exploration and development, prevailing
oil and gas prices and other factors, many of which are beyond our control.
You should not assume that the present value of future net cash flows from our
proved reserves referred to in this report is the current market value of our
estimated oil and gas reserves. In accordance with SEC requirements, we
generally base the estimated discounted future net cash flows from our proved
reserves on prices and costs on the date of the estimate. Actual future prices
and costs may differ materially from those used in the present value estimate.
Information about reserves constitutes forward-looking information. See
"Forward-Looking Statements" for information regarding forward-looking
information. The discounted present value of our oil and gas reserves is
prepared in accordance with guidelines established by the SEC. A purchaser of
reserves would use numerous other factors to value our reserves. The discounted
present value of reserves, therefore, does not represent the fair market value
of those reserves.
On December 31, 2003, approximately 53% of the discounted present value of our
estimated net proved reserves were proved undeveloped. Proved undeveloped oil
volumes represented 58% of total proved oil reserves. Substantially all of these
proved undeveloped reserves were attributable to our deepwater properties.
Development of these properties is subject to additional risks as described
above.
THE SEC MAY REQUIRE US TO BOOK RESERVES AS PROVED IN A MANNER THAT DIFFERS FROM
OUR HISTORICAL PRACTICES AND CURRENT INDUSTRY STANDARDS, AND WHICH MAY RESULT IN
A SIGNIFICANT DOWNWARD REVISION OF OUR PROVED RESERVES. As discussed above,
beginning in October 2002 we received a series of inquiries from the SEC
regarding our Annual Report on Form 10-K for the year ended December 31, 2001
requesting supplemental information concerning our operations in the Gulf of
Mexico. The comment
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letters requested information about the procedures we used to classify our
deepwater reserves as proved and requested that our financials be restated to
reflect the removal of the Boomslang reserves as proved for all prior periods
during which such reserves were reported as proved. We have reviewed the SEC
comments with our independent petroleum reserve engineers, Huddleston & Co.,
Inc. of Houston, Texas. Both Huddleston & Co. and we believe that such reserves
were properly classified as proved. However, if the SEC decides to question our
other deepwater properties and these reserves are ultimately required to be
reclassified as not proved, our proved reserves will be materially reduced. If
the SEC requires us to retroactively classify Boomslang as an unproved property
through December 2002, we would be required to restate our financial position,
results of operations, and supplemental oil and gas reserve data from 1998
through 2002. A material reduction in our proved reserves could have a material
adverse effect on our financial condition and results of operations. We have
responded to all the inquiries from the SEC.
UNLESS WE ARE ABLE TO REPLACE RESERVES WHICH WE HAVE PRODUCED, OUR CASH FLOWS
AND PRODUCTION WILL DECREASE OVER TIME. Our future success depends upon our
ability to find, develop and acquire oil and gas reserves that are economically
recoverable. As is generally the case for Gulf properties, our producing
properties usually have high initial production rates, followed by a steep
decline in production. As a result, we must continually locate and develop or
acquire new oil and gas reserves to replace those being depleted by production.
We must do this even during periods of low oil and gas prices when it is
difficult to raise the capital necessary to finance these activities and during
periods of high operating costs when it is expensive to contract for drilling
rigs and other equipment and personnel necessary to explore for oil and gas.
Without successful exploration or acquisition activities, our reserves,
production and revenues will decline rapidly. We cannot assure you that we will
be able to find and develop or acquire additional reserves at an acceptable
cost.
A SIGNIFICANT PART OF THE VALUE OF OUR PRODUCTION AND RESERVES IS CONCENTRATED
IN A SMALL NUMBER OF OFFSHORE PROPERTIES, AND ANY PRODUCTION PROBLEMS OR
INACCURACIES IN RESERVE ESTIMATES RELATED TO THOSE PROPERTIES WOULD ADVERSELY
IMPACT OUR BUSINESS. During 2003, 64% of our daily production came from two of
our properties in the Gulf of Mexico. Moreover, one property accounted for 51%
of our production during this period. In addition, at December 31, 2003, most of
our proved reserves were located in four fields in the Gulf of Mexico, with
approximately 94% of our total net proved reserves attributable to these
properties. If mechanical problems, storms or other events curtailed a
substantial portion of this production or if the actual reserves associated with
any one of these producing properties are less than our estimated reserves, our
results of operations and financial condition could be adversely affected.
OUR FOCUS ON EXPLORATION PROJECTS INCREASES THE RISKS INHERENT IN OUR OIL AND
GAS ACTIVITIES. Our business strategy focuses on replacing reserves through
exploration, where the risks are greater than in acquisitions and development
drilling. Although we have been successful in exploration in the past, we cannot
assure you that we will continue to increase reserves through exploration or at
an acceptable cost. Additionally, we are often uncertain as to the future costs
and timing of drilling, completing and producing wells. Our drilling operations
may be curtailed, delayed or canceled as a result of a variety of factors,
including:
- unexpected drilling conditions;
- pressure or inequalities in formations;
- equipment failures or accidents;
- adverse weather conditions;
- compliance with governmental requirements; and
- shortages or delays in the availability of drilling rigs and the
delivery of equipment.
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WE DO NOT OPERATE ALL OF OUR PROPERTIES AND HAVE LIMITED INFLUENCE OVER THE
OPERATIONS OF SOME OF THESE PROPERTIES, PARTICULARLY OUR DEEPWATER PROPERTIES.
Our lack of control could result in the following:
- the operator may initiate exploration or development on a faster or
slower pace than we prefer;
- the operator may propose to drill more wells or build more
facilities on a project than we have funds for or that we deem
appropriate, which may mean that we are unable to participate in the
project or share in the revenues generated by the project even
though we paid our share of exploration costs; and
- if an operator refuses to initiate a project, we may be unable to
pursue the project.
Any of these events could materially reduce the value of our properties.
OUR DEEPWATER OPERATIONS HAVE SPECIAL OPERATIONAL RISKS THAT MAY NEGATIVELY
AFFECT THE VALUE OF THOSE ASSETS. Drilling operations in the deepwater area are
by their nature more difficult and costly than drilling operations in shallow
water. Deepwater drilling operations require the application of more advanced
drilling technologies involving a higher risk of technological failure and
usually have significantly higher drilling costs than shallow water drilling
operations. Deepwater wells are completed using sub-sea completion techniques
that require substantial time and the use of advanced remote installation
equipment. These operations involve a high risk of mechanical difficulties and
equipment failures that could result in significant cost overruns.
In deepwater, the time required to commence production following a discovery is
much longer than in shallow water and on-shore. Our deepwater discoveries and
prospects will require the construction of expensive production facilities and
pipelines prior to the beginning of production. We cannot estimate the costs and
timing of the construction of these facilities with certainty, and the accuracy
of our estimates will be affected by a number of factors beyond our control,
including the following:
- decisions made by the operators of our deepwater wells;
- the availability of materials necessary to construct the facilities;
- the proximity of our discoveries to pipelines; and
- the price of oil and natural gas.
Delays and cost overruns in the commencement of production will affect the value
of our deepwater prospects and the discounted present value of reserves
attributable to those prospects.
COMPETITIVE INDUSTRY CONDITIONS MAY NEGATIVELY AFFECT OUR ABILITY TO CONDUCT
OPERATIONS. We operate in the highly competitive areas of oil and gas
exploration, development and production. We compete for the purchase of leases
in the Gulf of Mexico from the U. S. government and from other oil and gas
companies. These leases include exploration prospects as well as properties with
proved reserves. Factors that affect our ability to compete in the marketplace
include:
- our access to the capital necessary to drill wells and acquire
properties;
- our ability to acquire and analyze seismic, geological and other
information relating to a property;
- our ability to retain the personnel necessary to properly evaluate
seismic and other information relating to a property;
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- the location of, and our ability to access, platforms, pipelines and
other facilities used to produce and transport oil and gas
production;
- the standards we establish for the minimum projected return on an
investment of our capital; and
- the availability of alternate fuel sources.
Our competitors include major integrated oil companies, substantial independent
energy companies, and affiliates of major interstate and intrastate pipelines
and national and local gas gatherers, many of which possess greater financial,
technological and other resources than we do.
OUR COMPETITORS MAY USE SUPERIOR TECHNOLOGY, WHICH WE MAY BE UNABLE TO AFFORD OR
WHICH WOULD REQUIRE COSTLY INVESTMENT BY US IN ORDER TO COMPETE. Our industry is
subject to rapid and significant advancements in technology, including the
introduction of new products and services using new technologies. As our
competitors use or develop new technologies, we may be placed at a competitive
disadvantage, and competitive pressures may force us to implement new
technologies at a substantial cost. In addition, our competitors may have
greater financial, technical and personnel resources that allow them to enjoy
technological advantages and may in the future allow them to implement new
technologies before we can. We cannot be certain that we will be able to
implement technologies on a timely basis or at a cost that is acceptable to us.
One or more of the technologies that we currently use or that we may implement
in the future may become obsolete, and we may be adversely affected. For
example, marine seismic acquisition technology has been characterized by rapid
technological advancements in recent years, and further significant
technological developments could substantially impair our 3-D seismic data's
value.
WE MAY NOT BE ABLE TO REPLACE OUR RESERVES OR GENERATE CASH FLOWS IF WE ARE
UNABLE TO RAISE CAPITAL. WE WILL BE REQUIRED TO MAKE SUBSTANTIAL CAPITAL
EXPENDITURES TO DEVELOP OUR EXISTING RESERVES, AND TO DISCOVER NEW OIL AND GAS
RESERVES. Historically, we have financed these expenditures primarily with cash
from operations, proceeds from bank borrowings and proceeds from the sale of
debt and equity securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for a discussion of our capital budget. We cannot assure you that we
will be able to raise capital in the future. We also make offers to acquire oil
and gas properties in the ordinary course of our business. If these offers are
accepted, our capital needs may increase substantially.
We expect to continue using our senior secured credit facility to borrow funds
to supplement our available cash. The amount we may borrow under our senior
secured credit facility may not exceed a borrowing base determined by the
lenders under such facility based on their projections of our future production,
future production costs, taxes, commodity prices and any other factors deemed
relevant by our lenders. We cannot control the assumptions the lenders use to
calculate our borrowing base. The lenders may, without our consent, adjust the
borrowing base semiannually or in situations where we purchase or sell assets or
issue debt securities. If our borrowings under the senior secured credit
facility exceed the borrowing base, the lenders may require that we repay the
excess. If this were to occur, we might have to sell assets or seek financing
from other sources. Sales of assets could further reduce the amount of our
borrowing base. We cannot assure you that we would be successful in selling
assets or arranging substitute financing. If we were not able to repay
borrowings under our senior secured credit facility to reduce the outstanding
amount to less than the borrowing base, we would be in default under our senior
secured credit facility. For a description of our senior secured credit facility
and its principal terms and conditions, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources."
OUR DECISION TO DRILL A PROSPECT IS SUBJECT TO A NUMBER OF FACTORS AND WE MAY
DECIDE TO ALTER OUR DRILLING SCHEDULE OR NOT DRILL AT ALL. We describe our
current prospects and our plans to explore these
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prospects in this annual report. A prospect is a property on which we have
identified what our geoscientists believe, based on available seismic and
geological information, to be indications of hydrocarbons. Our prospects are in
various stages of evaluation, ranging from a prospect which is ready to drill to
a prospect which will require substantial additional seismic data processing and
interpretation. Whether we ultimately drill a prospect may depend on the
following factors:
- receipt of additional seismic data or the reprocessing of existing
data;
- material changes in oil or gas prices;
- the costs and availability of drilling rigs;
- the success or failure of wells drilled in similar formations or
which would use the same production facilities;
- availability and cost of capital;
- changes in the estimates of the costs to drill or complete wells;
- our ability to attract other industry partners to acquire a portion
of the working interest to reduce exposure to costs and drilling
risks; and
- decisions of our joint working interest owners.
We will continue to gather data about our prospects and it is possible that
additional information may cause us to alter our drilling schedule or determine
that a prospect should not be pursued at all. You should understand that our
plans regarding our prospects are subject to change.
WEATHER, UNEXPECTED SUBSURFACE CONDITIONS, AND OTHER UNFORESEEN OPERATING
HAZARDS MAY ADVERSELY IMPACT OUR ABILITY TO CONDUCT BUSINESS. There are many
operating hazards in exploring for and producing oil and gas, including:
- our drilling operations may encounter unexpected formations or
pressures, which could cause damage to equipment or personal injury;
- we may experience equipment failures which curtail or stop
production; and
- we could experience blowouts or other damages to the productive
formations that may require a well to be re-drilled or other
corrective action to be taken.
In addition, any of the foregoing may result in environmental damages for which
we will be liable. Moreover, a substantial portion of our operations are
offshore and are subject to a variety of risks peculiar to the marine
environment such as capsizing, collisions, hurricanes and other adverse weather
conditions. These conditions can cause substantial damage to facilities and
interrupt production. Offshore operations are also subject to more extensive
governmental regulation.
We cannot assure you that we will be able to maintain adequate insurance at
rates we consider reasonable to cover our possible losses from operating
hazards. The occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect our financial condition and
results of operations.
WE MAY NOT HAVE PRODUCTION TO OFFSET HEDGES; BY HEDGING, WE MAY NOT BENEFIT FROM
PRICE INCREASES. Part of our business strategy is to reduce our exposure to the
volatility of oil and gas prices by hedging a portion of our production. In a
typical hedge transaction, we will have the right to receive from the other
parties to the hedge the excess of the fixed price specified in the hedge over a
floating price based on a market index, multiplied by the quantity hedged. If
the floating price exceeds the fixed price, we are required to pay the other
parties this difference multiplied by the quantity hedged. We are required to
pay the difference between the floating price and the fixed price when the
floating price exceeds the fixed
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price regardless of whether we have sufficient production to cover the
quantities specified in the hedge. Significant reductions in production at times
when the floating price exceeds the fixed price could require us to make
payments under the hedge agreements even though such payments are not offset by
sales of production. Hedging will also prevent us from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge. We also enter into price "collars" to reduce the risk of changes in
oil and gas prices. Under a collar, no payments are due by either party so long
as the market price is above a floor set in the collar and below a ceiling. If
the price falls below the floor, the counter-party to the collar pays the
difference to us and if the price is above the ceiling, we pay the counter-party
the difference. See "Quantitative and Qualitative Disclosures About Market
Risks" for a discussion of our hedging practices.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS COULD BE COSTLY
AND COULD NEGATIVELY IMPACT PRODUCTION. Our operations are subject to numerous
laws and regulations governing the operation and maintenance of our facilities
and the discharge of materials into the environment or otherwise relating to
environmental protection. For a discussion of the material regulations
applicable to us, see "Federal Regulations," "State Regulations," and
"Environmental Regulations." These laws and regulations may:
- require that we acquire permits before commencing drilling;
- restrict the substances that can be released into the environment in
connection with drilling and production activities;
- limit or prohibit drilling activities on protected areas such as
wetlands or wilderness areas; and
- require remedial measures to mitigate pollution from former
operations, such as dismantling abandoned production facilities.
Under these laws and regulations, we could be liable for personal injury and
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. We maintain limited insurance
coverage for sudden and accidental environmental damages. We do not believe that
insurance coverage for environmental damages that occur over time is available
at a reasonable cost. Also, we do not believe that insurance coverage for the
full potential liability that could be caused by sudden and accidental
environmental damages is available at a reasonable cost. Accordingly, we may be
subject to liability or we may be required to cease production from properties
in the event of environmental damages.
FACTORS BEYOND OUR CONTROL AFFECT OUR ABILITY TO MARKET PRODUCTION AND OUR
FINANCIAL RESULTS. The ability to market oil and gas from our wells depends upon
numerous factors beyond our control. These factors include:
- the extent of domestic production and imports of oil and gas;
- the proximity of the gas production to gas pipelines;
- the availability of pipeline capacity;
- the demand for oil and gas by utilities and other end users;
- the availability of alternative fuel sources;
- the effects of inclement weather;
- state and federal regulation of oil and gas marketing; and
- federal regulation of gas sold or transported in interstate
commerce.
10
Because of these factors, we may be unable to market all of the oil or gas we
produce. In addition, we may be unable to obtain favorable prices for the oil
and gas we produce.
IF OIL AND GAS PRICES DECREASE, WE MAY BE REQUIRED TO TAKE WRITEDOWNS OF THE
CARRYING VALUE OF OUR OIL AND GAS PROPERTIES. We may be required to writedown
the carrying value of our oil and gas properties when oil and gas prices are low
or if we have substantial downward adjustments to our estimated net proved
reserves, increases in our estimates of development costs or deterioration in
our exploration results. Under the full cost method which we use to account for
our oil and gas properties, the net capitalized costs of our oil and gas
properties may not exceed the present value, discounted at 10%, of future net
cash flows from estimated net proved reserves, using period end oil and gas
prices or prices as of the date of our auditor's report, plus the lower of cost
or fair market value of our unproved properties. If net capitalized costs of our
oil and gas properties exceed this limit, we must charge the amount of the
excess to earnings. This type of charge will not affect our cash flows, but will
reduce the book value of our stockholders' equity. We review the carrying value
of our properties quarterly, based on prices in effect as of the end of each
quarter or at the time of reporting our results. Once incurred, a writedown of
oil and gas properties is not reversible at a later date, even if prices
increase.
FORWARD-LOOKING STATEMENTS
In this report, we have made many forward-looking statements. We cannot assure
you that the plans, intentions or expectations upon which our forward-looking
statements are based will occur. Our forward-looking statements are subject to
risks, uncertainties and assumptions, including those discussed elsewhere in
this report. Forward-looking statements include statements regarding:
- our oil and gas reserve quantities, and the discounted present value
of these reserves;
- the amount and nature of our capital expenditures;
- drilling of wells;
- the timing and amount of future production and operating costs;
- business strategies and plans of management; and
- prospect development and property acquisitions.
Some of the risks, which could affect our future results and could cause results
to differ materially from those expressed in our forward-looking statements
include:
- general economic conditions;
- the volatility of oil and natural gas prices;
- the uncertainty of estimates of oil and natural gas reserves;
- the impact of competition;
- the availability and cost of seismic, drilling and other equipment;
- operating hazards inherent in the exploration for and production of
oil and natural gas;
- difficulties encountered during the exploration for and production
of oil and natural gas;
- difficulties encountered in delivering oil and natural gas to
commercial markets;
- changes in customer demand and producers' supply;
- the uncertainty of our ability to attract capital;
- compliance with, or the effect of changes in, the extensive
governmental regulations regarding the oil and natural gas business;
- actions of operators of our oil and gas properties; and
- weather conditions.
11
The information contained in this report, including the information set forth
under the heading "Risk Factors," identifies additional factors that could
affect our operating results and performance. We urge you to carefully consider
these factors and the other cautionary statements in this report. Our
forward-looking statements speak only as of the date made, and we have no
obligation to update these forward-looking statements.
CORPORATE OFFICES
Our headquarters are located in Natchez, Mississippi, in approximately 51,500
square feet of owned space, with a field office in Houston, Texas. We also
maintain owned or leased field offices in the area of the major fields in which
we operate properties or have a significant interest. Replacement of any of our
leased offices would not result in material expenditures by us as alternative
locations to our leased space are anticipated to be readily available.
EMPLOYEES
We had 94 employees as of December 31, 2003, none of whom are currently
represented by a union. We believe that we have good relations with our
employees. We employ eight petroleum engineers and seven petroleum
geoscientists.
FEDERAL REGULATIONS
SALES OF NATURAL GAS. Effective January 1, 1993, the Natural Gas Wellhead
Decontrol Act deregulated prices for all "first sales" of natural gas. Thus, all
sales of gas by us may be made at market prices, subject to applicable contract
provisions.
TRANSPORTATION OF NATURAL GAS. The rates, terms and conditions applicable to the
interstate transportation of natural 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 make natural gas transportation
more accessible to gas buyers and sellers on an open-access, non-discriminatory
basis.
In February, 2000, the FERC issued Order No. 637, a final rule designed to
continue the restructuring of the gas industry initiated by an earlier final
rule, Order No. 636, that instituted "open access" transportation. Order No. 637
further revised the FERC's policies governing interstate pipeline transportation
rates and penalties and further refined the regulatory framework governing
transportation terms and conditions to improve open access transportation. The
rule has been implemented on a pipeline-by-pipeline basis in individual
compliance proceedings, many of which have been settled or have otherwise been
terminated. A few proceedings, however, are still pending final resolution.
In Order No. 644 issued November 13, 2003, the FERC imposed new standards of
conduct, inter alia, for "all sellers for resale" marketing gas under blanket
market certificates. The standards include a requirement of accurate reporting,
if any, of the price of arm's-length deals to price index publishers and a
requirement to notify the FERC as to whether the marketer reports transactions
to price index publishers. In Order No. 2004, issued on November 25, 2003, the
FERC issued standards of conduct covering regulated interstate pipelines and
public utilities ("Transmission Providers") to govern the relationships between
regulated Transmission Providers and all of their energy affiliates. Among other
things, these measures are intended to
12
increase confidence and transparency in the gas market in the wake of recent
events involving anticompetitive behavior and market abuse.
On February 12, 2004, the FERC issued a notice of proposed rulemaking in Docket
No. RM04-4 designed to standardize the procedures for determining the
creditworthiness of shippers on interstate pipelines and to adopt certain
standards published by the North American Energy Standards Board with respect to
shipper creditworthiness. The standards are intended to facilitate and increase
transparency in the creditworthiness evaluation process.
The FERC is presently reviewing in Docket No. PL04-3 whether it should adopt
standards for "interchangeability" of natural gas, that is, whether it should
standardize the composition and quality of natural gas transported through the
delivery system, including interstate pipelines. Although the standards, if any,
are likely to be voluntary, at the present time the approach that the FERC will
take and the potential impact on gas supply are not clear.
With respect to the transportation of natural gas on or across the Outer
Continental Shelf ("OCS"), the FERC requires, as part of its regulation under
the Outer Continental Shelf Lands Act ("OCSLA"), that all pipelines provide open
and non-discriminatory access to both owner and non-owner shippers. Although to
date the FERC has imposed light-handed regulation on off-shore facilities that
meet its traditional test of gathering status, it has the authority to exercise
jurisdiction under the OCSLA over gathering facilities, if necessary, to permit
non-discriminatory access to service. In an effort to heighten its oversight of
the OCS, the FERC recently attempted to promulgate reporting requirements for
all OCS "service providers," including gatherers, but the regulations were
struck down as ultra vires by a federal district court in October, 2003. In
addition, the FERC recently reasserted NGA jurisdiction over certain offshore
gathering facilities over which it had previously disclaimed jurisdiction where
it determined that the FERC's open access regulatory regime was being frustrated
by an interstate pipeline in concert with an affiliated gathering company. For
those facilities transporting natural gas across the OCS that are not considered
to be gathering facilities, the rates, terms, and conditions applicable to this
transportation are regulated by the FERC under the NGA and NGPA, as well as the
OCSLA.
SALES AND TRANSPORTATION OF CRUDE OIL. Sales of crude oil and condensate can be
made by us at market prices not subject at this time to price controls. The
price that we receive from the sale of these products will be affected by the
cost of transporting the products to market. The rates, terms, and conditions
applicable to the interstate transportation of oil and related products by
pipelines are regulated by the FERC under the Interstate Commerce Act. Pursuant
to the Energy Policy Act of 1992, which "grandfathered" certain existing rates,
the FERC presently regulates oil pipeline rates under a light-handed,
streamlined regulatory regime where rates are adjusted annually using an index
ceiling based upon the producer price index. The FERC recently modified the
formula for calculating the index such that the index ceilings are now set
slightly higher than in their original iteration. As an exception to indexing,
the FERC will also, under defined circumstances, permit alternative ratemaking
methodologies for interstate oil pipelines such as the use of cost of service
rates, settlement rates, and market-based rates. Market-based rates will be
permitted to the extent the pipeline can demonstrate that it lacks significant
market power in the market in which it proposes to charge market-based rates.
The cumulative effect that these rules have had on moving our production to
market have not been material.
With respect to the transportation of oil and condensate on or across the OCS,
the FERC requires, as part of its regulation under the OCSLA, that all pipelines
provide open and non-discriminatory access to both owner and non-owner shippers.
Accordingly, the FERC has the authority to exercise jurisdiction under the
OCSLA, if necessary, to permit non-discriminatory access to service.
13
LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the area of
natural gas regulation. There are legislative proposals pending in Congress and
in various state legislatures which, if enacted, could significantly affect the
petroleum industry. At the present time it is difficult 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 our
operations.
FEDERAL, STATE OR INDIAN LEASES. In the event we conduct operations on federal,
state or Indian oil and gas leases, such operations must comply with numerous
regulatory restrictions, including various nondiscrimination statutes, royalty
and related valuation requirements, and certain of such operations must be
conducted pursuant to on-site security regulations and other appropriate permits
issued by the Bureau of Land Management ("BLM") or 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. Under
certain circumstances, the MMS may require our operations on federal leases to
be suspended or terminated. Any such suspension or termination could materially
and adversely affect our financial condition and operations. On March 15, 2000,
the MMS issued a final rule effective June 1, 2000 which amends its regulations
governing the calculation of royalties and the valuation of crude oil produced
from federal leases. Among other matters, this rule amends the valuation
procedure for the sale of federal royalty oil by eliminating posted prices as a
measure of value and relying instead on arm's length sales prices and spot
market prices as market value indicators. Because we sell our production in the
spot market and therefore pay royalties on production from federal leases, it is
not anticipated that this final rule will have any substantial impact on us.
The Mineral Leasing Act of 1920 ("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. We own interests in numerous
federal onshore oil and gas leases. It is possible that some of our stockholders
may be 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 natural gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. The rate of production may be regulated and the maximum daily
production allowable from both oil and gas wells may be established on a market
demand or conservation basis or both.
We may enter into agreements relating to the construction or operation of a
pipeline system for the transportation of natural 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
14
rates which we could charge for gas, the transportation of gas, and the costs of
construction and operation of such pipeline would be impacted by the rules and
regulations governing such matters, if any, of such administrative authority.
Further, such a pipeline system would be subject to various state and/or federal
pipeline safety regulations and requirements, including those of, among others,
the Department of Transportation. Such regulations can increase the cost of
planning, designing, installing and operating such facilities. The impact of
such pipeline safety regulations would not be any more adverse to us than it
would be to other similar owners or operators of such pipeline facilities.
ENVIRONMENTAL REGULATIONS
GENERAL. Our activities are subject to federal, state and local laws and
regulations governing environmental quality and pollution control. Although no
assurances can be made, we believe that, absent the occurrence of an
extraordinary event, 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 effect upon our capital expenditures, earnings or competitive position
with respect to our existing assets and operations. We cannot predict what
effect future regulation or legislation, enforcement policies, and claims for
damages to property, employees, other persons and the environment resulting from
our operations could have on our activities.
Our activities with respect to natural gas facilities, including the operation
and construction of pipelines, plants and other facilities for transporting,
processing, treating or storing natural gas and other products, are subject to
stringent environmental regulation by state and federal authorities including
the United States Environmental Protection Agency ("EPA"). Such regulation can
increase the cost of planning, designing, installing and operating such
facilities. In most instances, the regulatory requirements relate to water and
air pollution control measures. Although we believe that compliance with
environmental regulations will not have a material adverse effect on us, risks
of substantial costs and liabilities are inherent in oil and gas production
operations, and there can be no assurance that significant costs and liabilities
will not be incurred. Moreover, it is possible that other developments, such as
stricter environmental laws and regulations, and claims for damages to property
or persons resulting from oil and gas production, would result in substantial
costs and liabilities to us.
SOLID AND HAZARDOUS WASTE. We currently own or lease, and in the past owned or
leased, properties that have been used for the exploration and production of oil
and gas for many years. Although we have utilized operating and 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 us or on or under locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties. We have no control over such entities' 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 new laws, we
could be required to remediate property, including groundwater, containing or
impacted by 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 or mitigate existing contamination.
We generate wastes, including hazardous wastes that are subject to the federal
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes.
The EPA and various state agencies have limited the disposal options for certain
wastes, including wastes designated as hazardous under the RCRA and similar
state statutes ("Hazardous Wastes"). Furthermore, it is possible that certain
wastes generated by our oil and gas operations that are (currently exempt from
treatment as) Hazardous Wastes may in the future be
15
designated as Hazardous Wastes under RCRA or other applicable statutes and,
therefore, may be subject to more rigorous and costly disposal requirements.
SUPERFUND. The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, generally imposes
joint and several liability for costs of investigation and remediation and for
natural resource damages, without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release into
the environment of substances designated under CERCLA as hazardous substances
("Hazardous Substances"). These classes of persons, or so-called potentially
responsible parties ("PRPs"), include the current and certain past owners and
operators of a facility where there has been a release or threat of release of a
Hazardous Substance and persons who disposed of or arranged for the disposal of
Hazardous Substances found at a 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 PRPs the costs of such
action. Although CERCLA generally exempts "petroleum" from the definition of
Hazardous Substance, in the course of its operations, we have generated and will
generate wastes that may fall within CERCLA's definition of Hazardous Substance.
We may also be the owner or operator of sites on which Hazardous Substances have
been released. To our knowledge, neither we nor our predecessors have been
designated as a PRP by the EPA under CERCLA. We also do not know of any prior
owners or operators of our properties that are named as PRPs related to their
ownership or operation of such properties.
CLEAN WATER ACT. The Clean Water Act ("CWA") imposes restrictions and strict
controls regarding the discharge of wastes including produced waters and other
oil and natural gas wastes, into waters of the United States, a term broadly
defined. These controls have become more stringent over the years, and it is
probable that additional restrictions will be imposed in the future. Permits
must be obtained to discharge pollutants into federal waters. The CWA provides
for civil, criminal and administrative penalties for unauthorized discharges of
oil and hazardous substances and of other pollutants. It imposes substantial
potential liability for the costs of removal or remediation associated with
discharges of oil or hazardous substances and other pollutants. State laws
governing discharges to water also provide varying civil, criminal and
administrative penalties and impose liabilities in the case of a discharge of
petroleum or its derivatives, or other hazardous substances, into state waters.
In addition, the EPA has promulgated regulations that may require us to obtain
permits to discharge storm water runoff, including discharges associated with
construction activities. In the event of an unauthorized discharge of wastes, we
may be liable for penalties and costs.
OIL POLLUTION ACT. The Oil Pollution Act of 1990 ("OPA"), which amends and
augments oil spill provisions of the CWA, imposes certain duties and liabilities
on certain "responsible parties" related to the prevention of oil spills and
damages resulting from such spills in or threatening United States waters or
adjoining shorelines. A liable "responsible party" includes the owner or
operator of a facility, vessel or pipeline that is a source of an oil discharge
or that poses the substantial threat of discharge, or the lessee or permittee of
the area in which a discharging facility is located. The OPA assigns joint and
several liability, without regard to fault, to each liable party for oil removal
costs and a variety of public and private damages. Although defenses and
limitations exist to the liability imposed by OPA, they are limited. In the
event of an oil discharge or substantial threat of discharge, we may be liable
for costs and damages.
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 and $35 million in federal
OCS waters, with higher amounts, up to $150 million based
16
upon worst case oil-spill discharge volume calculations. We believe that we have
established adequate proof of financial responsibility for our offshore
facilities.
AIR EMISSIONS. Our operations are subject to local, state and federal
regulations for the control of emissions from sources of air pollution. Federal
and state laws require new and modified sources of air pollutants to obtain
permits prior to commencing construction. Major sources of air pollutants are
subject to more stringent, federally imposed requirements including additional
permits. Federal and state laws designed to control hazardous (toxic) air
pollutants, might require installation of additional controls. Administrative
enforcement actions for failure to comply strictly with air pollution
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could bring lawsuits for civil penalties or require us to forego construction,
modification or operation of certain air emission sources.
COASTAL COORDINATION. There are various federal and state programs that regulate
the conservation and development of coastal resources. The federal Coastal Zone
Management Act ("CZMA") was passed in 1972 to preserve and, where possible,
restore the natural resources of the Nation's coastal zone. The CZMA provides
for federal grants for state management programs that regulate land use, water
use and coastal development.
Various states, such as Alabama, Louisiana and Texas, also have coastal
management programs, which provide for, among other things, the coordination
among local and state authorities to protect coastal resources through
regulating land use, water, and coastal development. Coastal management programs
also may provide for the review of state and federal agency rules and agency
actions for consistency with the goals and policies of the state coastal
management plan. This review may impact agency permitting and review activities
and add an additional layer of review to certain activities undertaken by us.
OSHA AND OTHER REGULATIONS. We are 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 us to organize
and/or disclose information about hazardous materials used or produced in its
operations.
Our management believes that we are in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements would not have a material adverse impact on us.
PROPERTY SUMMARY
We are engaged in the exploration, development, acquisition and production of
oil and gas properties and provide oil and gas property management services for
other investors. Our properties are concentrated offshore in the Gulf of Mexico
and onshore, primarily, in Louisiana and Alabama. We have historically grown our
reserves and production by focusing primarily on low to moderate risk
exploration and acquisition opportunities in the Gulf of Mexico shelf area. Over
the last several years, we have expanded our area of exploration to include the
Gulf of Mexico deepwater area. As of December 31, 2003, our estimated net proved
reserves totaled 23.7 million barrels of oil ("MBbl") and 74.7 billion cubic
feet of natural gas ("Bcf"), with a pre-tax present value, discounted at 10%, of
the estimated future net revenues based on constant prices in effect at year-end
("Discounted Cash Flow") of $570.5 million. Gas constitutes approximately 34% of
our total estimated proved reserves and approximately 42% of our total estimated
proved reserves are proved developed reserves.
17
Our Medusa (Mississippi Canyon Blocks 538/582) and Habanero (Garden Banks Block
341) discoveries began production in the fourth quarter of 2003. These two
deepwater discoveries are expected to increase our projected 2004 production by
approximately 85% from 2003 levels. A detail discussion of each of these
properties is provided in the "Significant Properties" section of this report.
SIGNIFICANT PROPERTIES
The following table shows discounted cash flows and estimated net proved oil and
gas reserves by major field, within the focus area, for our seven largest fields
and for all other properties combined at December 31, 2003.
ESTIMATED NET PROVED RESERVES PRE-TAX
------------------------------ DISCOUNTED
OIL GAS TOTAL PRESENT VALUE
OPERATOR (MBBLS) (MMCF) (MMCFE) ($000)
-------- -------- -------- -------- -------------
(A)(B)
GULF OF MEXICO DEEPWATER:
Mississippi Canyon Blocks 538/582
"Medusa" Murphy 10,312 6,173 68,043 $160,297
Garden Banks Block 341
"Habanero" Shell 4,687 11,207 39,328 124,876
Garden Banks Blocks 738/782/826/827
"Entrada" BP Amoco 7,772 29,126 75,760 185,608
GULF OF MEXICO SHELF:
Mobile Blocks 863/864/907/908 Callon -- 4,873 4,873 15,641
Mobile Blocks 952/953/955 Callon -- 15,229 15,229 60,487
Ship Shoal Blocks 28/35 Callon 6 701 739 3,115
ONSHORE AND OTHER:
Big Escambia Creek Exxon 422 1,188 3,718 6,116
Other Various 510 6,194 9,253 14,323
-------- -------- -------- --------
TOTAL NET PROVED RESERVES 23,709 74,691 216,943 $570,463
======== ======== ======== ========
(a) Represents the present value of future net cash flows before deduction of
federal income taxes, discounted at 10%, attributable to estimated net
proved reserves as of December 31, 2003, as set forth in the Company's
reserve reports prepared by its independent petroleum reserve engineers,
Huddleston & Co., Inc. of Houston, Texas.
(b) Includes a reduction for estimated plugging and abandonment costs that is
reflected as a liability on our balance sheet at December 31, 2003, in
accordance with Statement of Financial Accounting Standards No. 143.
18
GULF OF MEXICO DEEPWATER
Medusa, Mississippi Canyon Blocks 538/582
Our Medusa deepwater discovery was announced in September 1999, when we drilled
the initial test well in 2,235 feet of water to a total depth of 16,241 feet and
encountered over 120 feet of pay in two intervals. Subsequent sidetrack drilling
from the wellbore was used to determine the extent of the discovery and a second
successful well was drilled in the first quarter of 2000 to further delineate
the extent of the pay intervals. We own a 15% working interest, Murphy, the
operator, owns a 60% working interest and Agip Ventures, formerly British-Borneo
Petroleum, Inc., owns the remaining 25% working interest.
In 2001 a drilling program began which included four development wells and one
sidetrack. The program included production casing being set on six wells to
provide initial production take-points. The program was completed in the first
half of 2002. Also in 2001, the operator submitted an Authorization for
Expenditure for a floating production system, spar, at Medusa and awarded the
contract to J. Ray McDermott, Inc. The spar hull was barged to Mississippi
Canyon Block 582 during the first quarter of 2003, uprighted, moored and placed
in position to receive the production deck. The topside deck and production
facilities were delivered and lifted into place atop the spar hull during the
second quarter of 2003. The A-1 well, the first of six, was completed and tied
into the spar and commenced production in late November 2003. The A-2 well
commenced production in January 2004 and during February 2004 the field produced
approximately 19,000 barrels of oil and 18 million cubic feet of gas per day.
Initial production from the A-3 well is expected during March 2004 and will be
followed by initial production from the A-6 and A-4 wells in the second quarter
of 2004 with production from the A-5 well expected early in the 3rd quarter of
2004. Peak production from the field is expected to reach approximately 40,000
barrels of crude oil and 35 million cubic feet of natural gas per day.
In December 2003, we transferred our undivided 15% working interest in the spar
production facilities to Medusa Spar LLC in exchange for cash proceeds of
approximately $25 million and a 10% ownership interest in the LLC. A detailed
discussion of this transaction is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations-"Off-Balance Sheet
Arrangements".
Habanero, Garden Banks Block 341
During February 1999 the initial test well on our Habanero deepwater discovery
encountered over 200 feet of net pay in two zones. Located in 2,000 feet of
water, the well was drilled to a measured depth of 21,158 feet. We own an 11.25%
working interest in the well. The well is operated by Shell Deepwater
Development Inc., which owns a 55% working interest, with the remaining working
interest being owned by Murphy.
A field delineation program began in mid-year 2001, which included three
sidetracks of the discovery well. Production casing was set on this well through
one of the sidetracks to the Habanero 52 oil and gas sand and the Habanero 55
gas sand. Initial production will be from the Habanero 55 gas sand and future
recompletions are scheduled up-hole to the Habanero 52 oil and gas sand. Also, a
development well was drilled in the summer of 2003 which provides a take-point
for production from the Habanero 52 oil sand.
19
By means of a sub-sea completion and tie back to an existing production facility
in the area operated by Shell, production from the Habanero 52 oil sand
commenced in late November 2003. Production from the Habanero 55 gas sand
commenced in January, after mechanical adjustments were made down hole. Gross
production during February 2003 from the Habanero field was approximately 22,000
barrels of oil and 56 million cubic feet of gas per day.
Entrada, Garden Banks Blocks 738/782/826/827
The Entrada discovery is located in approximately 4,500 feet of water in the
Gulf of Mexico. Two wells and seven sidetracks have been drilled to date on
Garden Banks 782 on a northwest plunging salt ridge along the southern edge of
the Entrada Basin. Multiple stacked amplitudes trapped against a salt or fault
interface characterize the Entrada Area. We own a 20% working interest in this
discovery with BP Amoco, the operator, holding the remaining working interest.
The owners of an adjacent discovery have announced their plans to construct
production facilities to enable them to be a regional off-take point in
Southeastern Garden Banks. These plans include handling third party tie-ins. We
expect to tie-in Entrada to this regional off-take point with initial production
anticipated in 2006. First production from the adjacent discovery is expected in
late 2004. Information obtained in a data swap with the adjacent owners is being
incorporated into the Entrada development plans. An integrated project team was
formed by the working interest owners during 2002 to begin planning the
development of the field. The team has been reviewing alternate development
plans which could accelerate field development.
GULF OF MEXICO SHELF
Mobile Blocks 863/864/ 907/908
We own an average 67.9% working interest in these blocks and we are the
operator. The Mobile 864 unit, in which we have a 66.4% working interest, has
three producing wells, unit production facilities and covers portions of these
four blocks. During 2003 the unit produced an average of 4.9 MMcf per day net to
us.
Mobile Blocks 952/953/955
We own a 100% working interest in these three blocks and we are the operator. In
the fourth quarter of 2001, we initiated a production acceleration program for
Mobile Blocks 952, 953 and 955, which were being produced through the Mobile
Block 864 unit facilities. An acceleration well was successfully drilled in the
fourth quarter of 2001 and stand-alone production facilities were installed and
production flow lines were rerouted to the new facilities. Production commenced
through the new facilities in April 2002. In order to completely produce the
proved reserves of the field we drilled a development well on Mobile Block 955
during the first quarter of 2004. The well is flowing without compression and
commenced production in March 2004 at a gross rate of approximately 8 MMcf per
day. The installation of compression facilities at the well site is expected to
be completed by June 2004 and should increase the production rate by an
additional 2-3 MMcf per day. Production from the field for 2003 was 19.6 MMcf
per day net to us. Production for 2002 was 14.0 MMcf per day net to us.
20
Ship Shoal Blocks 28/35
We successfully drilled an exploratory well at Ship Shoal Blocks 28 and 35
during the third quarter of 2002. The well was drilled to a measured depth of
15,237 feet (12,295 feet of true vertical depth) and encountered 140 feet of net
natural gas pay. The well was completed as a single producer in the deepest of
three productive intervals and first production commenced in late April, 2003
and averaged 1.7 MMcfe per day net to us through December 31, 2003. We operate
and own a 22% working interest.
ONSHORE AND OTHER
Big Escambia Creek
This gas field in south Alabama produces from the Smackover formation at depths
ranging from 15,100 to 15,600 feet and is operated by ExxonMobil. We own an
average working interest of 4.9% (5.5% net revenue interest), in six wells and a
2.2% average royalty interest in another five wells. This field produced 0.7
MMcfe per day to our interest in 2003. The field has an estimated reserve life
in excess of 10 years given current production rates.
Other
We own various royalty and working interests in numerous onshore areas and the
Gulf of Mexico other than the fields discussed above.
21
OIL AND GAS RESERVES
The following table sets forth certain information about our estimated proved
reserves as of the dates set forth below.
YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002(a) 2001(a)
--------- --------- ---------
(IN THOUSANDS)
Proved developed:
Oil (Bbls) 9,919 1,056 885
Gas (Mcf) 31,415 37,631 52,375
Mcfe 90,926 43,966 57,683
Proved undeveloped:
Oil (Bbls) 13,790 22,988 29,324
Gas (Mcf) 43,276 53,908 69,078
Mcfe 126,017 191,833 245,023
Total proved:
Oil (Bbls) 23,709 24,043 30,209
Gas (Mcf) 74,691 91,539 121,453
Mcfe 216,943 235,799 302,706
Estimated pre-tax future net cash flows(b) $ 838,847 $ 970,198 $ 473,896
========= ========= =========
Pre-tax discounted present value (b) $ 570,463 $ 623,946 $ 272,053
========= ========= =========
Standardized measure of discounted future
net cash flows(b) $ 519,026 $ 556,046 $ 254,857
========= ========= =========
(a) The estimates include reserve volumes of approximately 1.2 Bcf, $2.9
million of pre-tax discounted present value in 2001, attributable to
a volumetric production payment. Standardized measure of discounted
future net cash flows does not include any volumes or cash flows
associated with the volumetric production payment.
(b) Includes a reduction for estimated plugging and abandonment costs
that is reflected as a liability on our balance sheet at December
31, 2003, in accordance with Statement of Financial Accounting
Standards No. 143.
Our independent reserve engineers, Huddleston & Co., Inc., prepared the
estimates of the proved reserves and the future net cash flows and present value
thereof attributable to such proved reserves. Reserves were estimated using oil
and gas prices and production and development costs in effect on December 31 of
each such year, without escalation, and were otherwise prepared in accordance
with Securities and Exchange Commission regulations regarding disclosure of oil
and gas reserve information.
There are numerous uncertainties inherent in estimating quantities of proved
reserves, including many factors beyond our control or the control of the
reserve engineers. Reserve engineering is a subjective
22
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact manner. The accuracy of any reserve or cash flow estimate
is a function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates by different engineers often vary,
sometimes significantly. In addition, physical factors, such as the results of
drilling, testing and production subsequent to the date of an estimate, as well
as economic factors, such as an increase or decrease in product prices that
renders production of such reserves more or less economic, may justify revision
of such estimates. Accordingly, reserve estimates could be different from the
quantities of oil and gas that are ultimately recovered.
We have not filed any reports with other federal agencies which contain an
estimate of total proved net oil and gas reserves during our last fiscal year.
PRESENT ACTIVITIES AND PRODUCTIVE WELLS
The following table sets forth the wells we have drilled and completed during
the periods indicated. All such wells were drilled in the continental United
States primarily in federal and state waters in the Gulf of Mexico.
The following table sets forth our productive wells as of December 31, 2003:
WELLS
--------------
GROSS NET
------ -----
Oil:
Working interest 39.00 3.05
Royalty interest 188.00 3.20
------ ----
Total 227.00 6.25
====== ====
Gas:
Working interest 41.00 21.11
Royalty interest 209.00 1.67
------ ----
Total 250.00 22.78
====== =====
23
A well is categorized as an oil well or a natural gas well based upon the ratio
of oil to gas reserves on a Mcfe basis. However, some of our wells produce both
oil and gas. At December 31, 2003, we had no wells with multiple completions. At
December 31, 2003, we had 1 gross (0.03 net) exploratory oil well in progress.
LEASEHOLD ACREAGE
The following table shows our approximate developed and undeveloped (gross and
net) leasehold acreage as of December 31, 2003.
LEASEHOLD ACREAGE
-----------------------------------
DEVELOPED UNDEVELOPED
---------------- ----------------
LOCATION GROSS NET GROSS NET
-------------- ------- ------ ------- ------
Louisiana 6,554 4,179 3,770 1,179
Other states 680 362 681 509
Federal waters 101,743 73,483 295,180 77,207
------- ------ ------- ------
Total 108,977 78,024 299,631 78,895
======= ====== ======= ======
As of December 31, 2003, we owned various royalty and overriding royalty
interests in 1,336 net developed and 6,862 net undeveloped acres. In addition,
we owned 4,711 developed and 121,289 undeveloped mineral acres.
MAJOR CUSTOMERS
Our production is sold generally on month-to-month contracts at prevailing
prices. The following table identifies customers to whom we sold a significant
percentage of our total oil and gas production during each of the 12-month
periods ended:
DECEMBER 31,
----------------------
2003 2002 2001
---- ---- ----
Petrocom Energy Group, Ltd. 4% 4% --
Dynegy 5% 7% 8%
Prior Energy Corporation 20% -- 20%
Reliant Energy Services 28% 70% 49%
Louis Dreyfus Energy Services 27% -- --
Because alternative purchasers of oil and gas are readily available, we believe
that the loss of any of these purchasers would not result in a material adverse
effect on our ability to market future oil and gas production.
TITLE TO PROPERTIES
We believe that the title to our oil and gas properties is good and defensible
in accordance with standards generally accepted in the oil and gas industry,
subject to such exceptions which, in our opinion, are not so
24
material as to detract substantially from the use or value of such properties.
Our properties are typically subject, in one degree or another, to one or more
of the following:
- royalties and other burdens and obligations, express or implied,
under oil and gas leases;
- overriding royalties and other burdens created by us or our
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 existing 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 property.
To the extent that such burdens and obligations affect our rights to production
revenues, they have been taken into account in calculating our net revenue
interests and in estimating the size and value of our reserves. We believe that
the burdens and obligations affecting our properties are conventional in the
industry for properties of the kind owned by us.
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in various legal proceedings and claims, which arise in the
ordinary course of our business. We do not believe the ultimate resolution of
any such actions will have a material affect on our financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2003.
25
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the New York Stock Exchange under the symbol "CPE".
The following table sets forth the high and low sale prices per share as
reported for the periods indicated.
QUARTER ENDED HIGH LOW
-------------- ------ ------
2002:
First quarter $ 9.40 $ 3.97
Second quarter 8.39 4.50
Third quarter 5.15 3.20
Fourth quarter 6.25 3.35
2003:
First quarter $ 4.35 $ 3.35
Second quarter 8.44 3.66
Third quarter 7.95 5.46
Fourth quarter 11.48 7.31
As of March 4, 2004, there were approximately 4,514 common stockholders of
record.
We have never paid dividends on our common stock and intend to retain our cash
flow from operations, net of preferred stock dividends, for the future operation
and development of our business. In addition, our primary credit facility and
the terms of our outstanding subordinated debt prohibit the payment of cash
dividends on our common stock.
In December 2003, we borrowed $185 million pursuant to an amended and restated
senior unsecured credit agreement dated December 23, 2003. In connection with
our borrowings under the senior unsecured credit agreement, we issued to the
lenders under the credit agreement warrants to purchase an aggregate of
2,775,000 shares of our common stock at an exercise price of $10.00 per share.
The warrants are exercisable for seven years from the date of issuance. The
issuance of the warrants was exempt pursuant to Section 4(2) of the Securities
Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, as of the dates and for the periods indicated,
selected financial information about us. The financial information for each of
the five years in the period ended December 31, 2003 has been derived from our
audited Consolidated Financial Statements for such periods. The information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto. The following information is not necessarily
indicative of our future results.
26
CALLON PETROLEUM COMPANY
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Oil and gas sales $ 73,697 $ 61,171 $ 60,010 $ 56,310 $ 37,140
---------- ---------- ---------- ---------- ----------
Operating expenses:
Lease operating expenses 11,301 11,030 11,252 9,339 7,536
Depreciation, depletion and amortization 28,253 27,096 21,081 17,153 16,727
General and administrative 4,713 4,705 4,635 4,155 4,575
Accretion expense 2,884 -- -- -- --
Loss on mark-to-market commodity derivative contracts 535 708 -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses 47,686 43,539 36,968 30,647 28,838
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 26,011 17,632 23,042 25,663 8,302
---------- ---------- ---------- ---------- ----------
Other (income) expenses:
Interest expense 30,614 26,140 12,805 8,420 6,175
Other income (444) (1,004) (1,742) (1,767) (1,853)
Loss on early extinguishment of debt 5,573 -- -- --
Gain on sale of pipeline -- (2,454) -- -- --
Gain on sale of Enron derivatives -- (2,479) -- -- --
Writedown of Enron derivatives -- -- 9,186 -- --
---------- ---------- ---------- ---------- ----------
Total other (income) expenses 35,743 20,203 20,249 6,653 4,322
---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes (9,732) (2,571) 2,793 19,010 3,980
Income tax expense (benefit) 8,432 (900) 977 6,463 1,353
---------- ---------- ---------- ---------- ----------
Net income (loss) before Medusa Spar LLC and
cumulative effect of change in accounting principle (18,164) (1,671) 1,816 12,547 2,627
Loss on Medusa Spar LLC, net of tax (8) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of change in
in accounting principle (18,172) (1,671) 1,816 12,547 2,627
Cumulative effect of change in accounting principle,
net of tax 181 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) (17,991) (1,671) 1,816 12,547 2,627
Preferred stock dividends 1,277 1,277 1,277 2,403 2,497
---------- ---------- ---------- ---------- ----------
Net income (loss) available to common shares $ (19,268) $ (2,948) $ 539 $ 10,144 $ 130
========== ========== ========== ========== ==========
27
CALLON PETROLEUM COMPANY
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net income (loss) available to common shares $(19,268) $ (2,948) $ 539 $ 10,144 $ 130
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic:
Net income (loss) available to common before cumulative
effect of change in accounting principle $ (1.42) $ (.22) $ .04 $ .82 $ .01
Cumulative effect of change in accounting principle,
net of tax .01 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to common $ (1.41) $ (.22) $ .04 $ .82 $ .01
======== ======== ======== ======== ========
Diluted:
Net income (loss) available to common before cumulative
effect of change in accounting principle $ (1.42) $ (.22) $ .04 $ .80 $ .01
Cumulative effect of change in accounting principle,
net of tax .01 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) available to common $ (1.41) $ (.22) $ .04 $ .80 $ .01
======== ======== ======== ======== ========
Shares used in computing net income (loss) per common share:
Basic 13,662 13,387 13,273 12,420 8,976
======== ======== ======== ======== ========
Diluted 13,662 13,387 13,366 12,745 9,075
======== ======== ======== ======== ========
BALANCE SHEET DATA (END OF PERIOD):
Oil and gas properties, net $390,163 $377,661 $343,158 $258,613 $194,365
Total assets $496,032 $410,613 $372,095 $301,569 $259,877
Long-term debt, less current portion $214,885 $248,269 $161,733 $134,000 $100,250
Stockholders' equity $133,261 $140,960 $147,224 $136,328 $124,380
- ----------
We use the full-cost method of accounting. Under this method of
accounting, our net capitalized costs to acquire, explore and develop oil
and gas properties may not exceed the standardized measure of our proved
reserves. If these capitalized costs exceed a ceiling amount, the excess
is charged to expense.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in an understanding of our
financial condition and results of operations. Our Consolidated Financial
Statements and Notes thereto contain detailed information that should be
referred to in conjunction with the following discussion. See Item 8. "Financial
Statements and Supplementary Data."
GENERAL
We have been engaged in the exploration, development, acquisition and production
of oil and gas properties since 1950. Our revenues, profitability and future
growth and the carrying value of our oil and gas properties are substantially
dependent on prevailing prices of oil and gas and our ability to find, develop
and acquire additional oil and gas reserves that are economically recoverable.
Our ability to maintain or increase our borrowing capacity and to obtain
additional capital on attractive terms is also influenced by oil and gas prices.
Significant events of our financial and operating results for the year ended
December 31, 2003 included:
- borrowing $185 million for a term of seven-years at an interest rate
of 9.75% pursuant to a senior unsecured credit agreement;
- the contribution of our 15% working interest in the Medusa spar
production facilities into a limited liability company in return for
approximately $25 million of cash and a 10% interest in the limited
liability company which will earn a throughput fee for production
processed in the Medusa area; and
- the commencement of production from two of our deepwater
discoveries, Medusa and Habanero, in late November 2003 which is
expected to increase production for 2004 by approximately 80% over
2003 levels.
- a charge of $11.5 million to income tax expense as the result of
establishing a valuation allowance against our deferred tax asset
required by SFAS 109 "Accounting for Income Taxes". This charge was
taken due to the negative evidence resulting from the cumulative
losses incurred for the three year period ending December 31, 2003.
Relevant accounting guidance suggests that positive future
expectations about income are diminished by such losses. If the
Company achieves profitable operations in 2004, the Company expects
it will reverse a portion of the valuation allowance in an amount at
least sufficient to eliminate any tax provision in that period. See
Note 3 to the Company's Consolidated Financial Statements for a more
detailed discussion.
These financial transactions allowed us to redeem $62.9 million of senior
subordinated notes which were maturing in 2004, redeem $85.0 million of 12%
loans maturing in March 2005 and reduce the outstanding balance under our senior
secured credit facility. As a result, we expect that planned 2004 capital
expenditures of approximately $65 million will be funded with cash flows from
operations and draws under our senior secured credit facility, if necessary. The
current borrowing base of $45 million under the senior secured credit facility,
which had $30.0 million outstanding against it on December 31, 2003, is
currently under review and may be increased since a majority of our reserves for
Medusa and Habanero are now classified as proved developed reserves. This credit
facility matures on June 30, 2004 and we
29
anticipate extending the due date or replacing it with a facility with similar
or more favorable terms. For a more detailed discussion of outstanding debt see
Note 5 to our Consolidated Financial Statements.
Our estimated net proved oil and gas reserves decreased at December 31, 2003 to
217 billion cubic feet of natural gas equivalent (Bcfe). This represents a
decrease of 8% from previous year-end 2002 estimated proved reserves of 236
Bcfe.
We incurred a major downward revision to proved reserves in 2002 at our
Boomslang discovery. The initial exploratory well drilled at this location in
1998 encountered 185 feet of pay. The well was drilled with mechanical problems
and was subsequently determined not to be a viable well for completion and
production of the estimated proved reserves encountered in this initial well. A
second well, drilled in the fourth quarter of 2002, to serve as a production
take point, was drilled in a down dip direction from the first well targeting
what was anticipated to be a better sand development in the three separate
reservoirs found in the first well, but still up dip of the lowest known
hydrocarbons in the first well. Reservoir sand quality changed dramatically,
reducing the estimated reservoir volumes found and booked as estimated proved
reserves by the first well to an extent that the partners determined that the
risk of development was not economic. Callon had a 40% working interest. The
Company's proved reserves in the prior year included 7.2 million barrels of oil
and 13 billion cubic feet of natural gas attributable to Boomslang.
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 our control. 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 crude oil and natural gas, the price of foreign
imports and the availability of alternate fuel sources. Any substantial and
extended decline in the price of crude oil or natural gas would have an adverse
effect on our carrying value of our proved reserves, borrowing capacity,
revenues, profitability and cash flows from operations. We use derivative
financial instruments (see Note 6 and Item 7A. "Quantitative and Qualitative
Disclosures About Market Risks") for price protection purposes on a limited
amount of our future production and do not use them for trading purposes. On a
Mcfe basis, natural gas represents 45% of the budgeted 2004 production and 34%
of proved reserves at year-end 2003.
Inflation has not had a material impact on us and is not expected to have a
material impact on us in the future.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities.
The Statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires us to report changes in
the fair value of our derivative financial instruments that qualify as cash flow
hedges in other comprehensive income, a component of stockholders' equity, until
realized. We adopted SFAS 133 effective January 1, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations ("SFAS 143") effective for
fiscal years beginning after June 15, 2002. SFAS 143 essentially requires
entities to record the fair value of a liability for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs. We adopted the
30
statement on January 1, 2003 resulting in a cumulative effect of accounting
change of $181,000, net of tax. See Note 8 to our Consolidated Financial
Statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure -an amendment of SFAS No. 123." SFAS 148 amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on the
reported results. SFAS 148 is effective for the year ended December 31, 2002 and
for interim financial statements commencing in 2003. The adoption of this
pronouncement by us did not have an impact on our financial condition or results
of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) 51" ("FIN 46"). FIN 46 addresses consolidation by business enterprises of
variable interest entities ("VIEs"). The primary objective of FIN 46 is to
provide guidance on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting rights; such
entities are known as VIEs. The provisions of FIN 46 are effective immediately
for these variable interest entities created after January 31, 2003. On December
24, 2003, the FASB issued a revision to FIN 46 which among other things deferred
the effective date for certain variable interests created prior to January 31,
2003. Application is required for interests in special-purpose entities in the
periods ending after December 15, 2003 and application is required for all other
types of variable interest entities in the periods ending after March 31, 2004.
We adopted FIN 46, as revised, as of December 31, 2003, which had no impact on
the financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations," which requires the use of the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also
issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an
annual review of impairment. The new standard also requires that all intangible
assets be aggregated and presented as a separate line item in the balance sheet.
The adoption of SFAS No. 141 and 142 had no impact on the Company's financial
position or results of operations. A reporting issue has arisen regarding the
application of certain provisions of SFAS No. 141 and 142 to companies in the
oil and gas industry. The issue is whether SFAS No. 141 requires registrants to
classify the costs of mineral rights associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, the
Company has included the costs of mineral rights associated with extracting oil
and gas as a component of oil and gas properties. These costs include those to
acquire contract based drilling and mineral use rights such as delay rentals,
lease bonuses, commissions and brokerage fees, and other leasehold costs.
The Emerging Issues Task Force ("EITF") has added the treatment of oil and gas
mineral rights to an upcoming agenda, which may result in a change in the
classification of these amounts, as described above. The Company will continue
to classify its oil and gas leasehold costs as tangible oil and gas properties
until further guidance is provided. The Company's cash flows and results of
operations would not be affected since such intangible assets would continue to
be depleted and assessed for impairment in accordance with full cost accounting
rules, as allowed by SFAS No. 142. Further, the Company believes
31
that the amounts that would be classified as intangible assets as of December
31, 2003 and 2002, would be immaterial.
PROPERTY AND EQUIPMENT. We follow 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 into the "full-cost pool." The amounts we capitalize into
the full-cost pool are depleted (charged against earnings) using the
unit-of-production method. The full-cost method of accounting for our proved oil
and gas properties requires that we make estimates based on assumptions as to
future events which could change. These estimates are described below.
Depreciation, Depletion and Amortization (DD&A) of Oil and Gas Properties. We
calculate depletion by using the capitalized costs in our full-cost pool plus
future development and abandonment costs (combined, the depletable base) and our
estimated net proved reserve quantities. Capitalized costs added to the
full-cost pool and other costs added to the depletable base include the
following:
- the cost of drilling and equipping productive wells, dry hole costs,
acquisition costs of properties with proved reserves, delay rentals
and other costs related to exploration and development of our oil
and gas properties;
- our payroll and general and administrative costs and costs related
to 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. Such
capitalized costs do not include any costs related to our production
of oil and gas or our general corporate overhead;
- costs associated with properties that do not have proved reserves
attributed to them are excluded from the full cost pool. These
unevaluated property costs are added to the full cost pool at such
time as wells are completed on the properties, the properties are
sold or we determine these costs have been impaired. Our
determination that a property has or has not been impaired (which is
discussed below) requires that we make assumptions about future
events;
- our estimates of future costs to develop proved properties are added
to the full cost pool for purposes of the DD&A computation. We use
assumptions based on the latest geologic, engineering, regulatory
and cost data available to us to estimate these amounts. However,
the estimates we make are subjective and may change over time. Our
estimates of future development costs are periodically updated as
additional information becomes available; and
- prior to the adoption of SFAS 143, estimated costs to dismantle,
abandon and restore a proved property were added to the full cost
pool for the purposes of DD&A. Subsequent to the adoption of SFAS
143, effective January 1, 2003, these costs are included in the full
cost pool. Such cost estimates are periodically updated as
additional information becomes available. As discussed above under
Accounting Pronouncements, specifically SFAS 143, beginning January
1, 2003, we changed the method for which we account for such costs.
Capitalized costs included in the full-cost pool are depleted and charged
against earnings using the unit of production method. Under this method, we
estimate our quantity of proved reserves at the beginning of each accounting
period. For each barrel of oil equivalent produced during the period, we record
a depletion charge equal to the amount included in the depletable base (net of
accumulated depreciation, depletion and amortization) divided by our estimated
net proved reserve quantities.
Because we use estimates and assumptions to calculate proved reserves (as
discussed below) and the amounts included in the full-cost pool, our depletion
calculations will change if the estimates and assumptions are not realized. Such
changes may be material.
32
Ceiling Test. Under the full-cost accounting rules, capitalized costs included
in the full-cost pool, net of accumulated depreciation, depletion and
amortization (DD&A), cost of unevaluated properties and deferred income taxes,
may not exceed the present value of our estimated future net cash flows from
proved oil and gas reserves, discounted at 10 percent, plus the lower of cost or
fair value of unproved properties included in the costs being amortized, net of
related tax effects. These rules generally require that, in estimating future
net cash flow, we assume that future oil and gas production will be sold at the
unescalated market price for oil and gas received at the end of each fiscal
quarter and that future costs to produce oil and gas will remain constant at the
prices in effect at the end of the fiscal quarter. We are required to write-down
and charge to earnings the amount, if any, by which these costs exceed the
discounted future net cash flows, unless prices recover sufficiently before the
date of our financial statements. Given the volatility of oil and gas prices, it
is likely that our estimates of discounted future net cash flows from proved oil
and gas reserves will change in the near term. If oil and gas prices decline
significantly, even if only for a short period of time, it is possible that
writedowns of oil and gas properties could occur in the future.
Estimating Reserves and Present Values. Our estimates of quantities of proved
oil and gas reserves and the discounted present value of such reserves at the
end of each quarter are based on numerous assumptions which are likely to change
over time. These assumptions include:
- the prices at which we can sell our oil and gas production in the
future. Oil and gas prices are volatile, but we are generally
required to assume that they will not change from the prices in
effect at the end of the quarter. In general, higher oil and gas
prices will increase quantities of proved reserves and the present
value of such reserves, while lower prices will decrease these
amounts. Because our properties have relatively short productive
lives, changes in prices will affect the present value more than
quantities of oil and gas reserves; and
- the costs to develop and produce our reserves and the costs to
dismantle our production facilities when reserves are depleted.
These costs are likely to change over time, but we are required to
assume that costs in effect at the end of the quarter will not
change. Increases in costs will reduce oil and gas quantities and
present values, while decreases in costs will increase such amounts.
Because our properties have relatively short productive lives,
changes in costs will affect the present value more than quantities
of oil and gas reserves.
- the potential liability to pay royalties to the Mineral Management
Service on some of the Company's properties which qualify for
royalty relief under the Deep Water Royalty Relief Act could reduce
proved reserves. See Note 7 of our Consolidated Financial Statements
for a more detailed discussion of this potential liability.
In addition, the process of estimating proved oil and gas reserves requires that
our independent and internal reserve engineers exercise judgment based on
available geological, geophysical and technical information. We have described
the risks associated with reserve estimation and the volatility of oil and gas
prices, under "Risk Factors" .
Unproved Properties. Costs associated with properties that do not have proved
reserves, including capitalized interest, are excluded from the full-cost pool.
These unproved properties are included in the line item "Unevaluated properties
excluded from amortization." Unproved property costs are transferred to the
full-cost pool when wells are completed on the properties or the properties are
sold. In addition, we are required to determine whether our unproved properties
are impaired and, if so, add the costs of such properties to the full-cost pool.
We determine whether an unproved property should be impaired by periodically
reviewing our exploration program on a property by property basis. This
determination may require the exercise of substantial judgment by our
management.
33
DERIVATIVES. We use derivative financial instruments for price protection
purposes on a limited amount of our future production and do not use them for
trading purposes. Such derivatives were accounted for in years prior to 2001 as
hedges and have been recognized as an adjustment to oil and gas sales in the
period in which they are related. We currently use the accounting treatment for
derivatives specified under SFAS 133.
INCOME TAXES. We follow the asset and liability method of accounting for
deferred income taxes prescribed by Statement of Financial Accounting Standards
No. 109 ("SFAS 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.
SFAS 109 provides for the weighing of positive and negative evidence in
determining whether it is more likely than not that a deferred tax asset is
recoverable. We have incurred losses in 2002 and 2003 and have losses on an
aggregate basis for the three-year period ended December 31, 2003. However, as
discussed in Note 5, in December 2003 we refinanced nearly all our highest cost
debt, incurring an early extinguishment loss of $5.6 million, but achieving
significant interest savings in the future. In addition, as discussed in Note 5,
the first two of our deepwater projects began production in November 2003, which
is expected to result in a significant increase in 2004 production as compared
to 2003. Nevertheless, relevant accounting guidance suggests that a recent
history of cumulative losses constitutes significant negative evidence, and that
future expectations about income are overshadowed by such recent losses. As a
result, we established a valuation allowance of $11.5 million as of December 31,
2003. If we achieve profitable operations in 2004, we expect to reverse a
portion of the valuation allowance in an amount at least sufficient to eliminate
any tax provision in that period. See Note 3 of our Consolidated Financial
Statements for further disclosure.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital are cash flows from operations, borrowings from
financial institutions and the sale of debt and equity securities. Net cash and
cash equivalents increased during 2003 to $8.7 million, up $2.9 million. Cash
provided from operating activities during 2003 totaled $34.6 million, up from
$12.2 million in 2002. Cash provided by operating activities during 2004 is
expected to increase significantly due to the Medusa and Habanero deepwater
projects commencing production in late November 2003. Dividends paid on
preferred stock were $1.3 million. Most of our outstanding debt was restructured
during December 2003. The restructuring of our debt is discussed in the
following paragraphs.
In December 2003 we borrowed $185 million pursuant to a senior unsecured credit
facility with a stated interest rate of 9.75%. The net proceeds from the loans
of $181.3 million were used to redeem $22.9 million of 10.125% senior
subordinated notes due July 31, 2004, $40 million of 10.25% senior subordinated
notes due September 15, 2004, $85 million of our 12% loans due March 31, 2005
plus a 1% call premium of $850,000 and to reduce the balance outstanding under
our senior secured revolving credit facility. A charge of $5.3 million was
incurred in 2003 as a result of the early extinguishment of debt for the 12%
loans due March 31, 2005 and a charge of approximately $1.4 million will be
incurred in 2004 for the early extinguishment of the $22.9 million 10.125%
senior subordinated notes due July 31, 2004 and the $40 million 10.25% senior
subordinated notes due September 15, 2004. We exercised covenant defeasance
under the indentures for the 10.125% and 10.25% notes on December 8, 2003 and
distributed a required 30-
34
day redemption notice. The funds necessary to redeem the notes were placed in
trust and the trustee paid the holders of the notes on January 8, 2004. The
funds in trust were classified on our December 31, 2003 balance sheet as
restricted cash. In conjunction with the new senior unsecured notes, we issued
detachable warrants to purchase 2.775 million of our common stock at an exercise
price of $10 per share. This senior unsecured debt matures December 8, 2010. See
Note 5 of our Consolidated Financial Statements for a more detailed description
of these securities.
In December 2003, we announced the formation of a limited liability company,
Medusa Spar LLC, which now owns a 75% undivided ownership interest in the
deepwater spar production facilities on our Medusa Field in the Gulf of Mexico.
We contributed a 15% undivided ownership interest in the production facility to
the LLC in return for approximately $25 million in cash and a 10% ownership
interest in the LLC. Our cash proceeds were used to reduce the balance
outstanding under our senior secured credit facility. The LLC will earn a tariff
based upon production volume throughput from the Medusa area. We are obligated
to process our share of production from the Medusa field and any future
discoveries in the area through the spar production facilities. The LLC used the
cash proceeds from $83.7 of non-recourse financing and a cash contribution by
one of the LLC owners to acquire its 75% interest in the spar. The balance of
the LLC is owned by Oceaneering International, Inc. (NYSE:OII) and Murphy Oil
Corporation (NYSE:MUR). We are accounting for our 10% ownership interest in the
LLC under the equity method.
Our remaining maturities for unsecured debt, excluding the $185 million in 9.75%
loans due 2010, consists of $10 million of the 12% loans with a due date of
March 31, 2005 and $33 million of 11% senior subordinated notes with a due date
of December 15, 2005. These 2005 maturities will be retired by our primary
sources of capital which are cash flows from operations, borrowings from
financial institutions and the sale of debt and equity securities. See Note 5 of
our Consolidated Financial Statements for a more detailed description of these
securities
Borrowings under our senior secured credit facility are secured by mortgages
covering substantially all of our producing oil and gas properties. This
facility had a $45 million borrowing base on December 31, 2003 with $30 million
outstanding against it. As of February 29, 2004, $20 million in loans were
outstanding under the facility. The borrowing base is currently being reviewed
by the lenders and could be increased due to our proved producing reserves
increasing as a result of the Medusa and Habanero fields commencing production
late in the fourth quarter of 2003. The facility expires on June 30, 2004 and we
are currently reviewing options to extend the maturity date or to replace the
facility with one that is similar or with more favorable terms. See Note 5 of
our Consolidated Financial Statements for a more detailed description of the
credit facility.
Outstanding debt on December 31, 2003 was $308.1 million, and after retirement
of the 2004 notes using restricted cash on January 8, 2004, debt was $245.2
million, compared to $249.6 million on December 31, 2002. The senior secured
credit facility, our two senior unsecured credit facilities and the indenture
for our senior subordinated debt contain various covenants including
restrictions on additional indebtedness and payment of cash dividends as well as
maintenance of certain financial ratios. We were in compliance with these
covenants at December 31, 2003.
Capital expenditure plans for 2004 include:
- the completion of the development projects for Medusa and Habanero;
- the drilling of a satellite prospect in the Medusa field;
- the drilling and completion of a proved undeveloped location in the
Mobile Blocks 952/953/955 field;
- the acquisition of seismic and leases; and
35
- discretionary capital projects for the exploratory drilling of deep
shelf prospects we developed through our 3-D seismic partnership
using AVO technology.
We anticipate that cash flow generated during 2004 and current availability
under our senior secured credit facility, if necessary, will provide the $65
million, which includes capitalized interest and general and administrative
expenses, of capital necessary to fund these planned capital expenditures and
the current portion of our asset retirement obligation in the amount of $8.6
million.
The following table describes our outstanding contractual obligations (in
thousands) as of December 31, 2003:
(a) These notes were retired with restricted cash on January 8, 2004.
(b) This facility matures June 30, 2004 and is expected to be extended or
replaced with a new facility.
36
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect to our
oil and gas operations for each of the three years in the period ended December
31, 2003.
DECEMBER 31,
---------------------------------
2003(A) 2002(A)(B) 2001(A)(B)
------- ---------- ----------
Production:
Oil (MBbls) 268 226 273
Gas (MMcf) 12,315 14,215 13,566
Total production (MMcfe) 13,923 15,571 15,206
Average daily production (MMcfe) 38.1 42.7 41.7
Average sales price:
Oil (per Bbl) $ 28.72 $ 23.11 $ 22.95
Gas (per Mcf) $ 5.36 $ 3.94 $ 3.96
Total (per Mcfe) $ 5.29 $ 3.93 $ 3.95
Oil and Gas revenues:
Gas revenue $66,001 $55,949 $53,729
Oil revenue 7,696 5,222 6,281
------- ------- -------
Total $73,697 $61,171 $60,010
======= ======= =======
Oil and gas production costs:
Lease operating expenses $11,301 $11,030 $11,252
Additional per Mcfe data:
Sale price $ 5.29 $ 3.93 $ 3.95
Lease operating expenses .81 .71 .73
------- ------- -------
Operating margin $ 4.48 $ 3.22 $ 3.22
======= ======= =======
Depletion $ 2.03 $ 1.73 $ 1.37
Accretion $ .21 $ -- $ --
General and administrative (net of management fees) $ .34 $ .30 $ .30
(a) Average sales price includes hedging gains and losses.
(b) Production volumes include 1,200 MMcf for the year 2002 and 2,300 MMcf for
2001, at an average price of $2.08 per Mcf associated with a volumetric
production payment.
37
OFF-BALANCE SHEET ARRANGEMENTS
In December 2003, we announced the formation of a limited liability company,
Medusa Spar LLC, which now owns a 75% undivided ownership interest in the
deepwater spar production facilities on our Medusa Field in the Gulf of Mexico.
We contributed a 15% undivided ownership interest in the production facility to
Medusa Spar LLC in return for approximately $25 million in cash and a 10%
ownership interest in the LLC. The LLC will earn a tariff based upon production
volume throughput from the Medusa area. We are obligated to process our share of
production from the Medusa field and any future discoveries in the area through
the spar production facilities. This arrangement allows us to defer the cost of
the Spar production facility over the life of the Medusa field. Our cash
proceeds were used to reduce the balance outstanding under our senior secured
credit facility. The LLC used the cash proceeds from $83.7 of non-recourse
financing and a cash contribution by one of the LLC owners to acquire its 75%
interest in the spar. The balance of Medusa Spar LLC is owned by Oceaneering
International, Inc. (NYSE:OII) and Murphy Oil Corporation (NYSE:MUR). We are
accounting for our 10% ownership interest in the LLC under the equity method.
SEC INQUIRIES REGARDING RESERVE INFORMATION
Beginning in October 2002 we received a series of inquiries from the SEC
regarding our Annual Report on Form 10-K for the year ended December 31, 2001
requesting supplemental information concerning our operations in the Gulf of
Mexico. The comment letters requested information about the procedures we used
to classify our deepwater reserves as proved and requested that our financials
be restated to reflect the removal of the Boomslang reserves as proved for all
prior periods during which such reserves were reported as proved. We have
reviewed the SEC comments with our independent petroleum reserve engineers,
Huddleston & Co., Inc., of Houston, Texas. Both Huddleston & Co. and we believe
that such deepwater reserves are properly classified as proved. The Company has
responded to all of the SEC inquiries.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
OIL AND GAS REVENUES
Total oil and gas revenues increased 20% from $61.2 million in 2002 to $73.7 in
2003 while total production for 2003 decreased by 11% versus 2002. Realized oil
and gas prices were substantially higher when compared to the same period in
2002 and accounted for the increase in revenue. Gas revenues for 2002 included
$9.2 million of non-cash revenue related to the Enron derivatives discussed in
Note 6 to the Consolidated Financial Statements.
Gas production during 2003 totaled 12.3 Bcf and generated $66.0 million in
revenues compared to 14.2 Bcf and $55.9 million in revenues during the same
period in 2002. Average gas prices for 2003 were $5.36 per Mcf compared to $3.94
per Mcf during the same period last year. The decrease in production was
primarily due to the depletion of the lowest productive zone of the East Cameron
Block 294 field. The well at East Cameron Block 294 was returned to production
after a recompletion to a behind pipe zone in the third quarter of 2003. Also,
the sale of the North and Northwest Dauphin Island fields in the fourth quarter
of 2002 and the normal and expected declines in production from other properties
contributed to the variance.
Oil production during 2003 totaled 268,000 barrels and generated $7.7 million in
revenues compared to 226,000 barrels and $5.2 million in revenues for the same
period in 2002. Average oil prices received in
38
2003 were $28.72 per barrel compared to $23.11 per barrel in 2002. The increase
in production was due to the initial production from our deepwater discoveries,
Medusa and Habanero, which began producing late in the fourth quarter of 2003.
This was offset slightly by downtime for maintenance to the facility and
equipment at the Big Escambia Creek Field operated by ExxonMobil Corporation and
normal and expected declines in production from older properties.
LEASE OPERATING EXPENSES
Lease operating expenses for 2003 increased by 2% to $11.3 million compared to
$11.0 million for the same period in 2002. The increase was primarily due to the
increase in lease operating expenses for the Mobile Block 864 area resulting
from the implementation of the accelerated production program in the second
quarter of 2002 and lease operating expenses related to our deepwater
discoveries, Medusa and Habanero, which began producing late in the fourth
quarter of 2003. The increase was slightly offset as a result of the sale of
North and Northwest Dauphin Island fields in the fourth quarter of 2002 which
reduced lease operating expenses for 2003.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization for 2003 and 2002 were $28.3 million
and $27.1 million, respectively. The 4% increase was due primarily to the
downward reserve revisions for our Boomslang field at Ewing Bank Block 994 at
the end of 2002. This decrease in estimated proved reserves increased the
depletable cost per unit of production.
ACCRETION EXPENSE
Accretion expense of $2.9 million represents accretion for our asset retirement
obligations for 2003.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for 2003, net of amounts capitalized, were
$4.7 million and flat with the amount incurred in 2002.
INTEREST EXPENSE
Interest expense increased by 17% in 2003 to $30.6 million compared to $26.1
million in 2002. This was a result of higher debt levels.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
A loss of $5.6 million was incurred in December of 2003 for the write-off of
deferred financing costs and bond discounts associated with the early
extinguishment of $85 million of the 12% loans due in 2005 plus a 1% pre-payment
premium.
INCOME TAXES
The income tax expense of $8.4 million in 2003 was primarily due to a charge of
$11.5 million to establish a valuation allowance against our deferred tax asset
required by SFAS 109 "Accounting for Income Taxes". This charge was taken due to
the negative evidence resulting from the cumulative losses incurred for the
three year period ending December 31, 2003. Relevant accounting guidance
suggests that positive future expectations about income are diminished by such
losses. If the Company achieves
39
profitable operations in 2004, the Company expects it will reverse a portion of
the valuation allowance in an amount at least sufficient to eliminate any tax
provision in that period. See Note 3 to the Company's Consolidated Financial
Statements for a more detailed discussion.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001
OIL AND GAS REVENUES
Oil and gas revenues for 2002 were $61.2 million, a 2% increase from the 2001
amount of $60.0 million. Oil and gas production of 15,571 MMcfe during 2002
increased as well from the 2001 amount of 15,206 MMcfe.
Oil production decreased from 273,000 barrels in 2001 to 226,000 barrels in 2002
but the average sales price increased from $22.95 in 2001 to $23.11 in 2002. As
a result, oil revenues dropped from $6.3 million in 2001 to $5.2 million in
2002. The production decrease was primarily due to older properties' normal and
expected decline in production.
Gas revenues for 2002 were $55.9 million based on sales of 14.2 Bcf at an
average sales price of $3.94 per Mcf. For 2001, gas revenues were $53.7 million
based on production of 13.6 Bcf sold at an average sales price of $3.96 per Mcf.
Our gas production in 2002 increased when compared to last year due primarily to
the acceleration program at Mobile Blocks 952/953/955 area initiated in the
fourth quarter of 2001.
LEASE OPERATING EXPENSES
Lease operating expenses remained relatively stable at $11.0 million ($.71 per
Mcfe) in 2002 compared to $11.3 million ($.73 per Mcfe) in 2001.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization increased by 28% due in large part to
the downward reserve revisions at Boomslang. This decrease in estimated proved
reserves, over which depletable costs are amortized, increased the per unit
depletion rate, while production remained relatively constant between years.
Total charges increased from $21.1 million or $1.39 per Mcfe in 2001, to $27.1
million, or $1.74 per Mcfe in 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for 2002 were $4.7 million, or $.30 per
Mcfe, compared to $4.6 million, or $.30 per Mcfe, in 2001.
INTEREST EXPENSE
Interest expense for 2002 was $26.1 million increasing from $12.8 million in
2001. This is a result of an increase in our long-term debt as well as higher
interest rates associated with additional debt incurred in 2002.
40
INCOME TAXES
Our 2002 results included a deferred income tax benefit of $900,000. We
evaluated the deferred income tax asset in light of our reserve quantity
estimates, our long-term outlook for oil and gas prices and our expected level
of future revenues and expenses. We believe it is more likely than not, based
upon this evaluation, that we will realize the recorded deferred income tax
asset. However, there is no assurance that such asset will ultimately be
realized.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's revenues are derived from the sale of its crude oil and natural
gas production. In recent months, the prices for oil and gas have increased;
however, they remain extremely volatile and sometimes experience large
fluctuations as a result of relatively small changes in supplies, weather
conditions, economic conditions and government actions. The Company enters into
derivative financial instruments to hedge oil and gas price risks for the
production volumes to which the hedge relates. The derivatives reduce the
Company's exposure on the hedged volumes to decreases in commodity prices and
limit the benefit the Company might otherwise have received from any increases
in commodity prices on the hedged volumes.
The Company also enters into price "collars" to reduce the risk of changes in
oil and gas prices. Under these arrangements, no payments are due by either
party so long as the market price is above the floor price set in the collar and
below the ceiling. If the price falls below the floor, the counter-party to the
collar pays the difference to the Company and if the price is above the ceiling,
the counter-party receives the difference from the Company. The Company enters
into these various agreements to reduce the effects of volatile oil and gas
prices and does not enter into hedge transactions for speculative purposes. See
Note 6 to the Consolidated Financial Statements for a description of the
Company's hedged position at December 31, 2003. There have been no significant
changes in market risks faced by the Company since the end of 2003.
Based on projected annual sales volumes for 2004 (excluding forecast production
increases over 2003), a 10% decline in the prices we receive for our crude oil
and natural gas production would have an approximate $13.7 million impact on our
revenues.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
---------
Report of Independent Auditors 44 and 45
Consolidated Balance Sheets as of December 31, 2003 46
and 2002
Consolidated Statements of Operations for Each of the Three Years
in the Period Ended December 31, 2003 47
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended December 31, 2003 48
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 2003 49
Notes to Consolidated Financial Statements 50
43
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Callon Petroleum Company
We have audited the accompanying consolidated balance sheets of Callon
Petroleum Company as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for the two years
in the period ended December 31, 2003. 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. The financial
statements of Callon Petroleum Company as of December 31, 2001 and for the year
then ended, were audited by other auditors who have ceased operations and whose
report dated March 29, 2002, expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the change in
the Company's method of accounting for derivative instruments and hedging
activities discussed in Note 2 to those financial statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of Callon
Petroleum Company as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the two years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the financial statements, effective January 1,
2003, the Company adopted Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations".
ERNST & YOUNG LLP
New Orleans, Louisiana
March 3, 2004
44
The following report is a copy of the audit report previously issued by Arthur
Andersen LLP in connection with Callon Petroleum Company's annual report on Form
10-K for the year ended December 31, 2001. This audit report has not been
reissued by Arthur Andersen LLP in connection with this filing on form 10-K for
the year ended December 31, 2003. The consolidated balance sheet as of December
31, 2000 and the consolidated statements of operations, stockholders' equity and
cash flows for the year ended December 31, 2000, mentioned in the report, are
not required in the Company's annual report for 2003 and are therefore not
presented among the financial statements in this annual report.
REPORT OF INDEPENDENT AUDITORS
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,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the consolidated financial statements effective
January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities."
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
MARCH 29, 2002
45
CALLON PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 8,700 $ 5,807
Restricted cash 63,345 --
Accounts receivable 10,117 10,875
Other current assets 3,606 570
--------- ---------
Total current assets 85,768 17,252
--------- ---------
Oil and gas properties, full-cost accounting method:
Evaluated properties 802,912 762,918
Less accumulated depreciation, depletion and amortization (447,000) (426,254)
--------- ---------
355,912 336,664
Unevaluated properties excluded from amortization 34,251 40,997
--------- ---------
Total oil and gas properties 390,163 377,661
--------- ---------
Pipeline and other facilities, net -- 853
Other property and equipment, net 1,547 1,890
Deferred tax asset -- 8,767
Long-term gas balancing receivable 1,101 761
Restricted investments 7,420 --
Investment in Medusa Spar LLC 8,471 --
Other assets, net 1,562 3,429
--------- ---------
Total assets $ 496,032 $ 410,613
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,020 $ 12,498
Undistributed oil and gas revenues 897 1,109
Accrued net profits interest payable 1,886 1,707
Asset retirement obligations, current portion 8,571 --
Current maturities of long-term debt 93,223 1,320
--------- ---------
Total current liabilities 120,597 16,634
--------- ---------
Long-term debt-excluding current maturities 214,885 248,269
Accounts payable and accrued liabilities to be refinanced -- 3,861
Asset retirement obligations 25,120 --
Accrued retirement benefits 189 204
Other long-term liabilities 1,980 685
--------- ---------
Total liabilities 362,771 269,653
--------- ---------
Stockholders' equity:
Preferred Stock, $.01 par value; 2,500,000 shares
authorized; 600,861 shares of Convertible
Exchangeable Preferred Stock, Series A issued
and outstanding at December 31, 2003
with a liquidation preference of $15,021,525 6 6
Common Stock, $.01 par value; 20,000,000 shares
authorized; 13,935,311 shares and 13,900,466 shares
outstanding at December 31, 2003 and 2002, respectively 139 139
Capital in excess of par value 169,036 158,370
Unearned restricted stock compensation (372) (826)
Accumulated other comprehensive income (loss) (20) (469)
Retained earnings (deficit) (35,528) (16,260)
--------- ---------
Total stockholders' equity 133,261 140,960
--------- ---------
Total liabilities and stockholders' equity $ 496,032 $ 410,613
========= =========
The accompanying notes are an integral part of these financial statements.
46
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002 2001
-------- -------- --------
Operating revenues:
Oil and gas sales $ 73,697 $ 61,171 $ 60,010
-------- -------- --------
Operating expenses:
Lease operating expenses 11,301 11,030 11,252
Depreciation, depletion and amortization 28,253 27,096 21,081
General and administrative 4,713 4,705 4,635
Accretion expense 2,884 -- --
Loss on mark-to-market commodity derivative contracts 535 708 --
-------- -------- --------
Total operating expenses 47,686 43,539 36,968
-------- -------- --------
Income from operations 26,011 17,632 23,042
-------- -------- --------
Other (income) expenses:
Interest expense 30,614 26,140 12,805
Other income (444) (1,004) (1,742)
Loss on early extinguishment of debt 5,573 -- --
Gain on sale of pipeline -- (2,454) --
Gain on sale of Enron derivatives -- (2,479) --
Writedown of Enron derivatives -- -- 9,186
-------- -------- --------
Total other (income) expenses 35,743 20,203 20,249
-------- -------- --------
Income (loss) before income taxes (9,732) (2,571) 2,793
Income tax expense (benefit) 8,432 (900) 977
-------- -------- --------
Net income (loss) before Medusa Spar LLC and cumulative
effect of change in accounting principle (18,164) (1,671) 1,816
Loss from Medusa Spar LLC, net of tax (8) -- --
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle (18,172) (1,671) 1,816
Cumulative effect of change in accounting principle, net of tax 181 -- --
-------- -------- --------
Net income (loss) (17,991) (1,671) 1,816
Preferred stock dividends 1,277 1,277 1,277
-------- -------- --------
Net income (loss) available to common shares $(19,268) $ (2,948) $ 539
======== ======== ========
Net income (loss) per common share:
Basic
Net income (loss) available to common before cumulative
effect of change in accounting principle $ (1.42) $ (0.22) $ .04
Cumulative effect of change in accounting principle, net of tax 0.01 -- --
-------- -------- --------
Net income (loss) available to common $ (1.41) $ (0.22) $ .04
======== ======== ========
Diluted
Net income (loss) available to common before cumulative
effect of change in accounting principle $ (1.42) $ (0.22) $ .04
Cumulative effect of change in accounting principle, net of tax 0.01 -- --
-------- -------- --------
Net income (loss) available to common $ (1.41) $ (0.22) $ .04
======== ======== ========
Shares used in computing net income (loss):
Basic 13,662 13,387 13,273
======== ======== ========
Diluted 13,662 13,387 13,366
======== ======== ========
The accompanying notes are an integral part of these financial statements.
47
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Unearned Accumulated Total
Restricted Capital in Other Retained Stock-
Preferred Common Stock Excess of Comprehensive Earnings holders'
Stock Stock Compensation Par Value Income (Loss) (Deficit) Equity
--------- ------ ------------ ---------- ------------- ------------- ---------
Balances, December 31, 2000 $ 6 $133 $ -- $ 150,040 $ -- $ (13,851) $136,328
-------- ---- ----- --------- ------- --------- --------
Comprehensive income:
Net income -- -- -- -- -- 1,816
Other comprehensive income -- -- -- -- 5,971 --
--------
Total comprehensive income 7,787
Preferred stock dividend -- -- -- -- -- (1,277) (1,277)
Shares issued pursuant to employee
benefit and option plan -- 1 -- 942 -- -- 943
Employee stock purchase plan -- -- -- 357 -- -- 357
Tax benefits related to stock
compensation plans -- -- -- 18 -- -- 18
Warrants -- -- -- 3,068 -- -- 3,068
-------- ---- ----- --------- ------- --------- --------
Balances, December 31, 2001 6 134 -- 154,425 5,971 (13,312) 147,224
-------- ---- ----- --------- ------- --------- --------
Comprehensive income:
Net loss -- -- -- -- -- (1,671)
Other comprehensive loss -- -- -- -- (6,440) --
--------
Total comprehensive loss (8,111)
Preferred stock dividends -- -- -- -- -- (1,277) (1,277)
Shares issued pursuant to employee
benefit and option plan -- 1 -- 770 -- -- 771
Employee stock purchase plan -- -- -- 79 -- -- 79
Tax benefits related to stock
compensation plans -- -- -- (29) -- -- (29)
Restricted stock -- 3 (826) 1,849 -- -- 1,026
Warrants -- 1 -- 1,276 -- -- 1,277
-------- ---- ----- --------- ------- --------- --------
Balances, December 31, 2002 6 139 (826) 158,370 (469) (16,260) 140,960
-------- ---- ----- --------- ------- --------- --------
Comprehensive income:
Net loss -- -- -- -- -- (17,991)
Other comprehensive income -- -- -- -- 449 --
--------
Total comprehensive loss (17,542)
Preferred stock dividends -- -- -- -- -- (1,277) (1,277)
Shares issued pursuant to employee
benefit and option plan -- 1 -- 427 -- -- 428
Employee stock purchase plan -- -- -- 127 -- -- 127
Restricted stock -- (1) 454 (516) -- -- (63)
Warrants -- -- -- 10,628 -- -- 10,628
-------- ---- ----- --------- ------- --------- --------
Balances, December 31, 2003 $ 6 $139 $(372) $ 169,036 $ (20) $ (35,528) $133,261
======== ==== ===== ========= ======= ========= ========
The accompanying notes are an integral part of these financial statements.
48
CALLON PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
--------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (17,991) $ (1,671) $ 1,816
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 29,264 27,774 21,709
Accretion expense 2,884 -- --
Amortization of deferred costs 6,568 5,521 2,485
Non-cash loss on early extinguishment of debt 4,423
Amortization of deferred production payment revenue -- (2,406) (4,830)
Cumulative effect of change in accounting principle (181) -- --
Non-cash derivative income -- (9,186) --
Non-cash mark-to-market commodity derivative contracts 487 708 --
Non-cash charge related to compensation plans 858 1,267 942
Deferred income tax expense (benefit) 8,432 (900) 977
Gain on sale of pipeline -- (2,454) --
Writedown of Enron derivatives -- -- 9,186
Changes in current assets and liabilities:
Accounts receivable, trade (1,438) (4,967) 3,336
Advance to operators (1,501) (98) 1,131
Other current assets (1,166) (6) (2)
Current liabilities 5,185 3,198 (8,782)
Investment in derivative contracts -- (1,687) --
Increase in accounts payable and accrued liabilities
to be refinanced -- -- 9,558
Change in gas balancing receivable (340) (288) 170
Change in gas balancing payable (491) (390) 355
Change in other long-term liabilities (15) 67 (1,749)
Change in other assets, net (349) (2,315) (1,071)
--------- -------- --------
Cash provided (used) by operating activities 34,629 12,167 35,231
--------- -------- --------
Cash flows from investing activities:
Capital expenditures (50,705) (66,023) (113,833)
Sale of Medusa Spar to Medusa Spar, LLC 24,908 -- --
Proceeds from sale of pipeline and other facilities 1,500 6,784 --
Cash proceeds from sale of mineral interests 982 4,492 1,195
--------- -------- --------
Cash provided (used) by operating activities (23,315) (54,747) (112,638)
--------- -------- --------
Cash flows from financing activities:
Change in accounts payable and accrued liability to be refinanced (3,861) (5,697) --
Increase in debt 198,000 109,900 155,000
Payment on debt (133,000) (58,085) (84,900)
Restricted cash (63,345) -- --
Debt issuance costs (3,745) (2,291) (2,374)
Equity issued related to employee stock plans 127 79 357
Capital lease (1,320) (1,129) 5,612
Cash dividends on preferred stock (1,277) (1,277) (1,277)
--------- -------- --------
Cash provided (used) by financing activities (8,421) 41,500 72,418
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,893 (1,080) (4,989)
Cash and cash equivalents:
Balance, beginning of period 5,807 6,887 11,876
--------- -------- --------
Balance, end of period $ 8,700 $ 5,807 $ 6,887
========= ======== ========
The accompanying notes are an integral part of these financial statements.
49
CALLON PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
GENERAL
Callon Petroleum Company ("the Company" or "Callon") was organized under the
laws of the state of Delaware in March 1994 to serve as the surviving entity in
the consolidation and combination of several related entities (referred to
herein collectively as the "Constituent Entities"). The combination of the
businesses and properties of the Constituent Entities with the Company was
completed on September 16, 1994 ("Consolidation").
As a result of the Consolidation, all of the businesses and properties of the
Constituent Entities are owned (directly or indirectly) by the Company. Certain
registration rights were granted to the stockholders of certain of the
Constituent Entities. See Note 7.
The Company and its predecessors have been engaged in the acquisition,
development and exploration of crude oil and natural gas since 1950. The
Company's properties are geographically concentrated in Louisiana, Alabama,
Texas and offshore Gulf of Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND REPORTING
The Consolidated Financial Statements include the accounts of the Company, and
its subsidiary, Callon Petroleum Operating Company ("CPOC"). CPOC also has
subsidiaries, namely Callon Offshore Production, Inc. and Mississippi Marketing,
Inc. All intercompany accounts and transactions have been eliminated. Certain
prior year amounts have been reclassified to conform to presentation in the
current year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. The Statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Company adopted SFAS 133 effective January 1, 2001. The
cumulative effect of the accounting change, net of tax, recorded as other
comprehensive loss was $3.8 million.
50
SFAS 133 requires the Company to report changes in the fair value of its
derivative financial instruments that qualify as cash flow hedges in other
comprehensive income, a component of stockholders' equity, until realized. See
Note 6 for a discussion of the Company's derivative financial instruments.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations ("SFAS 143") effective for
fiscal years beginning after June 15, 2002. SFAS 143 essentially requires
entities to record the fair value of a liability for obligations associated with
the retirement of tangible long-lived assets and the associated asset retirement
costs. Callon adopted the statement on January 1, 2003 resulting in a cumulative
effect of accounting change of $181,000, net of tax. See Note 8.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure -an amendment of SFAS No. 123." SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on the reported results. SFAS 148
was effective for the year ended December 31, 2002 and for interim financial
statements commencing in 2003. The adoption of this pronouncement by the Company
did not have an impact on its financial condition or results of operations. See
Stock-Based Compensation for related disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) 51" ("FIN 46"). FIN 46 addresses consolidation by business enterprises of
variable interest entities ("VIEs"). The primary objective of FIN 46 is to
provide guidance on the identification of, and financial reporting for, entities
over which control is achieved through means other than voting rights; such
entities are known as VIEs. The provisions of FIN 46 are effective immediately
for these variable interest entities created after January 31, 2003. On December
24, 2003, the FASB issued a revision to FIN 46 which among other things deferred
the effective date for certain variable interests created prior to January 31,
2003. Application is required for interests in special-purpose entities in the
periods ending after December 15, 2003 and application is required for all other
types of variable interest entities in the periods ending after March 31, 2004.
The Company adopted FIN 46, as revised, as of December 31, 2003, which had no
impact on the financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations," which requires the use of the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also
issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an
annual review of impairment. The new standard also requires that all intangible
assets be aggregated and presented as a separate line item in the balance sheet.
The adoption of SFAS No. 141 and 142 had no impact on the Company's financial
position or results of operations. A reporting issue has arisen regarding the
application of certain provisions of SFAS No. 141 and 142 to companies in the
oil and gas industry. The issue is whether SFAS No. 141 requires registrants to
classify the costs of mineral rights associated with extracting oil and gas as
intangible assets in the balance sheet, apart from other capitalized oil and gas
property costs, and provide specific footnote disclosures. Historically, the
Company has included the costs of mineral rights associated with extracting oil
and gas as
51
a component of oil and gas properties. These costs include those to acquire
contract based drilling and mineral use rights such as delay rentals, lease
bonuses, commissions and brokerage fees, and other leasehold costs.
The Emerging Issues Task Force ("EITF") has added the treatment of oil and gas
mineral rights to an upcoming agenda, which may result in a change in the
classification of these amounts, as described above. The Company will continue
to classify its oil and gas leasehold costs as tangible oil and gas properties
until further guidance is provided. The Company's cash flows and results of
operations would not be affected since such intangible assets would continue to
be depleted and assessed for impairment in accordance with full cost accounting
rules, as allowed by SFAS No. 142. Further, the Company believes that the
amounts that would be classified as intangible assets as of December 31, 2003
and 2002 would be immaterial.
The Company follows the asset and liability method of accounting for deferred
income taxes prescribed by Statement of Financial Accounting Standards No. 109
("SFAS 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. See Note 3.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties whereby all costs incurred in connection with the acquisition,
exploration and development of oil and gas reserves, including certain overhead
costs, are capitalized. Such amounts include the cost of drilling and equipping
productive wells, dry hole costs, lease acquisition costs, delay rentals,
interest capitalized on unevaluated leases and other costs related to
exploration and development activities. Payroll and general and administrative
costs capitalized include salaries and related fringe benefits paid to employees
directly engaged in the acquisition, exploration and/or development of oil and
gas properties as well as other directly identifiable general and administrative
costs associated with such activities. Such capitalized costs ($13.2 million in
2003, $9.6 million in 2002 and $10.0 million in 2001) do not include any costs
related to production or general corporate overhead. Costs associated with
unevaluated properties, including capitalized interest on such costs, are
excluded from amortization. Unevaluated property costs are transferred to
evaluated property costs at such time as wells are completed on the properties,
the properties are sold or management determines that 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 accumulated amortization and deferred
taxes relating to oil and gas properties, exceed the sum of (1) the estimated
future net revenues from proved reserves at current prices and discounted at 10%
and (2) the lower of cost or market of unevaluated properties (the full cost
ceiling amount), net of tax effects, then such excess is charged to expense
during the period in which the excess occurs. See Note 9.
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 available geological, engineering and regulatory data. 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
52
or discovery. Until January 1, 2003, such costs were capitalized as oil and gas
properties as the actual restoration, dismantlement and abandonment activities
took place. As discussed above under Accounting Pronouncements, beginning
January 1, 2003, the Company changed the method for which we account for such
costs upon adoption of SFAS 143 and these costs are included in the full cost
pool. For purposes of the full cost ceiling test, the Company nets the Asset
Retirement Obligation liability against the net capitalized costs of oil and gas
properties and includes cash outflows associated with asset retirement
obligations in the calculation of the full cost ceiling amount.
Depreciation of other property and equipment is provided using the straight-line
method over estimated lives of three to 20 years. Depreciation of pipeline and
other facilities is provided using the straight-line method over estimated lives
of 15 to 27 years.
SALE OF PRODUCTION PAYMENT INTEREST
In June 1999, the Company acquired a working interest in the Mobile Block 864
Area where the Company already owned an interest. Concurrent with this
acquisition, the seller received a volumetric production payment, valued at
approximately $14.8 million, from production attributable to a portion of the
Company's interest in the area over a 39-month period. The Company recorded a
liability associated with the sale of this production payment interest because a
substantial obligation for future performance existed. Under the terms of the
sale, the Company was obligated to deliver the production volumes free and clear
of royalties, lease operating expenses, production taxes and all capital costs.
The production payment was amortized, beginning in June 1999, to oil and gas
sales on the units-of-production method as associated hydrocarbons were
delivered, and expired in July 2002.
NATURAL GAS IMBALANCES
The Company follows the 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 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 under SFAS 133 (See Note 6).
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of accrued oil and gas production
receivables. The balance in the reserve for doubtful accounts included in
accounts receivable was $103,000 and $143,000 at December 31, 2003 and 2002,
respectively. Net charge offs were $40,000 in 2003 and net recoveries were
$75,000 in 2002. There were no provisions to expense in the three-year period
ended December 31, 2003.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES TO BE REFINANCED
These amounts included in the Consolidated Balance Sheet represent capital
expenditures in accounts payable and accrued liabilities that were refinanced
with the availability under the Company's senior secured credit facility
subsequent to December 31, 2002. Amounts in 2003 were classified as short term
because of the maturity of the Credit Facility on June 30, 2004.
53
STOCK-BASED COMPENSATION
The Company's pro forma net income (loss) and net income (loss) per share of
common stock for the 12-month periods ended December 31, 2003, 2002 and 2001 had
compensation costs been recorded using the fair value method in accordance with
SFAS 123, as amended by SFAS 148 are presented below pursuant to the disclosure
requirements of SFAS 148 (in thousands except per share data):
2003 2002 2001
-------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) available to common shares,
as reported $(19,268) $(2,948) $ 539
Stock-based compensation expense included
in net income as reported, net of tax 17 270 397
Deduct: Total stock-based
compensation expense under fair
value based method, net of tax (202) (907) (1,775)
-------- ------- -------
Pro forma net income (loss) available to
common shares $(19,453) $(3,585) $ (839)
======== ======= =======
Basic earnings (loss) per share: As Reported (1.41) (.22) .04
Pro Forma (1.42) (.27) (.06)
Diluted earnings (loss) per share: As Reported (1.41) (.22) .04
Pro Forma (1.42) (.27) (.06)
See Note 11 for descriptions and additional disclosures related to the plans.
MAJOR CUSTOMERS
The Company's production is sold generally on month-to-month contracts at
prevailing prices. The following table identifies customers to whom it sold a
significant percentage of its total oil and gas production during each of the
12-month periods ended:
DECEMBER 31,
------------------
2003 2002 2001
---- ---- ----
Petrocom Energy Group, Ltd. 4% 4% --
Dynegy 5% 7% 8%
Prior Energy Corporation 20% -- 20%
Reliant Energy Services 28% 70% 49%
Louis Dreyfus Energy Services 27% -- --
Because alternative purchasers of oil and gas are readily available, the Company
believes that the loss of any of these purchasers would not result in a material
adverse effect on its ability to market future oil and gas production.
STATEMENTS OF CASH FLOWS
For purposes of the Consolidated Financial Statements, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
54
The Company paid no federal income taxes for the three years ended December 31,
2003. During the years ended December 31, 2003, 2002 and 2001, the Company made
cash payments for interest of $27,913,000, $25,507,000 and $16,441,000,
respectively.
PER SHARE AMOUNTS
Basic income or loss per common share was computed by dividing net income or
loss by the weighted average number of shares of common stock outstanding during
the year. Diluted income or loss per common share was determined on a weighted
average basis using common shares issued and outstanding adjusted for the effect
of stock options considered common stock equivalents computed using the treasury
stock method and the effect of the convertible preferred stock (if dilutive).
The conversion of the preferred stock was not included in any annual calculation
due to its antidilutive effect on diluted income or loss per common share. In
addition, below are the shares relating to stock options, warrants and
restricted stock that were not included in diluted shares for the twelve-month
periods ended December 31, 2003 and 2002 due to the fact that the Company had a
loss for these periods. The Company had net income for the period ended December
31, 2001 and therefore had no such shares for this period.
A reconciliation of the basic and diluted per share computation is as follows
(in thousands, except per share amounts):
2003 2002 2001
-------- ------- -------
(a) Net income (loss) available to common shares $(19,268) $(2,948) $ 539
Preferred dividends assuming conversion of
preferred stock (if dilutive) -- -- --
-------- ------- -------
(b) Income (loss) available to common shares assum-
ing conversion of preferred stock (if dilutive) $(19,268) $(2,948) $ 539
======== ======= =======
(c) Weighted average shares outstanding 13,662 13,387 13,273
Dilutive impact of stock options -- -- 27
Dilutive impact of restricted stock -- -- --
Dilutive impact of warrants -- -- 66
Convertible preferred stock (if dilutive) -- -- --
-------- ------- -------
(d) Total diluted shares 13,662 13,387 13,366
======== ======= =======
Stock options and warrants excluded due to the
exercise price being greater than the stock price 2,297 2,250 1,438
Basic income (loss) per share (a/c) $ (1.41) $ (.22) $ .04
Diluted income (loss) per share (b/d) $ (1.41) $ (.22) $ .04
55
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of cash, cash equivalents, accounts receivable, accounts payable, the
capital lease and the senior secured credit facility approximates book value at
December 31, 2003 and 2002. Fair value of long-term debt (specifically, the
10.125%, the 10.25%, the 11% Senior Subordinated Notes and the 12% loans) have
an estimated fair value of 100% of face value at December 31, 2003.
3. INCOME TAXES
The Company has recorded a deferred tax asset at December 31, 2003 and 2002 and
a valuation allowance at December 31, 2003 as follows:
DECEMBER 31,
---------------------
2003 2002
-------- --------
(IN THOUSANDS)
Federal net operating loss carryforwards $ 61,805 $ 42,464
Statutory depletion carryforward 4,255 4,251
Temporary differences:
Oil and gas properties (66,725) (39,159)
Pipeline and other facilities -- (299)
Non-oil and gas property (16) (30)
Other 1,620 1,540
SFAS 143-Asset Retirement Obligations 10,563 --
-------- --------
Total tax asset 11,502 8,767
Valuation allowance (11,502) --
-------- --------
Net tax asset $ -- $ 8,767
======== ========
SFAS 109 provides for the weighing of positive and negative evidence in
determining whether it is more likely than not that a deferred tax asset is
recoverable. The Company has incurred losses in 2002 and 2003 and has losses on
an aggregate basis for the three-year period ended December 31, 2003. However,
as discussed in Note 5, in December 2003 the Company refinanced nearly all its
highest cost debt, incurring an early extinguishment loss of $5.6 million, but
achieving significant interest savings in the future. In addition, as discussed
in Note 5, the first two of the Company's deepwater projects began production in
November 2003, which is expected to result in a significant increase in 2004
production as compared to 2003. Nevertheless, relevant accounting guidance
suggests that a recent history of cumulative losses constitutes significant
negative evidence, and that future expectations about income are overshadowed by
such recent losses. As a result, the Company established a valuation allowance
of $11.5 million as of December 31, 2003. If the Company achieves profitable
operations in 2004, the Company expects it will reverse a portion of the
valuation allowance in an amount at least sufficient to eliminate any tax
provision in that period.
56
Below is a reconciliation of the reported amount of income tax expense
attributable to continuing operations for the year to the amount of income tax
expense that would result from applying domestic federal statutory tax rates to
pretax income from continuing operations.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2000
---- ---- ----
Income tax expense (benefit) computed at the statutory
federal income tax rate (35%) (35%) 35%
Change in valuation allowance 118% -- --
Write off of NOL's 4% -- --
---- ---- ----
Effective income tax rate 87% (35%) 35%
==== ==== ====
The Company has significant state net operating loss carryforwards that are not
included in the deferred tax asset above, as the Company does not anticipate
generating taxable state income in the states in which these loss carryforwards
apply. The Company has very limited state taxable income as primarily all of its
revenue is generated in federal waters not subject to state income taxes.
4. OTHER COMPREHENSIVE INCOME
A recap of the Company's 2003, 2002 and 2001 comprehensive income (net of tax)
is shown below (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
Other comprehensive income (loss):
Cumulative effect of change in
accounting principle $ -- $ -- $ (3,764)
Change in derivatives fair value 449 (469) 9,735
Amortization of Enron derivatives -- (5,971) --
-------- -------- --------
Total other comprehensive income (loss) $ 449 $ (6,440) $ 5,971
======== ======== ========
57
5. LONG-TERM DEBT
Long-term debt consisted of the following at:
DECEMBER 31,
2003 2002
--------- ---------
(IN THOUSANDS)
Senior Secured Credit Facility $ 30,000* $ 65,000
Senior Subordinated Notes (due 2004) - these notes were
retired with restricted cash on 01/08/2004:
10.125% notes net of discount 21,772* 20,086
10.250% notes 40,000* 40,000
12% Senior Loans (due 2005) net of discount 9,490 87,020
11% Senior Subordinated Notes (due 2005) 33,000 33,000
9.75% Senior Loans (due 2010) net of discount 170,684 --
Capital Lease 3,162 4,483
--------- ---------
Total Long-term Debt 308,108* 249,589
Less current portion 93,223* 1,320
--------- ---------
Long-term portion $214,885 $248,269
========= =========
* $62.9 million of 2004 senior subordinated notes are in this
current portion and were retired on January 8, 2004. Total Long-term
Debt after retirement of the 2004 notes was $245.2 million. The
senior secured credit facility comprises $30 million of the current
portion. It is expected that the maturity date of the facility will
be renegotiated and extended or the facility will be replaced.
SENIOR SECURED CREDIT FACILITY. The Company negotiated its senior secured credit
facility effective October 31, 2000 with Wachovia Bank, National Association,
formerly First Union National Bank. Borrowings under the senior secured credit
facility are secured by mortgages covering substantially all of the Company's
producing oil and gas properties. On June 30, 2002 the Company amended the
senior secured credit facility to increase availability under the revolving
borrowing base from $50 million to $75 million under a dual tranche loan. The
Tranche A revolver bears interest at 0.25% to 0.75% above a defined base rate
depending on utilization of the borrowing base or, at the option of the Company,
LIBOR plus 2% to 2.5% based on utilization of the borrowing base and has a
maximum aggregate credit amount of $45 million until Tranche B is retired. The
range of interest rates on the Tranche A revolver was 3.12% to 5.00% for the 12
months ended December 31, 2003. The Tranche B part of the facility bears an
interest rate of 15% and has an aggregate maximum credit amount of $30 million.
The weighted average interest rate for the senior secured credit facility debt
outstanding at December 31, 2003 and 2002 was 15% and 9%, respectively. Under
the senior secured credit facility, a commitment fee of 0.25% or 0.375% per
annum, depending on the amount of the unused portion of the borrowing base, is
payable quarterly.
There were no borrowings outstanding on Tranche A and there was $30 million
outstanding against Tranche B at December 31, 2003. On December 21, 2003, the
Company exercised its right to call the Tranche B loan with a 30-day notice and
on January 21, 2004, the Company drew $27 million under Tranche A and redeemed
the Tranche B principal plus a 1% call premium. Repayment of Tranche B cancelled
any future credit amounts available under Tranche B. Currently, the facility
provides for a $45.0 million borrowing base under Tranche A which is adjusted
periodically on the basis of the discounted present value of future net cash
flows attributable to our proved producing oil and gas reserves
58
and other factors deemed relevant by the lenders. The borrowing base for Tranche
A is currently being reviewed by the lenders and could be increased due to the
Company's proved producing reserves increasing as a result of the Medusa and
Habanero fields commencing production in the fourth quarter of 2003. This
facility expires on June 30, 2004 and the Company is currently reviewing options
to extend the maturity date or to replace the facility with one that is similar
or with more favorable terms. Borrowings under the credit facility are
classified as current at December 31, 2003.
SENIOR SUBORDINATED NOTES (DUE 2004). Covenant defeasance was exercised under
the indentures for the 10.125% and 10.25% notes on December 8, 2003 and a
required 30-day redemption notice was distributed to holders. The funds
necessary to redeem the notes were placed in trust, from the net proceeds of the
new 9.75% loans and the trustee paid the holders of the notes on January 8,
2004. The terms of the covenant defeasance that were exercised did not meet the
requirements for legal defeasance under SFAS 140, "Accounting for Transfers and
Servicing of Financial Instruments and Extinguishment of Debt", and therefore
these notes are considered outstanding at December 31, 2003. The funds in trust
were classified on the Company's December 31, 2003 consolidated balance sheet as
restricted cash.
On September 15, 2002, $36 million of the Company's 10.125% Senior Subordinated
Notes ("Notes") that were issued on July 31, 1997, were due. The holders of
$22.9 million of the Notes consented to an extension of such Notes until July
31, 2004. The Company granted 274,980 warrants (with a fair market value of
approximately $1.3 million) to purchase Common Stock of the Company and paid
consent fees in the amount of $2.3 million to the holders of the Notes that
granted the extensions. These amounts were treated as an additional discount on
the debt. The warrants have a term of five years and an exercise price of $0.01.
The holders of the Notes had exercised approximately 116,000 warrants as of
December 31, 2003. The holders of the Notes that did not consent to the
extension were paid on the maturity date in September 2002. Interest on the
Notes was payable quarterly, on March 15, June 15, September 15, and December 15
of each year.
The Company accounted for the extension of the $22.9 million in Notes described
above as an extinguishment of the Notes and the issuance of new securities were
recorded at a fair value of $19.3 million. The net loss on extinguishment was
not significant. Costs deferred with the extensions were being amortized through
July 2004. As a result of the redemption of the Notes on January 8, 2004, the
unamortized balance of the discount and the deferred costs of $1.1 million will
be expensed during the first quarter of 2004 as a loss on early extinguishment
of debt.
On July 15, 1999, the Company completed the sale of $40 million of Senior
Subordinated Notes due 2004 at 10.25%. These notes were not entitled to any
mandatory sinking fund payments and were subject to redemption at the Company's
option at par plus unpaid interest at any time after March 15, 2001. Interest
was paid quarterly. The notes were redeemed on January 8, 2004. These notes are
classified as current at December 31, 2003.
12% SENIOR UNSECURED CREDIT FACILITY (DUE 2005). In July 2001, the Company
entered into a $95 million senior unsecured credit facility with a private
lender. The Company borrowed $45 million upon closing of the loan and borrowed
the remaining $50 million in December 2001. The loans bear interest at the rate
of 12% per year. Under the terms of the agreement, Callon also issued warrants
to purchase, at a nominal exercise price, 265,210 shares of its Common Stock
(fair value of $3.1 million) and conveyed an overriding royalty interest equal
to 2% of the Company's net interest in four existing deepwater discoveries (fair
value of $5.9 million). These amounts were treated as an additional discount on
the debt. The warrants and the overriding royalty interest were earned by the
lender based on the ratio of the
59
amount of the loan proceeds advanced to the total loan facility amount. The
loans will mature March 31, 2005 and have an effective interest rate of
approximately 16%.
The Company recorded these borrowings at a value of $84 million net of discount.
Deferred costs associated with the loans are being amortized through March 2005.
Upon redemption of $85 million of the loans on December 30, 2003 the pro rata
portion of the unamortized balance of the discount and the associated deferred
costs in the amount of $4.4 million and a 1% call premium of $850,000 were
expensed during the fourth quarter of 2003 as a loss on early extinguishment of
debt.
11% SENIOR SUBORDINATED NOTES (DUE 2005). On October 26, 2000 the Company
completed the sale of $33 million of 11% Senior Subordinated Notes due December
15, 2005. The Company netted $31.5 million from the offering after deducting the
underwriters' discount and offering expenses.
9.75% SENIOR LOANS (DUE 2010). In December 2003 the Company borrowed $185
million pursuant to a senior unsecured credit facility. The loans under the
credit facility have a stated interest rate of 9.75% and a seven-year maturity.
The net proceeds of $181.3 million were used to redeem $22.9 million of 10.125%
senior subordinated notes due July 31, 2004, $40 million of 10.25% senior
subordinated notes due September 15, 2004 and $85 million of our 12% loan due
March 31, 2005 issued pursuant to a senior unsecured credit agreement dated July
29, 2001 plus a 1% pre-payment premium of $850,000, and to reduce the balance
outstanding under the Company's senior secured credit facility. In conjunction
with the new senior unsecured notes, the Company issued detachable warrants to
purchase 2.775 million of our common stock at an exercise price of $10 per
share. The warrants were valued at $10.6 million and were treated as an
additional discount on the debt. This senior unsecured debt matures December 8,
2010 and has an effective interest rate of 11.4%. The Company recorded the
issuance of these new securities at a fair value of $171 million. Deferred costs
of $14 million associated with the notes will be amortized over the life of the
notes.
REMAINING MATURITIES FOR UNSECURED DEBT. Our remaining maturities for unsecured
debt consist of the $185 million in 9.75% loans due 2010, $10 million of the 12%
loans with a due date of March 31, 2005 and $33 million of 11% senior
subordinated notes with a due date of December 15, 2005. These 2005 maturities
will be retired by our primary sources of capital which are cash flows from
operations, borrowings from financial institutions and the sale of debt and
equity securities.
CAPITAL LEASE. In December 2001, the Company entered into a 10-year gas
processing agreement associated with a production facility on Callon's Mobile
Block 952 field with Hanover Compression Limited Partnership, which is being
accounted for as a capital lease. Total minimum obligations are $8.4 million
with interest representing approximately $2.8 million and the present value
minimum obligations were $5.6 million ($1.2 million current).
RESTRICTIVE COVENANTS. The senior secured credit facility, the senior
subordinated debt and the senior unsecured credit facilities contain various
covenants including restrictions on additional indebtedness and payment of cash
dividends as well as maintenance of certain financial ratios. The Company was in
compliance with these covenants at December 31, 2003.
60
FUTURE MINIMUM LEASE PAYMENTS AND DEBT MATURITIES (IN THOUSANDS) ARE AS FOLLOWS:
* These maturities consist of $62.9 million of senior subordinated notes which
were retired on January 8, 2004 and $30 million under the senior secured credit
facility which matures June 30, 2004 and which the Company expects will be
renegotiated and extended or replaced with a new facility.
6. DERIVATIVES
The Company periodically uses derivative financial instruments to manage oil and
gas price risk. Settlements of gains and losses on commodity price 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.
In 2003 and 2002, the Company purchased and sold various put options and call
options and elected not to designate these derivative financial instruments as
hedges and accordingly, the changes in fair value of these contracts were
recorded through earnings. A loss of approximately $666,000 and $708,000 was
recognized for the twelve month periods ended December 31, 2003 and 2002,
respectively. The fair value of the open contracts at December 31, 2003 was a
current liability of $134,640. At December 31, 2002 the fair value was a current
asset of $352,500.
During 2002, the Company entered into costless natural gas collar contracts in
effect for February 2003 through October 2003. These agreements were for volumes
of 275,000 Mcf per month with an average ceiling price of $4.79 and a floor
price of $3.52. These contracts were accounted for as cash flow hedges under
SFAS 133. The fair value of these collar contracts at December 31, 2002 was
recorded on the balance sheet as a liability of $721,350. The Company recognized
a reduction of $2,932,000 in oil and gas sales related to the settlements of
such collars for the 12 months ended December 31, 2003.
During 2003, the Company entered into additional costless natural gas collar
contracts in effect for May 2003 through October 2003. These agreements were for
volumes of 200,000 Mcf per month with a ceiling price of $5.80 and a floor price
of $5.00. The Company elected not to designate these derivative financial
instruments as hedges and accordingly, the changes in fair value of these
contracts were recorded through earnings. For the twelve month period ended
December 31, 2003, the Company recognized a gain of approximately $131,600.
In 2001, the Company entered into derivative contracts for 2002 production with
Enron North America Corp. ("Enron"). In the fourth quarter of 2001, the Company
charged to expense (non-cash) $9.2 million representing the fair market value of
these derivatives as of September 30, 2001. As the contracts matured, the
Company recorded non-cash revenue each month. For the twelve month period ended
December 31, 2002, the Company recorded approximately $9.2 million, as non-cash
oil and gas revenues.
61
Also, in the second quarter of 2002, the Company completed the sale of its
claims against Enron for $2.5 million and reported a pre-tax gain of that
amount.
In the fourth quarter of 2003, Callon entered into two natural gas collar
contracts which are listed below:
Collars
Volumes per Quantity Floor Ceiling
Product Month Type Price Price Period
----------- ----------- -------- ------- ------- ----------
Natural Gas 100,000 MMBtu $ 5.25 $7.25 12/03-03/04
Natural Gas 100,000 MMBtu $ 5.00 $7.20 01/04-03/04
These contracts are accounted for as cash flow hedges under SFAS 133. The
Company recognized an increase of $52,500 in oil and gas sales related to the
settlements of such collars in the twelve month period ended December 31, 2003.
The fair value of these collar contracts at December 31, 2003 was recorded on
the balance sheet as a liability in the amount of $30,400.
In the first quarter of 2004, Callon entered into various derivative contracts
which are listed in the table below:
Swaps
Volumes per Quantity
Product Month Type Average Period
--------- ----------- -------- --------- -----------
Oil 30,000 Bbls $ 31.29 02/04-01/05
Oil 15,000 Bbls $ 30.00 04/04-03/05
Oil 15,000 Bbls $ 30.00 07/04-12/04
Collars
Average Average
Volumes per Quantity Floor Ceiling
Product Month Type Price Price Period
----------- ----------- -------- --------- -------- -----------
Oil 45,000 Bbls $ 29.33 $ 32.17 02/04-01/05
Oil 15,000 Bbls $ 30.00 $ 32.50 02/04-10/04
Natural Gas 500,000 MMBtu $ 5.00 $ 6.08 04/04-11/04
Natural Gas 100,000 MMBtu $ 5.00 $ 5.60 06/04-11/04
Natural Gas 300,000 MMBtu $ 5.00 $ 6.91 12/04-03/05
These contracts will be accounted for as cash flow hedges under SFAS 133.
7. COMMITMENTS AND CONTINGENCIES
As described in Note 10, 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, 2003, total estimated site
restoration, dismantlement and abandonment costs were approximately $7.4
million, 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 Notes 2 and 8.
62
From time to time, the Company, as part of the Consolidation and other capital
transactions, entered into registration rights agreements whereby certain
parties to the transactions 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 firm commitment public offerings 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 broker's
discounts and commissions, which will be paid by the respective sellers of the
common stock.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liability thereunder, if
any, will not have a material adverse effect on the financial position or
results of operations of the Company.
The Company may be required to retroactively pay royalties to the Minerals
Management Service on one of the Company's properties which could reduce
revenues and reserves. The Company's Medusa deepwater property is eligible for
royalty suspensions pursuant to the Deep Water Royalty Relief Act. However, the
federal offshore leases covering this property contains "price threshold"
provisions for oil and gas prices. Under this "price threshold" provision, if
the average monthly New York Mercantile Exchange (NYMEX) sales price for oil or
gas during a fiscal year exceeds the price threshold for oil or gas,
respectively, then royalties on the associated production must be paid to the
Minerals Management Service (MMS) at the rate stipulated in the lease. The price
thresholds are adjusted annually by the implicit price deflator for the GDP. The
determination of whether or not royalties are due as a result of the average
NYMEX price exceeding the price threshold is made during the first quarter of
the succeeding year. Any royalty payments due must be made shortly after this
determination is made. If a royalty payment is due for all production during a
year as a result of exceeding the price threshold, the lessee is required to
make monthly royalty payments during the succeeding fiscal year for the
succeeding year's production. If at the end of any year the average NYMEX price
is below the price threshold, the lessee can apply for a refund for any
associated royalties paid during that year and the lessee will not be required
to pay royalties monthly during the succeeding year for the succeeding year's
production.
The thresholds and the average NYMEX prices are calculated by the MMS. The
average NYMEX price for 2003 was $31.08 per barrel of oil and $5.49 per MMBtu of
natural gas. For the year ended December 31, 2003 the thresholds were $32.77 per
barrel of oil and $4.10 per MMBtu of natural gas, subject to finalization of the
adjustment for the 2003 GDP implicit price deflator. As a result the Company
will pay royalties related to 2003 gas production for Medusa, which commenced
production in late November 2003 and will make monthly royalty payments for 2004
gas production during 2004. The actual liability for 2004 oil royalties, if any,
cannot be determined until after the end of 2004.
In the year succeeding the year in which any of the Company's properties became
subject to royalties as the result of the average NYMEX price exceeding the
price threshold, the portion of reserves attributable to potential future
royalties would not be included in a year-end reserve report. However, if the
average NYMEX prices were below the price thresholds in subsequent years, our
reserves would be increased to reflect reserves previously attributed to future
royalties. As a result, reported oil and gas reserves could materially increase
or decrease, depending on the relation of price thresholds versus the average
NYMEX prices. The reduction in revenues resulting from an obligation to pay
these royalties and subsequent reduction of proved reserves could have a
material adverse effect on the Company's results of operations and financial
condition. The Company's reserve report as of December 31, 2003 excluded gas
reserves for Medusa that are subject to MMS royalties as a result of the average
2003 NYMEX price for gas exceeding the price threshold. Oil reserves in this
reserve report were not impacted since the 2003 average NYMEX price was below
the threshold.
63
The Company's activities are subject to federal, state and local laws and
regulations governing environmental quality and pollution control. Although no
assurances can be made, the Company believes that, absent the occurrence of an
extraordinary event, compliance with existing federal, state and local laws,
rules and regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the capital expenditures, earnings or the competitive position of the
Company with respect to its existing assets and operations. The Company cannot
predict what effect additional regulation or legislation, enforcement polices
thereunder, and claims for damages to property, employees, other persons and the
environment resulting from the Company's operations could have on its
activities.
8. ASSET RETIREMENT OBLIGATIONS
As discussed in Note 2, the Company adopted SFAS 143 on January 1, 2003. The
impact of adopting the statement resulted in a gain of $181,000, net of tax,
which is reported as a cumulative effect of change in accounting principle.
Approximately $30.3 million was recorded as the present value of asset
retirement obligations on January 1, 2003 with the adoption of SFAS 143 related
to the Company's oil and gas properties. Interest is accreted on this amount and
reported as accretion expense in the Consolidated Statements of Operations.
Assets, primarily short-term U.S. Government securities, of approximately $7.4
million at December 31, 2003, are recorded as restricted investments. These
assets are held in abandonment trusts dedicated to pay future abandonment costs
of oil and gas properties in which the Company has sold a net profits interest.
If there is any excess of trust assets over abandonment costs, the excess will
be distributed to the net profits interest owners.
The following table summarizes the activity for the Company's asset retirement
obligation:
TWELVE MONTHS ENDED
DECEMBER 31, 2003
-------------------
Asset retirement obligation at beginning of period $ --
Liability recognized in transition 30,251
Accretion expense 2,884
Net profits interest accretion 371
Liabilities incurred 3,649
Liabilities settled (2,847)
Revisions to estimate (617)
-------
Asset retirement obligation at end of period 33,691
Less: current retirement obligation (8,571)
-------
Long-term retirement obligation $25,120
=======
Pro forma net income and earnings per share are not presented for the 12 months
ended December 31, 2002 or 2001 because the pro forma application of SFAS 143 to
the prior periods would not result in pro forma net income and earnings per
share materially different from the actual amounts reported for the periods in
the accompanying Consolidated Statements of Operations.
64
9. 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.
YEARS ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
Capitalized costs incurred:
Evaluated Properties-
Beginning of period balance $ 762,918 $ 704,937 $ 589,549
Property acquisition costs 1,154 1,471 1,713
Exploration costs 21,390 17,851 85,782
Development costs 33,972 43,151 34,980
SFAS 143-Asset Retirement Obligation 18,002 -- --
Medusa Spar transaction (33,542) -- --
Sale of mineral interests (982) (4,492) (7,087)
--------- --------- ---------
End of period balance $ 802,912 $ 762,918 $ 704,937
========= ========= =========
Unevaluated Properties (excluded from
amortization) -
Beginning of period balance $ 40,997 $ 37,560 $ 47,653
Additions 5,228 5,802 8,760
Capitalized interest 4,862 5,289 4,879
Transfers to evaluated (16,836) (7,654) (23,732)
--------- --------- ---------
End of period balance $ 34,251 $ 40,997 $ 37,560
========= ========= =========
Accumulated depreciation, depletion
and amortization-
Beginning of period balance $ 426,254 $ 399,339 $ 378,589
Provision charged to expense 28,195 26,915 20,750
Cumulative effect of change in accounting
principle (7,449) -- --
--------- --------- ---------
End of period balance $ 447,000 $ 426,254 $ 399,339
========= ========= =========
Unevaluated property costs, primarily lease acquisition costs incurred at
federal lease sales, unevaluated drilling costs, capitalized interest and
general and administrative costs being excluded from the amortizable evaluated
property base, consisted of $8.6 million incurred in 2003, $7.1 million incurred
in 2002 and $18.5 million incurred in 2001 and prior. These costs are directly
related to the acquisition and evaluation of unproved properties and major
development projects. The excluded costs and related reserves are included in
the amortization base as the properties are evaluated and proved reserves are
established or impairment is determined. The Company expects that the majority
of these costs will be evaluated over the next three to five-year period.
Depletion per unit-of-production (thousand cubic feet of gas equivalent)
amounted to $2.03, $1.73 and $1.37 for the years ended December 31, 2003, 2002,
and 2001, respectively.
Under the full-cost accounting rules of the SEC, the Company reviews the
carrying value of its proved oil and gas properties each quarter. Under these
rules, capitalized costs of proved oil and gas properties net of accumulated
depreciation, depletion and amortization (DD&A) and deferred income taxes, may
not exceed the present value of estimated future net cash flows from proved oil
and gas reserves, discounted at 10
65
percent, plus the lower of cost or fair value of unproved properties included in
the costs being amortized, net of related tax effects. These rules generally
require pricing future oil and gas production at the unescalated market price
for oil and gas at the end of each fiscal quarter and require a write-down if
the "ceiling" is exceeded, unless prices recover sufficiently before the date of
the auditor's report. Given the volatility of oil and gas prices, it is
reasonably possible that the Company's estimate of discounted future net cash
flows from proved oil and gas reserves could change in the near term. If oil and
gas prices decline significantly, even if only for a short period of time, it is
possible that writedowns of oil and gas properties could occur in the future.
See Note 13 for information regarding the SEC inquiries concerning the Company's
proved reserves.
10. NET PROFITS INTEREST
From 1989 through 1994, the Constituent Entities entered into separate
agreements to purchase certain oil and gas properties with gross contract
acquisition prices of $170,000,000 ($150,000,000 net as of closing dates) and in
simultaneous transactions, entered into agreements to sell overriding royalty
interests ("ORRI") in the acquired properties. These ORRI are in the form of net
profits interests ("NPI") equal to a significant percentage of the excess of
gross proceeds over production costs, as defined, from the acquired oil and gas
properties. A net deficit incurred in any month can be carried forward to
subsequent months until such deficit is fully recovered. The Company has the
right to abandon the purchased oil and gas properties if it deems the properties
to be uneconomical.
The Company has, pursuant to the purchase agreements, created abandonment trusts
(see Note 7) 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 disbursement of
funds to 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. Estimated future revenues and costs associated
with the NPI and the Trusts are also excluded from the oil and gas reserve
disclosures at Note 13. As of December 31, 2003 and 2002, the Trusts' assets
(all cash and investments) totaled $7,420,000 and $6,896,000 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. SFAS 143, discussed in Note 2 and 8, does not allow the
Abandonment Trusts' assets to be used to offset the associated abandonment
liability. The Company did not record any income or loss associated with the
Trust asset or abandonment liability as a result of adoption of SFAS 143.
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.
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,
66
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.
11. 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, including
Company discretionary contributions, immediately upon participation in the
Savings and Protection Plan. The total amounts contributed by the Company,
including the value of the common stock contributed, were $562,000,
$611,000 and $595,000 in the years 2003, 2002 and 2001, respectively.
The 1994 Stock Incentive Plan (the "1994 Plan"), approved by the
shareholders in 1994, 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. These options have an
expiration date of 10 years from the 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 was approved by the shareholders in 1997 and
provides for the same types of awards as the 1994 Plan and is limited to a
maximum of 1,200,000 shares (as amended from the original 900,000 shares)
of common stock that may be subject to outstanding awards. Unvested
options are subject to forfeiture upon certain termination of employment
events and expire 10 years from the date of grant.
The Company granted 533,000 stock options to employees on March 23, 2000
and 120,000 stock options to directors on July 25, 2000 at $10.50 per
share. The March 23, 2000 grant was subject to shareholder approval of an
amendment to the 1996 Stock Incentive Plan. The amendment, which was
approved on May 9, 2000 at the Annual Meeting of Shareholders, increased
the number of shares reserved for issuance under the 1996 plan to
2,200,000 shares. The excess of the market price over the exercise price
on the approval date of the amendment is amortized over the three-year
vesting period of the options. Compensation costs of $27,000, $416,000 and
$611,000 were recognized in 2003, 2002 and 2001, respectively, related to
these options.
On February 14, 2002, the Board of Directors of the Company approved and
adopted the 2002 Stock Incentive Plan (the "2002 Plan"). Pursuant to the
2002 Plan, 350,000 shares of common stock shall be reserved for issuance
upon the exercise of options or for grants of stock options, stock
appreciation rights or units, bonus stock, or performance shares or units.
This Plan qualified as a "broadly based" plan under the provisions of the
New York Stock
67
Exchange's rules and regulations and therefore did not require shareholder
approval. Because the 2002 Plan is a broadly based plan, the aggregate
number of shares underlying awards granted to officers and directors
cannot exceed 50% of the total number of shares underlying the awards
granted to all employees during any three-year period.
In 2002, the Company awarded 300,000 shares of restricted stock from the
1996 and the 2002 Plan and 70,500 from treasury shares to be issued as
vested. The issuance of the restricted stock using treasury shares did not
require shareholder approval pursuant to the New York Stock Exchange's
rules and regulations, and therefore shareholder approval was not sought.
These shares will generally vest to the recipients over a three-year
period (one-third in each year) beginning in November 2002. The deferred
compensation portion of this grant will be amortized to expense over the
vesting period. The non-cash amortization expense in, 2003 and 2002 was
$454,000 and $496,000, respectively.
In 1997, the Board of Directors authorized the implementation of the
Callon Petroleum Company 1997 Employee Stock Purchase Plan (the "1997
Purchase Plan"), which was approved by the Company's shareholders at the
1997 Annual Meeting. The Plan provides eligible employees of the Company
with the opportunity to acquire a proprietary interest in the Company
through participation in a payroll deduction-based employee stock purchase
plan. An aggregate of 250,000 shares of common stock have been reserved
for issuance over the 10-year term of the 1997 Purchase Plan. The purchase
price per share at which common stock will be purchased on the
participant's behalf on each purchase date within an offering period is
equal to 85 percent of the fair market value per share of common stock.
A summary of the status of the Company's stock option plans for the three most
recent years and changes during the years then ended is presented in the table
and narrative below:
2003 2002 2001
--------------------- ---------------------- ----------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
---------- -------- ---------- --------- ---------- --------
Outstanding, beginning of year 2,520,417 $ 9.90 2,332,667 $ 10.84 2,304,167 $ 10.83
Granted (at market) 30,000 5.12 310,000 4.45 30,000 11.61
Exercised (500) 4.10 -- -- (1,500) 9.00
Forfeited (99,050) 9.74 (122,250) 14.10 -- --
Expired -- -- -- -- -- --
---------- -------- ---------- ------- ---------- -------
Outstanding, end of year 2,450,867 $ 9.84 2,520,417 $ 9.90 2,332,667 $ 10.84
========== ======== ========== ======= ========== =======
Exercisable, end of year 2,262,067 $ 10.31 2,224,334 $ 10.57 2,057,977 $ 10.80
========== ======== ========== ======= ========== =======
Weighted average fair value of
options granted (at market) $ 2.97 $ 2.44 $ 5.80
========== ========== ==========
68
The following table sets forth additional information regarding options
outstanding at December 31, 2003. Contractual life and exercise prices represent
weighted averages for options outstanding and options exercisable.
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Range of Number Contractual Exercise Number Exercise
exercise prices Outstanding Life (years) Price Exercisable Price
------------------ ----------- ------------ -------- ----------- --------
$ 3.70 to $ 6.41 315,200 8.6 $ 4.47 126,400 $ 4.74
$ 9.00 to $ 12.28 2,070,667 3.9 $ 10.53 2,070,667 $ 10.53
$ 13.56 to $ 15.31 65,000 4.3 $ 14.16 65,000 $ 14.16
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 the years presented are as follows:
12. EQUITY TRANSACTIONS
In November 1995, the Company sold 1,315,500 shares of $2.125 Convertible
Exchangeable Preferred Stock, Series A (the "Preferred Stock") for net proceeds
of $30.9 million. Annual dividends are $2.125 per share and are cumulative. The
net proceeds of the $.01 par value stock after underwriters discount and expense
was $30,899,000. Each share has a liquidation preference of $25.00, plus accrued
and unpaid dividends. Dividends on the Preferred Stock are cumulative from the
date of issuance and are payable quarterly, commencing January 15, 1996. The
Preferred Stock is convertible at any time, at the option of the holders
thereof, unless previously redeemed, into shares of Common Stock of the Company
at an initial conversion price of $11 per share of Common Stock, subject to
adjustments under certain conditions.
The Preferred Stock is redeemable at any time on or after December 31, 1998, in
whole or in part at the option of the Company at a redemption price of $26.488
per share beginning at December 31, 1998 and at premiums declining to the $25.00
liquidation preference by the year 2005 and thereafter, plus accrued and unpaid
dividends. The Preferred Stock is also exchangeable, in whole, but not in part,
at the option of the Company on or after January 15, 1998 for the Company's 8.5%
Convertible Subordinated Debentures due 2010 (the "Debentures") at a rate of
$25.00 principal amount of Debentures for each share of Preferred Stock. The
Debentures will be convertible into Common Stock of the Company on the same
terms as the Preferred Stock and will pay interest semi-annually.
In a December 1998 private transaction, a preferred stockholder elected to
convert 59,689 shares of Preferred Stock into 136,867 shares of the Company's
Common Stock. In 1999 certain other preferred stockholders, through private
transactions, agreed to convert 210,350 shares of Preferred Stock into 502,637
shares of the Company's Common Stock under similar terms. Likewise in 2000,
444,600 shares of Preferred Stock were
69
converted into 1,036,098 shares of the Company's Common Stock. Any non-cash
premium negotiated in excess of the conversion rate was recorded as additional
preferred stock dividends and excluded from the Consolidated Statements of Cash
Flows.
The Company adopted a stockholder rights plan on March 30, 2000, designed to
assure that the Company's stockholders receive fair and equal treatment in the
event of any proposed takeover of the Company and to guard against partial
tender offers, squeeze-outs, open market accumulations, and other abusive
tactics to gain control without paying all stockholders a fair price. The rights
plan was not adopted in response to any specific takeover proposal. Under the
rights plan, the Company declared a dividend of one right ("Right") on each
share of the Company's Common Stock. Each Right will entitle the holder to
purchase one one-thousandth of a share of a Series B Preferred Stock, par value
$0.01 per share, at an exercise price of $90 per one one-thousandth of a share.
The Rights are not currently exercisable and will become exercisable only in the
event a person or group acquires, or engages in a tender or exchange offer to
acquire, beneficial ownership of 15 percent or more (one existing stockholder
was granted an exception for up to 21 percent) of the Company's Common Stock.
After the Rights become exercisable, each Right will also entitle its holder to
purchase a number of common shares of the Company having a market value of twice
the exercise price. The dividend distribution was made to stockholders of record
at the close of business on April 10, 2000. The Rights will expire on March 30,
2010.
13. SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)
The Company's proved oil and gas reserves at December 31, 2003, 2002 and 2001
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. These estimates have been adjusted (per SEC
guidelines) to exclude the volumetric production payment described in Note 2.
There are numerous uncertainties inherent in establishing quantities of proved
reserves. The following reserve data represents estimates only and should not be
construed as being exact. In addition, the standard measure of discounted future
net cash flows 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. Reference the discussion in Note 7 regarding the Deep Water
Royalty Relief Act and the potential loss of reserves.
Beginning in October 2002, the Company received a series of inquiries from the
SEC regarding its Annual Report on Form 10-K for the year ended December 31,
2001 requesting supplemental information concerning its operations in the Gulf
of Mexico. The comment letters requested information about the procedures the
Company used to classify its deepwater reserves as proved and requested that the
Company's financials be restated to reflect the removal of the Boomslang
reserves as proved for all prior periods during which such reserves were
reported as proved. The Company has reviewed the SEC comments with its
independent petroleum reserve engineers, Huddleston & Co., Inc. of Houston,
Texas. Both Huddleston & Co. and Callon believe that such deepwater reserves are
properly classified as proved. If the SEC requires the Company to retroactively
classify Boomslang as an unproved property through December, 2002, the Company
would be required to restate its financial position, results of operations, and
supplemental oil and gas reserve data from 1999 through 2003. The Company has
responded to all of the SEC inquiries.
70
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
YEARS ENDED DECEMBER 31,
------------------------
2003 2002 2001
---- ---- ----
Proved developed and undeveloped reserves:
Crude Oil (MBbls):
Beginning of period 24,043 30,209 33,382
Revisions to previous estimates (1) (8,699) (a) (2,290)
Purchase of reserves in place -- -- --
Sales of reserves in place (65) -- (624)
Extensions and discoveries -- 2,759 (a) 14
Production (268) (226) (273)
------- ------- -------
End of period 23,709 24,043 30,209
======= ======= =======
Natural Gas (MMcf):
Beginning of period 91,539 120,299 129,922
Revisions to previous estimates (6,407) (19,284) (a) (4,578)
Purchase of reserves in place -- -- --
Sales of reserves in place (49) -- (1,296)
Extensions and discoveries 1,923 3,584 (a) 7,483
Production (12,315) (13,060) (11,232)
------- ------- -------
End of period 74,691 91,539 120,299
======= ======= =======
Proved developed reserves:
Crude Oil (MBbls):
Beginning of period 1,056 885 2,192
======= ======= =======
End of period 9,919 1,056 885
======= ======= =======
Natural Gas (MMcf):
Beginning of period 37,631 51,221 63,982
======= ======= =======
End of period 31,415 37,631 51,221
======= ======= =======
(a) For the year ended December 31, 2002, revisions to previous estimates and
extensions and discoveries were adjusted from the amounts reported in the
Company's Annual Report on Form 10-K dated March 27, 2003 to reflect the
subsequent changes in properties that were part of property acquisitions or
exploratory drilling programs and should have been classified as extensions
instead of revisions.
71
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 (approximately $5.99 per Mcf for natural gas and $30.50 per Bbl for oil
for the 2003 disclosures, $4.80 per Mcf and $34.22 per Bbl for 2002 disclosures,
and $2.58 per Mcf and $20.10 per Bbl for 2001 disclosures) at each date
presented and have not been escalated. Future production, development and net
abandonment costs are based on current costs without escalation. The resulting
net future cash flows have been discounted to their present values based on a
10% annual discount factor.
STANDARDIZED MEASURE
YEARS ENDED DECEMBER 31,
--------------------------------------
2003 2002 2001
----------- ----------- ----------
(IN THOUSANDS)
Future cash inflows $ 1,170,118 $ 1,261,571 $ 883,145
Future costs -
Production (219,421) (165,559) (220,857)
Development and net abandonment (111,850) (125,813) (191,369)
----------- ----------- ----------
Future net inflows before income taxes 838,847 970,199 470,919
Future income taxes (89,567) (119,020) (30,315)
----------- ----------- ----------
Future net cash flows 749,280 851,179 440,604
10% discount factor (230,254) (295,133) (185,747)
----------- ----------- ----------
Standardized measure of discounted
future net cash flows $ 519,026 $ 556,046 $ 254,857
=========== =========== ==========
CHANGES IN STANDARDIZED MEASURE
YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
---------- --------- ---------
(IN THOUSANDS)
Standardized measure - beginning of period $ 556,046 $ 254,857 $ 671,197
Sales and transfers, net of production costs (62,396) (38,375) (45,672)
Net change in sales and transfer prices,
net of production costs (41,011) 401,837 (604,391)
Exchange and sale of in place reserves (1,226) -- (5,850)
Purchases, extensions, discoveries, and improved
recovery, net of future production and
development costs incurred 25,632 8,456 9,358
Revisions of quantity estimates (18,018) (103,452) (23,314)
Accretion of discount 62,394 26,915 90,978
Net change in income taxes 16,460 (53,608) 224,290
Changes in production rates, timing and other (18,855) 59,416 (61,739)
--------- --------- ---------
Standardized measure - end of period $ 519,026 $ 556,046 $ 254,857
========= ========= =========
72
14. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003
Total revenues $ 21,351 $ 18,482 $ 15,152 $ 19,156
Total costs and expenses 19,503 19,477 18,270 26,623
Income tax expense (benefit) 647 (348) (1,092) 9,225
Income (loss) before cumulative effect of change
in accounting principle 1,201 (647) (2,026) (16,700)
Net income (loss) 1,382 (647) (2,026) (16,700)
Net income (loss) per common share-basic:
Net income (loss) available to common before
cumulative effect of change in accounting principle $ 0.07 ($0.07) ($0.17) ($1.24)
Cumulative effect of change in accounting principle,
net of tax 0.01 0.00 0.00 0.00
-------- ------- ------- -------
Net income (loss) per share $ 0.08 ($0.07) ($0.17) ($1.24)
Net income (loss) per common share-diluted:
Net income (loss) available to common before
cumulative effect of change in accounting principle $ 0.07 ($0.07) ($0.17) ($1.24)
Cumulative effect of change in accounting principle,
net of tax 0.01 0.00 0.00 0.00
-------- ------- ------- -------
Net income (loss) per share $ 0.08 ($0.07) (0.17) (1.24)
2002
Total revenues $ 11,624 $ 20,489 $ 15,786 $ 19,209
Total costs and expenses 15,399 16,888 17,786 19,606
Income tax expense (benefit) (1,321) 1,260 (700) (139)
Net income (loss) (2,454) 2,341 (1,300) (258)
Net income (loss) per share-basic (0.21) 0.15 (0.12) (0.04)
Net income (loss) per share-diluted (0.21) 0.15 (0.12) (0.04)
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the independent auditors on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures.
ITEM 9A. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission. Our management, including our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this annual report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this annual report.
There were no changes to our internal control over financial reporting during
our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
74
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information concerning Item 10, see the definitive proxy statement of Callon
Petroleum Company relating to the Annual Meeting of Stockholders on May 6, 2004
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
For information concerning Item 11, see the definitive proxy statement of Callon
Petroleum Company relating to the Annual Meeting of Stockholders on May 6, 2004
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
For information concerning the security ownership of certain beneficial owners
and management, see the definitive proxy statement of Callon Petroleum Company
relating to the Annual Meeting of Stockholders on May 6, 2004 which will be
filed with the Securities and Exchange Commission and is incorporated herein by
reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 regarding the
number of shares of Common Stock that may be issued under the Company's equity
compensation plans.
Plan Category Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected
in column (a)
(A) (B) (C)
--- --- ---
Equity compensation
plans approved by
security holders(1) 2,264,667 $10.30 197,140
Equity compensation
plans not approved by
security holders (2) 186,200 $ 4.33 75,317
--------- ------ -------
Total 2,450,867 $ 9.84 272,457
========= ====== =======
(1) Represents the Callon Petroleum Company 1994 and the 1996 Stock
Incentive Plans which were approved by the shareholders in prior
years. Remaining shares available for future
75
issuance listed in column (c) does not include 56,000 shares of
restricted stock awarded in 2002 which have not yet vested.
(2) Represents the Callon Petroleum Company 2002 Stock Incentive Plan
adopted by the Company on February 14, 2002. The plan qualified as a
"broadly based" plan under the provisions of the New York Stock
Exchange rules and regulations and therefore did not require
shareholder approval. Remaining shares available for future issuance
listed in column (c) does not include 34,484 shares of restricted
stock awarded in 2002 which have not yet vested.
See Note 10 to the Consolidated Financial Statements for a description of the
material provisions of each equity compensation plan under which our equity
securities are authorized for issuance that was adopted without the approval of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning Item 13, see the definitive proxy statement of Callon
Petroleum Company relating to the Annual Meeting of Stockholders on May 6, 2004
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
For information concerning Item 14, see the definitive proxy statement of Callon
Petroleum Company relating to the Annual Meeting of Stockholders on May 6, 2004
which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
76
PART IV.
ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following is an index to the financial statements and financial
statement schedules that are filed as part of this Form 10-K on pages 37 through
63.
Report of Independent Auditors
Consolidated Balance Sheets as of the Years Ended December 31, 2003 and
2002
Consolidated Statements of Operations for the Three Years in the Period
Ended December 31, 2003
Consolidated Statements of Stockholders' Equity for the Three Years in the
Period Ended December 31, 2003
Consolidated Statements of Cash Flows for the Three Years in the Period
Ended December 31, 2003
Notes to Consolidated Financial Statements
(a) 2. Schedules other than those listed above are omitted because they are not
required, not applicable or the required information is included in the
financial statements or notes thereto.
(a) 3. Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession*
3. Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Company, as amended
3.2 Bylaws of the Company (incorporated by reference from Exhibit
3.2 of the Company's Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company
77
4. Instruments defining the rights of security holders, including
indentures
4.1 Specimen Common Stock Certificate (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement on
Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.3 Designation for Convertible, Exchangeable Preferred Stock,
Series A as corrected (included as part of Exhibit 3.1)
4.4 Indenture for Convertible Debentures (incorporated by
reference from Exhibit 4.4 of the Company's Registration
Statement on Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.5 Indenture for the Company's 10.125% Senior Subordinated Notes
due 2002 dated as of July 31, 1997 (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement on
Form S-4, filed September 25, 1997, Reg. No. 333-36395)
4.6 Form of Note Indenture for the Company's 10.25% Senior
Subordinated Notes due 2004 (incorporated by reference from
Exhibit 4.10 of the Company's Registration Statement on Form
S-2, filed June 14, 1999, Reg. No. 333-80579)
4.7 Rights Agreement between Callon Petroleum Company and American
Stock Transfer & Trust Company, Rights Agent, dated March 30,
2000 (incorporated by reference from Exhibit 99.1 of the
Company's Registration Statement on Form 8-A, filed April 6,
2000, File No. 001-14039)
4.8 Subordinated Indenture for the Company dated October 26, 2000
(incorporated by reference from Exhibit 4.1 of the Company's
Current Report on Form 8-K dated October 24, 2000, File No.
001-14039)
4.9 Supplemental Indenture for the Company's 11% Senior
Subordinated Notes due 2005 (incorporated by reference from
Exhibit 4.2 of the Company's Current Report on Form 8-K dated
October 24, 2000, File No. 001-14039)
4.10 Warrant dated as of June 29, 2001 entitling Duke Capital
Partners, LLC to purchase common stock from the Company.
(incorporated by reference to Exhibit 4.11 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
78
4.11 First Supplemental Indenture, dated June 26, 2002, to
Indenture between Callon Petroleum Company and American Stock
Transfer & Trust Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K dated June 26, 2002, File No. 001-14039)
4.12 Form of Warrant entitling certain holders of the Company's
10.125% Senior Subordinated Notes due 2002 to purchase common
stock from the Company (incorporated by reference to Exhibit
4.13 of the Company's Form 10-Q for the period ended June 30,
2002, File No. 001- 14039)
4.13 Second Supplemental Indenture, dated September 16, 2002, to
Indenture between Callon Petroleum Company and American Stock
Transfer & Trust Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K dated September 16, 2002, File No. 001-14039)
4.14 Form of Warrants dated December 8, 2003 and December 29, 2003
entitling lenders under the Company's $185 million amended and
restated senior unsecured credit agreement dated December 23,
2003 to purchase common stock from the Company
9. Voting trust agreement
None.
10. Material contracts
10.1 Registration Rights Agreement dated September 16, 1994 between
the Company and NOCO Enterprises, L. P. (incorporated by
reference from Exhibit 10.2 of the Company's Registration
Statement on Form 8-B filed October 3, 1994)
10.2 Counterpart to Registration Rights Agreement by and between
the Company, Ganger Rolf ASA and Bonheur ASA. (incorporated by
reference from Exhibit 10.2 of the Company's Report on Form
10-K for the fiscal year ended December 31, 2000, File No.
001-14039)
10.3 Registration Rights Agreement dated September 16, 1994 between
the Company and Callon Stockholders (incorporated by reference
from Exhibit 10.3 of the Company's Registration Statement on
Form 8-B filed October 3, 1994)
10.4 Callon Petroleum Company 1994 Stock Incentive Plan
(incorporated by reference from Exhibit 10.5 of the Company's
Registration Statement on Form 8-B filed October 3, 1994)
10.5 Consulting Agreement between the Company and John S. Callon
dated June 19, 1996 (incorporated by reference from Exhibit
10.10 of the Company's Registration Statement on Form S-1,
filed November 5, 1996, Reg. No. 333-15501)
10.6 Callon Petroleum Company Amended 1996 Stock Incentive Plan
(incorporated by reference from Exhibit 4.4 of the
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-8, filed February 5, 1999, Reg. No.
333-29537)
79
10.7 Purchase and Sale Agreement between Callon Petroleum Operating
Company and Murphy Exploration Company, dated May 26, 1999
(incorporated by reference from Exhibit 10.11 on Form S-2,
filed June 14, 1999, Reg. No. 333-80579)
10.8 Callon Petroleum Company 1996 Stock Incentive Plan as amended
on May 9, 2000 (incorporated by reference from Appendix I of
the Company's Definitive Proxy Statement of Schedule 14A filed
March 28, 2000)
10.9 Credit Agreement dated as of October 30, 2000 between the
Company and First Union National Bank, as administrative agent
for the lenders (incorporated by reference from Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2000, File No. 001-14039)
10.10 Credit Agreement dated as of June 29, 2001 between the Company
and Duke Capital Partners, LLC, as Administrative Agent
(incorporated by reference to Exhibit 10.01 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
10.11 Second Amendment to Credit Agreement by and among the Company
and First Union National Bank, as Administrative Agent,
effective as of June 29, 2001 (incorporated by reference to
Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001, File No. 001-14039)
10.12 Conveyance of Overriding Royalty Interest from the Company to
Duke Capital Partners, LLC, dated June 29, 2001 (incorporated
by reference to Exhibit 10.03 of the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2001, File
No. 001-14039)
10.13 Callon Petroleum Company 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, File No. 001-14039)
10.14 Change of Control Severance Compensation Agreement by and
between Callon Petroleum and John S. Weatherly dated January
1, 2002 (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001, File No. 001-14039)
10.15 Change of Control Severance Compensation Agreement by and
between Callon Petroleum Company and Fred L. Callon, dated
January 1, 2002 (incorporated by reference to Exhibit 10.15 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, File No. 001-14039)
10.16 Change of Control Severance Compensation Agreement by and
between Callon Petroleum Company and Dennis W. Christian,
dated January 1, 2002 (incorporated by reference to Exhibit
10.16 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, File No. 001-14039)
80
10.17 First Amended and Restated Credit Agreement dated as of June
30, 2002, among Callon Petroleum Company, each of the lenders
that is a signatory thereto, Wachovia Bank National
Association, as administrative agent, and Union Bank of
California, N.A., as documentation agent (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for the
period ended June 30, 2002, File No. 001-14039)
10.18 Amended and Restated Credit Agreement Dated as of December 23,
2003, among Callon Petroleum Company, each of the lenders that
is signatory thereto or which becomes a signatory thereto; and
Wells Fargo Bank, National Association, a National Banking
Association, as administrative agent
10.19 Medusa Spar Agreement dated as of August 8, 2003, among Callon
Petroleum Operating Company, Murphy Exploration & Production
Company-USA and Oceaneering International, Inc.
10.20 Credit Agreement dated as of December 18, 2003 among Medusa
Spar LLC, The Bank of Nova Scotia, as Administrative Agent,
Bank One, N.A., Sun Trust Bank, as Syndication Agents and
other Lenders Party.
10.21 The Retirement Package and Release Agreement made, entered
into and effective March 9, 2004 between Callon Petroleum
Company and Dennis W. Christian.
10.22 The Retirement Package and Release Agreement made, entered
into and effective March 9, 2004 between Callon Petroleum
Company and Kathy G. Tilley.
11. Statement re computation of per share earnings*
12. Statements re computation of ratios*
13. Annual Report to security holders, Form 10-Q or quarterly reports*
14. Code of Ethics
14.1 Code of Ethics for Chief Executives Officer and Senior
Financial Officers
16. Letter re change in certifying accountant*
81
18. Letter re change in accounting principles*
21. Subsidiaries of the Company
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)
22. Published report regarding matters submitted to vote of security
holders*
23. Consents of experts and counsel
23.1 Consent of Ernst & Young LLP
24. Power of attorney*
31. Rule 13a-14(a) Certifications
31.1 Certification of Chief Executive Officer pursuant to Rule
13(a)-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule
13(a)-14(a)
32. Section 1350 Certifications
32.1 Certification of Chief Executive Officer pursuant to Rule
13(a)-14(b)
32.2 Certification of Chief Financial Officer pursuant to Rule
13(a)-14(b)
99. Additional Exhibits*
- ----------
*Inapplicable to this filing.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated November 11, 2003, reporting Item 12.
Results of Operations and Financial Condition
Current Report on Form 8-K dated December 1, 2003, reporting Item 9.
Regulation FD Disclosure
Current Report on Form 8-K dated December 8, 2003, reporting Item 9.
Regulation FD Disclosure
Current Report on Form 8-K dated January 23, 2004 reporting Item 5. Other
Events
82
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
CALLON PETROLEUM COMPANY
Date: March 15, 2004 /s/ Fred L. Callon
--------------------------------------
Fred L. Callon (principal executive
officer, director)
Date: March 15, 2004 /s/ John S. Weatherly
--------------------------------------
John S. Weatherly (principal
financial officer)
Date: March 15, 2004 /s/ Rodger W. Smith
--------------------------------------
Rodger W. Smith (principal
accounting officer)
Date: March 15, 2004 /s/ John S. Callon
--------------------------------------
John S. Callon (director)
Date: March 15, 2004 /s/ Leif Dons
--------------------------------------
Leif Dons (director)
Date: March 15, 2004 /s/ Robert A. Stanger
--------------------------------------
Robert A. Stanger (director)
Date: March 15, 2004 /s/ John C. Wallace
--------------------------------------
John C. Wallace (director)
Date: March 15, 2004 /s/ B. F. Weatherly
--------------------------------------
B. F. Weatherly (director)
Date: March 15, 2004 /s/ Richard O. Wilson
--------------------------------------
Richard O. Wilson (director)
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CALLON PETROLEUM COMPANY
Date: March 15, 2004 By: /s/ John S. Weatherly
--------------------------------------
John S. Weatherly, Senior Vice
President and Chief Financial Officer
84
INDEX TO EXHIBITS
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession*
3. Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation of the Company, as amended
3.2 Bylaws of the Company (incorporated by reference from Exhibit
3.2 of the Company's Registration Statement on Form S-4, filed
August 4, 1994, Reg. No. 33-82408)
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company
4. Instruments defining the rights of security holders, including
indentures
4.1 Specimen Common Stock Certificate (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement on
Form S-4, filed August 4, 1994, Reg. No. 33-82408)
4.2 Specimen Preferred Stock Certificate (incorporated by
reference from Exhibit 4.2 of the Company's Registration
Statement on Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.3 Designation for Convertible, Exchangeable Preferred Stock,
Series A as corrected (included as part of Exhibit 3.1)
4.4 Indenture for Convertible Debentures (incorporated by
reference from Exhibit 4.4 of the Company's Registration
Statement on Form S-1, filed November 13, 1995, Reg. No.
33-96700)
4.5 Indenture for the Company's 10.125% Senior Subordinated Notes
due 2002 dated as of July 31, 1997 (incorporated by reference
from Exhibit 4.1 of the Company's Registration Statement on
Form S-4, filed September 25, 1997, Reg. No. 333-36395)
4.6 Form of Note Indenture for the Company's 10.25% Senior
Subordinated Notes due 2004 (incorporated by reference from
Exhibit 4.10 of the Company's Registration Statement on Form
S-2, filed June 14, 1999, Reg. No. 333-80579)
4.7 Rights Agreement between Callon Petroleum Company and American
Stock Transfer & Trust Company, Rights Agent, dated March 30,
2000 (incorporated by reference from Exhibit 99.1 of the
Company's Registration Statement on Form 8-A, filed April 6,
2000, File No. 001-14039)
4.8 Subordinated Indenture for the Company dated October 26, 2000
(incorporated by reference from Exhibit 4.1 of the Company's
Current Report on Form 8-K dated October 24, 2000, File No.
001-14039)
4.9 Supplemental Indenture for the Company's 11% Senior
Subordinated Notes due 2005 (incorporated by reference from
Exhibit 4.2 of the Company's Current Report on Form 8-K dated
October 24, 2000, File No. 001-14039)
4.10 Warrant dated as of June 29, 2001 entitling Duke Capital
Partners, LLC to purchase common stock from the Company.
(incorporated by reference to Exhibit 4.11 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
4.11 First Supplemental Indenture, dated June 26, 2002, to
Indenture between Callon Petroleum Company and American Stock
Transfer & Trust Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K dated June 26, 2002, File No. 001-14039)
4.12 Form of Warrant entitling certain holders of the Company's
10.125% Senior Subordinated Notes due 2002 to purchase common
stock from the Company (incorporated by reference to Exhibit
4.13 of the Company's Form 10-Q for the period ended June 30,
2002, File No. 001- 14039)
4.13 Second Supplemental Indenture, dated September 16, 2002, to
Indenture between Callon Petroleum Company and American Stock
Transfer & Trust Company dated July 31, 1997. (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K dated September 16, 2002, File No. 001-14039)
4.14 Form of Warrants dated December 8, 2003 and December 29, 2003
entitling lenders under the Company's $185 million amended and
restated senior unsecured credit agreement dated December 23,
2003 to purchase common stock from the Company
9. Voting trust agreement
None.
10. Material contracts
10.1 Registration Rights Agreement dated September 16, 1994 between
the Company and NOCO Enterprises, L. P. (incorporated by
reference from Exhibit 10.2 of the Company's Registration
Statement on Form 8-B filed October 3, 1994)
10.2 Counterpart to Registration Rights Agreement by and between
the Company, Ganger Rolf ASA and Bonheur ASA. (incorporated by
reference from Exhibit 10.2 of the Company's Report on Form
10-K for the fiscal year ended December 31, 2000, File No.
001-14039)
10.3 Registration Rights Agreement dated September 16, 1994 between
the Company and Callon Stockholders (incorporated by reference
from Exhibit 10.3 of the Company's Registration Statement on
Form 8-B filed October 3, 1994)
10.4 Callon Petroleum Company 1994 Stock Incentive Plan
(incorporated by reference from Exhibit 10.5 of the Company's
Registration Statement on Form 8-B filed October 3, 1994)
10.5 Consulting Agreement between the Company and John S. Callon
dated June 19, 1996 (incorporated by reference from Exhibit
10.10 of the Company's Registration Statement on Form S-1,
filed November 5, 1996, Reg. No. 333-15501)
10.6 Callon Petroleum Company Amended 1996 Stock Incentive Plan
(incorporated by reference from Exhibit 4.4 of the
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-8, filed February 5, 1999, Reg. No.
333-29537)
10.7 Purchase and Sale Agreement between Callon Petroleum Operating
Company and Murphy Exploration Company, dated May 26, 1999
(incorporated by reference from Exhibit 10.11 on Form S-2,
filed June 14, 1999, Reg. No. 333-80579)
10.8 Callon Petroleum Company 1996 Stock Incentive Plan as amended
on May 9, 2000 (incorporated by reference from Appendix I of
the Company's Definitive Proxy Statement of Schedule 14A filed
March 28, 2000)
10.9 Credit Agreement dated as of October 30, 2000 between the
Company and First Union National Bank, as administrative agent
for the lenders (incorporated by reference from Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2000, File No. 001-14039)
10.10 Credit Agreement dated as of June 29, 2001 between the Company
and Duke Capital Partners, LLC, as Administrative Agent
(incorporated by reference to Exhibit 10.01 of the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, File No. 001-14039)
10.11 Second Amendment to Credit Agreement by and among the Company
and First Union National Bank, as Administrative Agent,
effective as of June 29, 2001 (incorporated by reference to
Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001, File No. 001-14039)
10.12 Conveyance of Overriding Royalty Interest from the Company to
Duke Capital Partners, LLC, dated June 29, 2001 (incorporated
by reference to Exhibit 10.03 of the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 2001, File
No. 001-14039)
10.13 Callon Petroleum Company 2002 Stock Incentive Plan
(incorporated by reference to Exhibit 10.13 of the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, File No. 001-14039)
10.14 Change of Control Severance Compensation Agreement by and
between Callon Petroleum and John S. Weatherly dated January
1, 2002 (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001, File No. 001-14039)
10.15 Change of Control Severance Compensation Agreement by and
between Callon Petroleum Company and Fred L. Callon, dated
January 1, 2002 (incorporated by reference to Exhibit 10.15 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, File No. 001-14039)
10.16 Change of Control Severance Compensation Agreement by and
between Callon Petroleum Company and Dennis W. Christian,
dated January 1, 2002 (incorporated by reference to Exhibit
10.16 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, File No. 001-14039)
10.17 First Amended and Restated Credit Agreement dated as of June
30, 2002, among Callon Petroleum Company, each of the lenders
that is a signatory thereto, Wachovia Bank National
Association, as administrative agent, and Union Bank of
California, N.A., as documentation agent (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for the
period ended June 30, 2002, File No. 001-14039)
10.18 Amended and Restated Credit Agreement Dated as of December 23,
2003, among Callon Petroleum Company, each of the lenders that
is signatory thereto or which becomes a signatory thereto; and
Wells Fargo Bank, National Association, a National Banking
Association, as administrative agent
10.19 Medusa Spar Agreement dated as of August 8, 2003, among Callon
Petroleum Operating Company, Murphy Exploration & Production
Company-USA and Oceaneering International, Inc.
10.20 Credit Agreement dated as of December 18, 2003 among Medusa
Spar LLC, The Bank of Nova Scotia, as Administrative Agent,
Bank One, N.A., Sun Trust Bank, as Syndication Agents and
other Lenders Party.
10.21 The Retirement Package and Release Agreement made, entered
into and effective March 9, 2004 between Callon Petroleum
Company and Dennis W. Christian.
10.22 The Retirement Package and Release Agreement made, entered
into and effective March 9, 2004 between Callon Petroleum
Company and Kathy G. Tilley.
11. Statement re computation of per share earnings*
12. Statements re computation of ratios*
13. Annual Report to security holders, Form 10-Q or quarterly reports*
14. Code of Ethics
14.1 Code of Ethics for Chief Executives Officer and Senior
Financial Officers
16. Letter re change in certifying accountant*
18. Letter re change in accounting principles*
21. Subsidiaries of the Company
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)
22. Published report regarding matters submitted to vote of security
holders*
23. Consents of experts and counsel
23.1 Consent of Ernst & Young LLP
24. Power of attorney*
31. Rule 13a-14(a) Certifications
31.1 Certification of Chief Executive Officer pursuant to Rule
13(a)-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule
13(a)-14(a)
32. Section 1350 Certifications
32.1 Certification of Chief Executive Officer pursuant to Rule
13(a)-14(b)
32.2 Certification of Chief Financial Officer pursuant to Rule
13(a)-14(b)
99. Additional Exhibits*
- ----------
*Inapplicable to this filing.
EXHIBIT 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 03/29/1994
344051804 - 2390003
CERTIFICATE OF INCORPORATION
OF
CALLON PETROLEUM HOLDING COMPANY
ARTICLE ONE
The name of the Corporation is Callon Petroleum Holding Company.
ARTICLE TWO
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801,
and the name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware ("Act"),
ARTICLE FOUR
The Corporation shall have authority to issue two classes of stock, and
the total number authorized shall be one (1) share of Common Stock of the par
value of one cent ($.01) each, and one (1) share of Preferred Stock of the par
value of one cent ($.01) each. A description of the different classes of stock
of the Corporation and a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, in respect of each class of such stock are as follows:
1. ISSUANCE IN CLASS OR SERIES. The Common Stock or
Preferred Stock may be issued from time to time in one or more series,
or either or both of the Common and Preferred Stock may be divided into
additional classes and such classes into one or more series. The terms
of a class or series, including all rights and preferences, shall be as
specified in the resolution or resolutions adopted by the Board of
Directors designating such class or series which resolution or
resolutions the Board of Directors is hereby expressly authorized to
adopt. Such resolution or resolutions with respect to a class or series
shall specify all or such of the rights or preferences of such class or
series as the Board of Directors shall determine, including, without
limitation, any or all of the following, if applicable: (a) the number
of shares to constitute such class or series and the distinctive
designation thereof; (b) the dividend or manner for determining the
dividend payable with respect to the shares of such class or series and
the date or dates from which dividends shall accrue, whether such
dividends shall be cumulative, and, if cumulative, the date or dates
from which dividends shall accumulate and whether the shares in such
class or series shall be entitled to preference or priority over any
other class or series of stock of the Corporation with respect to
payment of dividends; (c) the terms and conditions, including price or
a manner for determining the price, of redemption, if any, of the
shares of such class or series; (d) the terms and conditions of a
retirement or sinking fund, if any, for the purchase or redemption of
the shares of such class or series; (e) the amount which the shares of
such class or series shall be entitled to receive, if any, in the event
of any liquidation, dissolution or winding up of the Corporation and
whether such shares shall be entitled to a preference
or priority over shares of another class or series with respect to
amounts received in connection with any liquidation, dissolution or
winding up of the Corporation; (f) whether the shares of such class or
series shall be convertible into, or exchangeable for, shares of stock
of any other class or classes, or any other series of the same or any
other class or classes of stock, of the Corporation and the terms and
conditions of any such conversion or exchange; (g) the voting rights,
if any, of shares of stock of such class or series in addition to those
granted herein, if any; (h) the status as to reissuance or sale of
shares of such class or series redeemed, purchased or otherwise
reacquired or surrendered to the Corporation on conversion; (i) the
conditions and restrictions, if any, on the payment of dividends or on
the making of other distributions on, or the purchase, redemption or
other acquisition by the Corporation or any subsidiary, of any other
class or series of stock of the Corporation ranking junior to such
shares as to dividends or upon liquidation; (j) the conditions, if any,
on the creation of indebtedness of the Corporation, or any subsidiary,
and (k) such other preferences, rights, restrictions and qualifications
as the Board of Directors may determine.
All shares of the Common Stock shall rank equally and all
shares of the Preferred Stock shall rank equally, and be identical
within their classes in all respects regardless of series, except as to
terms which may be specified by the Board of Directors pursuant to the
above provisions. All shares of any one series of a class of Common
Stock or Preferred Stock shall be of equal rank and identical in all
respects, except that shares of any one series issued at different
times may differ as to the dates which dividends thereon shall accrue
and be cumulative.
2. OTHER PROVISIONS. Shares of Common Stock or Preferred
Stock of any class or series may be issued with such voting powers,
full or limited, or no voting powers, and such designations,
preferences and relative participating, option or special rights, and
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions providing for the
issuance of such stock adopted by the Board of Directors. Any of the
voting powers, designations, preferences, rights and qualifications,
limitations or restrictions of any such class or series of stock may be
made dependent upon facts ascertainable outside the resolution or
resolutions of the Board of Directors providing for the issue of such
stock by the Board of Directors, provided the manner in which such
facts shall operate upon the voting powers, designations, preferences,
rights and qualifications, limitations or restrictions of such class or
series is clearly set forth in the resolution or resolutions providing
for the issue of such stock adopted by the Board of Directors.
3. COMMON STOCK. Except as otherwise provided in any
resolution or resolutions adopted by the Board of Directors providing
for the issuance of a class or series of Preferred Stock or Common
Stock, the Common Stock shall (a) have the exclusive voting power of
the corporation; (b) entitle the holders thereof to one vote per share
at all meetings of the stockholders of the Corporation; (c) entitle the
holders to share ratably, without preference over any other shares of
the Corporation, in all assets of the Corporation in the event of any
dissolution, liquidation or winding up of the Corporation; and (d)
entitle the record holders thereof on such record dates as are
determined, from time to time, by the Board of Directors to receive
such dividends, if any, if, as and when declared by the Board of
Directors.
ARTICLE FIVE
The Corporation is to have perpetual existence.
- 2 -
ARTICLE SIX
1. NUMBER, ELECTION AND TERM OF DIRECTORS. The business
and affairs of the Corporation shall be managed by a Board of
Directors, which, subject to the rights of holders of shares of any
class of series of Preferred Stock of the Corporation then outstanding
to elect additional directors under specified circumstances, shall
consist of not less than three nor more than twenty-one persons. The
exact number of directors within the minimum and maximum limitations
specified in the preceding sentence shall be fixed from time to time by
either (i) the Board of Directors pursuant to a resolution adopted by a
majority of the entire Board of Directors or (ii) the affirmative vote
of the holders of 80% or more of the voting power of all of the shares
of the Corporation entitled to vote generally in the election of
directors voting together as a single class. No decrease in the number
of directors constituting the Board of Directors shall shorten the term
of any incumbent director. The directors shall be divided into three
classes as nearly equal in number as possible, with the term of office
of the first class to expire at the 1995 annual meeting of
stockholders, the term of office of the second class to expire at the
1996 annual meeting of stockholders, and the term of office of the
third class to expire at the 1997 annual meeting of stockholders, and
with the members of each class to hold office until their successors
shall have been elected and qualified At each annual meeting of
stockholders following such initial classification and election,
directors elected to succeed those directors whose terms expire shall
be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election.
2. STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES.
Advance notice of stockholder nominations for the election of directors
shall be submitted to the Board of Directors at least 120 days in
advance of the scheduled date for the next annual meeting of
stockholders.
3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to
the rights of the holders of any series of any Preferred Stock then
outstanding, newly created directorships resulting from any increase in
the authorized number of directors and any vacancies in the Board of
Directors resulting from the death, resignation, retirement,
disqualification, removal from office or other cause may be filled by a
majority vote of the directors then in office even though less than a
quorum, or by a sole remaining director.
4. REMOVAL. Subject to the rights of the holders of any
series of any Preferred Stock then outstanding, any director or the
entire Board of Directors, may be removed from office at any annual or
special meeting called for such purpose, and then only for cause and
only by the affirmative vote of the holders of 80% or more of the
voting power of all of the shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single
class. As used herein, cause shall mean only the following: conviction
of a felony or proof, beyond the existence of a reasonable doubt, that
a director has committed grossly negligent or wilful misconduct
resulting in a material detriment to the Corporation or committed a
material breach of his fiduciary duty to the Corporation resulting in a
material detriment to the Corporation.
5. AMENDMENT, REPEAT, ETC. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the
affirmative vote of the holders of 80% or more of the voting power of
all of the shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be
required to alter, amend or adopt any provision inconsistent with or
repeal this Article Six, or to alter, amend, adopt any provision
inconsistent with or repeal comparable sections of the Bylaws of the
Corporation.
- 3 -
ARTICLE SEVEN
Subject to the rights of the holders of any series of Preferred Shares
then outstanding, Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders unless all of the stockholders
entitled to vote thereon consent thereto in writing. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of 80% or more of the voting power of all the shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to call a special meeting of
stockholders or to alter, amend or adopt any provision inconsistent with or
repeal this Article Seven, or to alter, amend or adopt any provision
inconsistent with comparable sections of the Bylaws.
ARTICLE EIGHT
The Corporation shall have the power to indemnify its present or former
directors, officers, employees and agents or any person who served or is serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise to
the fun extent permitted by the General Corporation Law of Delaware. Such
indemnification shall not be deemed exclusive of any other rights to which such
person may be entitled, under any Bylaws, agreements, vote of stockholders or
disinterested directors, or otherwise.
ARTICLE NINE
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages or breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (if) for acts or omissions not
in good faith or which involved intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Act, or, (iv) for any transaction from which
the director derived an improper personal benefit.
ARTICLE TEN
In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to make, alter or repeal
the Bylaws of the corporation.
ARTICLE ELEVEN
The name and address of the incorporator is as follows:
George G. Young III
Butler & Binion
1700 First Interstate Bank Plaza
Houston, Texas 77002
In Witness Whereof, this certificate of incorporation was executed by
the above named individual on this 28th day of March, 1994.
/s/ George G. Young III
--------------------------------
George G. Young III
- 4 -
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 08/04/1994
944145890 - 2390003
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Callon Petroleum Holding Company, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of the Corporation:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by chanting Section 1. of the Article thereof
numbered "SIX" so that, as amended, Section 1. of said Article shall be
and read as follow:
"ARTICLE SIX
1. NUMBER, ELECTION AND TERM OF DIRECTORS. The business
and affairs of the Corporation shall be managed by a Board of
Directors, which, subject to the rights of holders of shares of any
class or series of Preferred Stock of the Corporation then outstanding
to elect additional directors under specified circumstances, shall
consist of no more than twenty-one person. The number of initial
directors shall be two. Thereafter, the exact number of director
within the maximum limitations as specified above shall be fixed from
time to time by either (i) the Board of Directors pursuant to a
resolution adopted by a majority of the entire Board of Directors or
(ii) the affirmative vote of the holders of 80% or more of the voting
power of all of the shares of the Corporation entitled to vote
generally in the election of directors voting together as a single
class. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director. The
directors shall be divided into three classes as nearly equal in number
as possible, with the term of office of the first class to expire at
the first annual meeting of stockholders following their election, the
term of office of the second class to expire at the second annual
meeting of stockholders following their election, and the term of
office of the third class to expire at the third annual meeting of
stockholders following their election, and with the members of each
class to hold office until their successors shall have been elected and
qualified. At each annual meeting of stockholders following such
initial classification and election, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after
their election. Notwithstanding the foregoing, the above provisions
regarding classification of directors shall be applicable only in the
event that the Board of Directors is composed of three or more
directors. Election of directors need not be by written ballot, except
as otherwise provided in the Bylaws."
SECOND: That in lieu of a meeting and vote of stockholders,
the sole stockholder of the Corporation has given its written consent to the
amendment in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: That the amendment was duly adopted in accordance with
the applicable provisions in Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by Fred L. Callon, its President, and attested by H.
Michael Tatum, Jr., its Secretary, this 2nd day of August, 1994.
CALLON PETROLEUM HOLDING COMPANY
By /s/ Fred L. Callon
-----------------------------
Fred L. Callon, President
ATTEST
/s/ H. Michael Tatum Jr.
- --------------------------------
H. Michael Tatum Jr., Secretary
- 2 -
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 09/16/1994
944174625 - 2390003
CERTIFICATE OF MERGER
OF
CALLON CONSOLIDATED PARTNERS, L.P.
(a Delaware limited partnership)
with and into
CALLON PETROLEUM HOLDING COMPANY
(a Delaware corporation)
Callon Consolidated Partners, L.P., a Delaware limited partnership, for
the purpose of merging with Callon Petroleum Holding Company, a Delaware
corporation, hereby certifies as follows:
1. The name and jurisdiction of formation or organization of each
of the constituent entities are:
Name Jurisdiction
Callon Petroleum Holding Company Delaware
Callon Consolidated Partners, L.P. Delaware
2. An agreement and plan of consolidation has been approved,
adopted, certified, executed and acknowledged by each of the
constituent entities in accordance with section 263 of the
Delaware General Corporation Law.
3. The name of the surviving corporation is Callon Petroleum
Holding Company, which shall herewith be changed to Callon
Petroleum Company.
4. The amendments or changes in the Certificate of Incorporation
of the surviving corporation are as follows:
(i) Article One is amended and replaced in its entirety
with the following Article One:
"ARTICLE ONE
The name of the Corporation is Callon Petroleum
Company."
(ii) The first sentence of Article Four is amended and
replaced in its entirety with the following sentence:
"The Corporation shall have authority to issue two
classes of stock, and the total number authorized
shall be 20,000,000 shares of Common Stock of the par
value of one cent ($.01) each, and 2,500,000 shares
of Preferred Stock of the par value of one cent
($.01) each."
5. The executed agreement and plan of consolidation is
on file at the principal place of business of the
surviving corporation, the address of which is:
Callon Petroleum Holding Company
200 North Canal Street
Natchez, Mississippi 39120
6. A copy of the agreement and plan of consolidation
will be furnished by Callon Petroleum Holding
Company, on request and without cost, to any partner
or stockholder of a constituent entity.
IN WITNESS WHEREOF, this Certificate of Merger has been duly
executed as of the 16th day of September 1994, and is being filed by Callon
Petroleum Holding Company, the surviving corporation.
CALLON PETROLEUM HOLDING COMPANY
By: /s/ FRED L. CALLON
----------------------------------
FRED L. CALLON, President
Attest:
/s/ H. Michael Tatum, Jr.
- ---------------------------
H. Michael Tatum, Jr., Secretary
- 2 -
AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CALLON PETROLEUM COMPANY
The undersigned, Robert A. Mayfield, Corporate Secretary of Callon
Petroleum Company, a corporation organized and existing under the laws of the
State of Delaware (the "CORPORATION"), does hereby certify as follows:
FIRST: The name of the Corporation is Callon Petroleum Company
SECOND: This Amendment (the "AMENDMENT") to the Certificate of
Incorporation of the Corporation (the "CERTIFICATE") was duly adopted in
accordance with the provisions of Section 242 of the Delaware General
Corporation Law. The Board of Directors has duly adopted resolutions setting
forth and declaring advisable this Amendment and the holders of a majority of
the outstanding stock of the Corporation entitled to vote at the special meeting
of the stockholders called for the purpose of voting on the Amendment have voted
in favor of this Amendment.
THIRD: The Certificate is hereby amended by amending and restating
the first sentence of Article Four to be and read as follows:
"The Corporation shall have authority to issue two classes of stock,
and the total number authorized shall be 30,000,000 shares of Common
Stock, par value $.01 per share, and 2,500,000 shares of Preferred
Stock, par value $.01 per share."
IN WITNESS WHEREOF, the undersigned has executed this Amendment on
behalf of the Corporation and has attested such execution and does verify and
affirm, under penalty of perjury, that this Amendment is the act and deed of
the Corporation and that the facts stated herein are true as of this 23rd day of
January, 2004.
CALLON PETROLEUM COMPANY
By: /s/ Robert A. Mayfield
------------------------------
Robert A. Mayfield, Corporate Secretary
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 11/22/1995
950272690 - 2390003
CERTIFICATE OF DESIGNATIONS
CALLON PETROLEUM COMPANY
$2.125 CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK, SERIES A
Callon Petroleum Company, a corporation organized and existing under
and by virtue of The General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
That the following resolutions, establishing and designating a series
of shares and fixing and determining the designations, preferences, limitations
and relative rights thereof, were duly adopted by the Board of Directors of the
Corporation or an authorized committee thereof on November 21, 1995.
RESOLVED, that pursuant to Article Four of the Certificate of
Incorporation of the Corporation, as amended, which authorizes the
issuance of 22,500,000 shares of capital stock ("Stock"), consisting of
2,500,000 shares of Preferred Stock of the par value of $.01 per share,
none of which is currently outstanding, and 20,000,000 shares of Common
Stock of the par value of $.01 per share (the "Common Stock"), the
Corporation hereby provides for the issuance of a series of Preferred
Stock, designated as $2.125 Convertible Exchangeable Preferred Stock,
Series A, and hereby fixes the designations, preferences, limitations
and relative rights of the shares of the $2.125 Convertible
Exchangeable Preferred Stock, Series A, in addition to those set forth
in such Article Four, which shall be as follows:
SECTION 1. DESIGNATION; NUMBER OF SHARES. The shares of the series
authorized by this resolution shall be designated as "$2.125 Convertible
Exchangeable Preferred Stock, Series A" (the "Convertible Preferred Stock"). The
number of shares initially constituting such series shall be limited to one
million three hundred eighty thousand (1,380,000). Such number of shares may be
decreased, at any time and from time to time, by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the number of shares
of Convertible Preferred Stock to a number less than the number of shares then
outstanding. The liquidation value of the Convertible Preferred Stock shall be
$25.00 per share.
SECTION 2. DIVIDENDS.
(a) AMOUNT. The holders of Convertible Preferred Stock shall be
entitled to receive, when and if declared by the Board of Directors, out of
funds legally available for the payment of dividends, cash dividends at the rate
of $2.125 per share per annum, and no more, payable in equal quarterly payments
on January 15, April 15, July 15, and October 15 in each year, commencing
January 15, 1996, except that if such date is not a business day then such
dividend shall be payable on the next succeeding business day (the "Dividend
Payment Date" or "Dividend Payment Dates") (as used herein, the term "business
day" shall mean any day except a Saturday, Sunday or day on which banking
institutions are authorized or required by law to close in New York City or in
the City of Natchez, Mississippi). Such dividends shall be cumulative (whether
or not declared) and shall accrue, without interest, from the first day in which
such dividend may be payable as provided herein, except that with respect to the
first quarterly dividend, such dividend shall accrue from the date of issuance
of such shares of Convertible Preferred Stock. Dividends shall be payable to
holders of record as they appear on the share transfer records of the
Corporation on such record dates as may be fixed by the Board of Directors, not
more than 60 days nor less than 10 days preceding such Dividend Payment Date.
Dividends in arrears may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record on such date, not more
than 60 days preceding the payment date thereof, as may be fixed by the Board of
Directors of the Corporation. The amount of dividends payable on shares of
Convertible Preferred Stock for each full quarterly dividend period shall be
computed by dividing by four the annual rate per share set forth in this
subsection (a). Dividends payable on the Convertible Preferred Stock for the
initial dividend period and for any period less than a full quarterly period
shall be computed on the basis of a 360-day year of twelve 30-day months.
(b) PRIORITY. If dividends upon any shares of Convertible
Preferred Stock, or any other outstanding class or series of stock of the
Corporation ranking on a parity with the Convertible Preferred Stock as to
dividends, are in arrears, all dividends or other distributions declared upon
each class or series of such stock (other than dividends paid in stock of the
Corporation ranking junior to the Convertible Preferred Stock as to dividends
and upon liquidation, dissolution or winding up) may only be declared pro rata
so that in all cases the amount of dividends or other distributions declared per
share on the Convertible Preferred Stock and such class or series bear to each
other the same ratio that the accrued and unpaid dividends per share on the
shares of the Convertible Preferred Stock and such class or series bear to each
other. Except as set forth above, if dividends upon any shares of Convertible
Preferred Stock, or any other outstanding stock of the Corporation ranking on a
parity with the Convertible Preferred Stock a$ to dividends, are in arrears: (i)
no dividends (in cash, stock or other property) may be paid, declared or set
aside for payment or any other distribution made on any stock of the Corporation
ranking junior to the Convertible Preferred Stock as to dividends (other than
dividends or distributions in stock of the Corporation ranking junior to the
Convertible Preferred Stock as to dividends and upon liquidation, dissolution or
winding up) and upon liquidation, dissolution or winding up; and (ii) DO stock
of the Corporation ranking junior to or on a parity with the Convertible
Preferred Stock as to dividends and upon liquidation, dissolution and winding up
may be redeemed, purchased or otherwise acquired pursuant to a sinking fund or
otherwise, except by conversion of such stock into, or exchange of such stock
for, stock of the Corporation ranking junior to the Convertible Preferred Stock
as to dividends and upon liquidation, dissolution or winding up.
-2-
(c) NO INTEREST. No interest, sum of money in lieu of interest, or
other property or securities shall be payable in respect of any dividend payment
or payments which are accrued but unpaid. Dividends paid on shares of
Convertible Preferred Stock in an amount less than the total amount of such
dividends at the time accumulated and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding.
SECTION 3. CONVERSION PRIVILEGE.
(a) RIGHT OF CONVERSION. Each share of Convertible Preferred Stock
shall be convertible at the option of the holder thereof at any time prior to
the close of business on the fifth business day prior to the date fixed for
redemption of such share as herein provided, into fully paid and nonassessable
shares of Common Stock, at a rate per full share of Convertible Preferred Stock
determined by dividing $25.00 by the conversion price per share of Common Stock
in effect on the date such share is surrendered for conversion, or into such
additional or other securities, cash or property and at such other rates as
required in accordance with the provisions of this Section 3. For purposes of
this resolution, the "conversion price" per share of Common Stock shall
initially be $11.00 and shall be adjusted from time to time in accordance with
the provisions of this Section 3. Each share of Convertible Preferred Stock may
be converted in whole or in part.
(b) CONVERSION PROCEDURES. Any holder of shares of Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Convertible
Preferred Stock at the office of the transfer agent for the Convertible
Preferred Stock, which certificate or certificates, if the Corporation shall so
require, shall be duly endorsed to the Corporation or in blank, or accompanied
by proper instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects to convert
such shares of Convertible Preferred Stock and specifying the name or names
(with address or addresses) in which a certificate or certificates evidencing
shares of Common Stock are to be issued.
Except as otherwise described in this paragraph, no payments or
adjustments in respect of dividends on shares of Convertible Preferred Stock
surrendered for conversion, whether paid or unpaid and whether or not in
arrears, or on account of any dividend on the Common Stock issued upon
conversion shall be made by the Corporation upon the conversion of any shares of
Convertible Preferred Stock. The holder of record of shares of Convertible
Preferred Stock on a dividend record date who surrenders such shares for
conversion during the period between such dividend record date and the
corresponding dividend payment date will be entitled to receive the dividend on
such dividend payment date notwithstanding the conversion of such shares;
provided, however, that unless such shares, prior to such surrender, had been
called for redemption on a redemption date
-3-
during the period between such dividend record date and the date after such
dividend payment date, such shares must be accompanied, upon surrender for
conversion, by payment from the holder to the Corporation of an amount equal to
the dividend payable on such shares on that dividend payment date.
The Corporation shall, as soon as practicable after such surrender of
certificates evidencing shares of Convertible Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Convertible Preferred Stock were so surrendered, or to the
nominee or nominees of such person, certificates evidencing the number of full
shares of Common Stock to which such person shall be entitled as aforesaid,
together with a cash adjustment in respect of any fraction of a share of Common
Stock as hereinafter provided. Such conversion shall be deemed to have been made
as of the date of such surrender of the shares of Convertible Preferred Stock to
be converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Convertible Preferred Stock shall be treated
for all purposes as the record bolder or holders of such Common Stock on such
date.
(c) ADJUSTMENT OF CONVERSION PRICE. The conversion price at which
a share of Convertible Preferred Stock is convertible into Common Stock shall be
subject to adjustment from time to time as follows:
(i) In case the Corporation shall pay or make a dividend
or other distribution on its Common Stock exclusively in Common Stock
or shall pay or make a dividend or other distribution on any other
class or series of capital stock of the Corporation which dividend or
distribution includes Common Stock, the conversion price in effect at
the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such dividend or
other distribution shall be reduced by multiplying such conversion
price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date
fixed for such determination and the denominator shall be the sum of
such number of shares and the total number of shares constituting or
included in such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day
following the date fixed for such determination. For the purposes of
this paragraph (i), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the
Corporation. The Corporation shall not pay any dividend or make any
distribution on shares of Common Stock held in the treasury of the
Corporation.
(ii) In case the Corporation shall pay or make a dividend
or other distribution on its Common Stock consisting exclusively of, or
shall otherwise issue
-4-
to all holders of its Common Stock, rights or warrants entitling the
holders thereof to subscribe for or purchase shares of Common Stock at
a price per share less than the current market price per share
(determined as provided in paragraph (vi) of this Section 3(c)) of the
Common Stock on the date fixed for the determination of stockholders
entitled to receive such rights or warrants, the conversion price in
effect at the opening of business on the day following the date fixed
for such determination shall be reduced by multiplying such conversion
price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date
fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares
of Common Stock so offered for subscription or purchase would purchase
at such current market price and the denominator shall be the number of
shares of Common Stock outstanding at the close of business on the date
fixed for such determination plus the number of shares of Common Stock
so offered for subscription or purchase, such reduction to become
effective immediately after the opening of business on the day
following the date fixed for such determination. In case any rights or
warrants referred to in this paragraph (ii) in respect of which an
adjustment shall have been made shall expire unexercised, the
conversion price shall be readjusted at the time of such expiration to
the conversion price that would have been in effect if no adjustment
had been made on account of the distribution or issuance of such
expired rights or warrants.
(iii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall
be proportionately reduced, and conversely, in case outstanding shares
of Common Stock shall each be combined into a smaller number of shares
of Common Stock, the conversion price in effect at the opening of
business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(iv) Subject to the last sentence of this paragraph (iv),
in case the Corporation shall, by dividend or otherwise, distribute to
all holders of its Common Stock evidences of its indebtedness, shares
of any class or series of capital stock, cash or assets (including
securities, but excluding any rights or warrants referred to in
paragraph (ii) of this Section 3(c), any dividend or distribution paid
exclusively in cash and any dividend or distribution referred to in
paragraph (i) of this Section 3(c)), the conversion price in effect on
the day following the date fixed for the payment of such distribution
(the date fixed for payment being referred to as the "Reference Date")
shall be reduced by
-5-
multiplying such conversion price by a fraction of which the numerator
shall be the current market price per share (determined as provided in
paragraph (vi) of this Section 3(c)) of the Common Stock on the
Reference Date less the fair market value (as determined in good faith
by the Board of Directors, whose determination shall be conclusive and
described in a resolution of the Board of Directors) on the Reference
Date of the portion of the evidences of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of Common
Stock, and the denominator shall be such current market price per share
of the Common Stock, such reduction to become effective immediately
prior to the opening of business on the day following the Reference
Date. If the Board of Directors determines the fair market value of any
distribution for purposes of this paragraph (iv) by reference to the
actual or when issued trading market for any securities comprising such
distribution, it must in doing so consider the prices in such market
over the same period used in computing the current market price per
share of Common Stock pursuant to paragraph (vi) of this Section 3(c).
For purposes of this paragraph (iv), any dividend or distribution that
includes shares of Common Stock or rights or warrants to subscribe for
or purchase shares of Common Stock shall be deemed to be (A) a dividend
or distribution of the evidences of indebtedness, cash, assets or
shares of capital stock other than such shares of Common Stock or
rights or warrants (making any conversion price reduction required by
this paragraph (iv)) immediately followed by (B) a dividend or
distribution of such shares of Common Stock or such rights or warrants
(making any further conversion price reduction required by paragraph
(i) or (ii) of this Section 3(c)), except (1) the Reference Date of
such dividend or distribution as defined in this paragraph (iv) shall
be substituted as "the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution," "the date
fixed for the determination of stockholders entitled to receive such
rights or warrants" and "the date fixed for such determination" within
the meaning of paragraphs (i) and (ii) of this Section 3(c) and (2) any
shares of Common Stock included in such dividend or distribution shall
not be deemed "outstanding at the close of business on the date fixed
for such determination" within the meaning of paragraph (i) of this
Section 3(c).
(v) In case the Corporation shall pay or make a dividend
or other distribution on its Common Stock exclusively in cash
(excluding (A) cash that is part of a distribution referred to in
paragraph (iv) above and (B) in the case of any quarterly cash dividend
on the Common Stock, the portion thereof that does not exceed the per
share amount of the next preceding quarterly cash dividend on the
Common Stock (as adjusted to appropriately reflect any of the events
referred to in paragraphs (i), (ii), (iii) and (iv) of this Section
3(c)), or all of such quarterly cash dividend if the amount thereof per
share of Common Stock multiplied by four does not exceed 15% of the
current market price per share (determined as
-6-
provided in paragraph (vi) of this Section 3(c)) of the Common Stock on
the trading day next preceding the date of declaration of such
dividend, the conversion price in effect immediately prior to the
opening of business on the day following the date fixed for the payment
for such distribution shall be reduced by multiplying such conversion
price by a fraction of which the numerator shall be the current market
price per share (determined as provided in paragraph (vi) of this
Section 3(c)) of the Common Stock on the date fixed for the payment of
such distribution less the amount of cash so distributed and not
excluded as provided above applicable to one share of Common Stock, and
the denominator of which shall be such current market price per share
of the Common Stock, such reduction to become effective immediately
prior to the opening of business on the day following the date fixed
for the payment of such distribution.
(vi) For the purpose of any computation under paragraph
(ii), (iii), (iv) or (v) of this Section 3(c), the current market price
per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices for the five consecutive trading days
ending with and including the date in question; provided, however, that
(A) if the "ex" date (as hereinafter defined) for any event (other than
the issuance or distribution requiring such computation) that requires
an adjustment to the conversion price pursuant to paragraph (i), (ii),
(iii), (iv) or (v) above ("Other Event") occurs after the fifth trading
day prior to the date in question and prior to the "ex" date for the
issuance or distribution requiring such computation (the "Current
Event"), the closing price for each trading day prior to the "ex" date
for such Other Event shall be adjusted by multiplying such closing
price by the same fraction by which the conversion price is so required
to be adjusted as a result of such Other Event, (B) if the "ex" date
for any Other Event occurs after the "ex" date for the Current Event
and on or prior to the date in question, the closing price for each
trading day on and after the "ex" date for such Other Event shall be
adjusted by multiplying such closing price by the reciprocal of the
fraction by which the conversion price is so required to be adjusted as
a result of such Other Event, (C) if the "ex" date for any Other Event
occurs on the "ex" date for the Current Event, one of those events
shall be deemed for purposes of clauses (A) and (B) of this proviso to
have an "ex" date occurring prior to the "ex" date for the other event,
and (D) if the "ex" date for the Current Event is on or prior to the
date in question, after taking into account any adjustment required
pursuant to clause (B) of this proviso, the closing price for each
trading day on or after such "ex" date shall be adjusted by adding
thereto the amount of any cash and the fair market value on the date in
question (as determined in good faith by the Board of Directors in a
manner consistent with any determination of such value for purposes of
paragraph (iv) or (v) of this Section 3(c), whose determination shall
be conclusive and described in a resolution of the Board of Directors)
of the portion of the rights, warrants,
- 7 -
evidences of indebtedness, shares of capital stock or assets being
distributed applicable to one share of Common Stock. For purposes of
this paragraph, the term "ex" date, (1) when used with respect to any
issuance 01 distribution, means the first date on which the Common
Stock trades regular way on the relevant exchange or in the relevant
market from which the closing price was obtained without the right to
receive such issuance or distribution and (2) when used with respect to
any subdivision or combination of shares of Common Stock, means the
first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
combination becomes effective.
(vii) No adjustment in the conversion price shall be
required unless such adjustment would require an increase or decrease
of at least 1% in the conversion price; provided, however, that any
adjustments which by reason of this paragraph (vii) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment.
(viii) Whenever the conversion price is adjusted as herein
provided:
(A) the Corporation shall compute the adjusted
conversion price and shall prepare a certificate signed by a
Vice President or the Treasurer of the Corporation setting
forth the adjusted conversion price and showing in reasonable
detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the transfer agent
for the Convertible Preferred Stock; and
(B) as soon as practicable after the adjustment,
the Corporation shall mail to all record holders of
Convertible Preferred Stock at their last addresses as they
shall appear in stock transfer books of the Corporation a
notice stating that the conversion price has been adjusted and
setting forth the adjusted conversion price.
(ix) The Corporation from time to time may reduce the
conversion price by any amount for any period of time if the period is
at least twenty days, the reduction is irrevocable during the period
and the Board of Directors shall have made a determination that such
reduction would be in the best interest of the Corporation, which
determination shall be conclusive. Whenever the conversion price is
reduced pursuant to the preceding sentence, the Corporation shall mail
to the record holders of Convertible Preferred Stock a notice of the
reduction at least fifteen days prior to the date the reduced
conversion price takes effect, and such notice shall state the reduced
conversion price and the period it will be in effect
-8-
(d) NO FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of the Convertible Preferred Stock. If more than
one certificate evidencing shares of Convertible Preferred Stock shall be
surrendered for conversion at such time by the holder, the number of full shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Convertible Preferred Stock so surrendered. Instead of any
fractional share of Common Stock that would otherwise be issuable to a holder
upon conversion of any shares of Convertible Preferred Stock, the Corporation
shall pay a cash adjustment in respect of such fractional share in an amount
equal to the same fraction of the closing price of the Common Stock on the day
of conversion or, if the day of conversion is not a trading day, on the next
preceding trading day.
(e) RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE OF ASSETS. In
the event that the Corporation shall be a party to any transaction pursuant to
which the Common Stock is converted into the right to receive other securities,
cash or other property (including without limitation any recapitalization or
reclassification of the Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination of the Common Stock), any consolidation of the
Corporation with, or merger of the Corporation into, any other person, any
merger or another person into the Corporation (other than a merger which does
not result in a reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock), any sale or transfer of all or
substantially all of the assets of the Corporation or any share exchange), then
lawful provisions shall be made as part of the terms of such transaction whereby
the holder of each share of Convertible Preferred Stock then outstanding shall
have the right thereafter to convert such share only into the kind and amount of
securities, cash and other property receivable upon such transaction by a holder
of the number of shares of Common Stock into which such share might have been
converted immediately prior to such transaction provided, however, that if the
holders of Common Stock were entitled by the terms of the transaction to make an
election to receive securities, cash or property, or any combination of the
foregoing, lawful provision shall be made as part of the terms of such
transaction whereby the holder of each share of Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such share only into the
kind and amount of securities, cash or other property receivable upon such trans
action by a holder of the number of shares of Common Stock who made one of the
elections provided for in such transaction (as determined by the Board of
Directors, whose determination shall be conclusive) into which such share might
have been converted immediately prior to such transaction. The Corporation or
the person formed by such consolidation or resulting from such merger or which
acquires such shares or which acquires the Corporation's shares, as the case may
be, shall make provisions in its certificate or articles of incorporation or
other governing document to establish such right Such certificate or articles of
incorporation or other governing document shall provide for adjustments which,
for events subsequent to the effective date of such certificate or articles
-9-
of incorporation or other governing document, shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 3. The above
provisions shall similarly apply to successive transactions of the foregoing
type.
(f) RESERVATION OF SHARES; ETC. The Corporation shall at all tunes
reserve and keep available, free from preemptive rights out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of
the Convertible Preferred Stock, such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all shares of
Convertible Preferred Stock from time to time outstanding. The Corporation shall
from time to time, in accordance with the laws of the State of Delaware, in good
faith and as expeditiously as possible endeavor to cause the authorized number
of shares of Common Stock to be increased if at any time the number of shares of
authorized and unissued Common Stock shall not be sufficient to permit the
conversion of all the then outstanding shares of Convertible Preferred Stock.
If any shares of Common Stock required to be reserved for the purposes
of conversion of the Convertible Preferred Stock hereunder require registration
with or approval of any governmental authority under any Federal or State law
before such shares may be issued upon conversion, the Corporation will in good
faith and as expeditiously as possible endeavor to cause such shares to be duly
registered or approved as the case may be. If the Common Stock is listed on any
national securities exchange, the Corporation will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of Common Stock issuable upon conversion of the Convertible
Preferred Stock, for so long as the Common Stock continues to be so listed.
(g) PRIOR NOTICE OF CERTAIN EVENTS. In case:
(i) the Corporation shall (A) declare any dividend (or
any other distribution) on its Common Stock, other than (1) a dividend
payable in shares of Common Stock or (2) a dividend payable in cash out
of its retained earnings other than any special or nonrecurring or
other extraordinary dividend or (B) declare or authorize a redemption
or repurchase of in excess of 10% of the then outstanding shares of
Common Stock; or
(ii) the Corporation shall authorize the granting to all
holders of Common Stock of rights or warrants to subscribe for or
purchase any shares of stock of any class or series or of any other
rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change
in par value, or from par value to no par value, or from no par value
to par value), or of any consolidation or merger to which the
Corporation is party and for which approval
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of any stockholders of the Corporation shall be required, or of the
sale or transfer of all or substantially all of the assets of the
Corporation or of any share exchange whereby the Corporation is
converted into other securities, cash or other property; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed with the transfer agent
for the Convertible Preferred Stock, and shall cause to be mailed to
all holders of record of the Convertible Preferred Stock at their last
addresses as they shall appear upon the stock transfer books of the
Corporation, at least 15 days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on
which a record (if any) is to be taken for the purpose of such
dividend, distribution, redemption, repurchase, or grant of rights or
warrants or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distribution, redemption, repurchase, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding up is expected to become effective and the date
as of which it is expected that holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding up (but no failure to mail such notice or any
defect therein or in the mailing thereof shall affect the validity of
the corporate action required to be specified in such notice).
(h) CERTAIN ADDITIONAL RIGHTS. In case the Corporation shall, by
dividend or otherwise, declare or make a distribution on its Common Stock
referred to in Section 3(c)(iv) or 3(c)(v) (including, without limitation,
dividends or distribution referred to in the last sentence of Section 3(c)(iv)),
the holder of each share of Convertible Preferred Stock upon the conversion
thereof subsequent to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution and prior to
the effectiveness of the conversion price adjustment in respect of such
distribution, shall also be entitled to receive for each share of Common Stock
into which such share of Convertible Preferred Stock is converted, the portion
of the shares of Common Stock, rights, warrants, evidences of indebtedness,
shares of capital stock, cash and assets as distributed applicable to one share
of Common Stock; provided, however, that at the election of the Corporation
(whose election shall be evidenced by a resolution of the Board of Directors)
with respect to all holders so converting, the Corporation may, in lieu of
distributing to such holder any portion of such distribution not consisting of
cash or securities of the Corporation, pay such holder an amount in cash equal
to the fair market value thereof (as determined in good
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faith by the Board of Directors, which determination shall be conclusive). If
any conversion of a share of Convertible Preferred Stock described in the
immediately preceding sentence occurs prior to the payment date for a
distribution to holders of Common Stock which the holder of the share of
Convertible Preferred Stock so converted is entitled to receive in accordance
with the immediately preceding sentence, the Corporation may elect (such
election to be evidenced by a resolution of the Board of Directors) to
distribute to such holder a due bill for the shares of Common Stock, rights,
warrants, evidences of indebtedness, shares of capital stock, cash or assets to
which such holder is so entitled, provided that such due bill (a) meets any
applicable requirements of the principal national securities exchange or other
market on which the Common Stock is then traded and (b) requires payment or
delivery of such shares of Common Stock, rights, warrants, evidences of
indebtedness, shares of capital Stock, cash or assets no later than the date of
payment or delivery thereof to holders of shares of Common Stock receiving such
distribution.
SECTION 4. SPECIAL CONVERSION RIGHTS.
(a) CHANGE OF CONTROL. Upon the occurrence of a Change of Control
(as defined in Section 4(e)) with respect to the Corporation, each holder of
Convertible Preferred Stock shall have the right, at the holder's option, for a
period of 30 days after the mailing of a notice by the Corporation that a Change
of Control has occurred, to convert all, but not less than all, of such holder's
Convertible Preferred Stock into Common Stock of the Corporation at an adjusted
conversion price per share equal to the Market Value (as defined in Section
4(e)) of the Common Stock. The Corporation may, at its option, in lieu of
providing Common Stock upon any such special conversion, provide the holder with
cash equal to the Market Value of the Common Stock multiplied by the number of
shares of Common Stock into which such Convertible Preferred Stock would have
been convertible immediately prior to such Change of Control. The special
conversion right arising upon a Change of Control shall only be applicable with
respect to the first Change of Control that occurs after the first date of
issuance of any Convertible Preferred Stock. Convertible Preferred Stock which
becomes convertible pursuant to a special conversion right shall, unless so
converted, remain convertible pursuant to Section 3 at the conversion price in
effect immediately before the effective date of the Change of Control, subject
to subsequent adjustment as provided in Section 3(c).
(b) FUNDAMENTAL CHANGE. Upon the occurrence of a Fundamental
Change (as defined in Section 4(e)) with respect to the Corporation, each holder
of Convertible Preferred Stock shall have a special conversion right, at the
holder's option, for a period of 30 days after the mailing of a notice by the
Corporation that a Fundamental Change has occurred, to convert all, but not less
than all, of such holder's Convertible Preferred Stock into the kind and amount
of cash, securities, property or other assets receivable upon such Fundamental
Change by a holder of the number of shares of Common Stock into which such
Convertible Preferred Stock would have been convertible immediately prior to
such
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Fundamental Change at an adjusted conversion price equal to the Market Value of
the Common Stock. The Corporation or a successor corporation, as the case may
be, may, at its option and in lieu of providing the consideration as required
above upon such conversion, provide the bolder with cash equal to the Market
Value of the Common Stock multiplied by the number of shares of Common Stock
into which such Convertible Preferred Stock would have been convertible
immediately prior to such Fundamental Change. Convertible Preferred Stock which
becomes convertible pursuant to a special conversion right shall, unless
converted, remain convertible pursuant to Section 3 into the kind and amount of
cash, securities, property or other assets that the holders of the Convertible
Preferred Stock would have owned immediately after the Fundamental Change if the
holders had converted the Convertible Preferred Stock immediately before the
effective date of the Fundamental Change, subject to subsequent adjustment under
the provisions contemplated by Section 3(c), if applicable.
(c) NOTICE. Upon the occurrence of a Change of Control or a
Fundamental Change with respect to the Corporation, within 30 days after such
occurrence, the Corporation shall mail to each bolder of Convertible Preferred
Stock a notice of such occurrence (the "Special Conversion Notice") setting
forth the following:
(i) the event constituting the Change of Control or
Fundamental Change;
(ii) the date upon which the applicable special conversion
right will terminate;
(iii) the Market Value of the Common Stock;
(iv) the conversion price then in effect under Section 3
and the continuing conversion rights, if any, under Section 3;
(v) the name and address of the paying agent and
conversion agent;
(vi) that holders who want to convert Convertible
Preferred Stock must satisfy the requirements of Section 4(d) and must
exercise such conversion right within the 30-day period after the
mailing of such notice by the Corporation;
(vii) that exercise of such conversion right shall be
irrevocable and no dividends on the Convertible Preferred Stock (or
portions thereof) tendered for conversion shall accrue from and after
the conversion date; and
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(viii) that the Corporation (or a successor corporation, if
applicable) may, at its option, elect to pay cash (specifying the
amount thereof per share) for all Convertible Preferred Stock tendered
for conversion.
(d) EXERCISE PROCEDURES. A bolder of Convertible Preferred Stock
must exercise the special conversion right within the 30-day period after the
mailing of the Special Conversion Notice or such special conversion right shall
expire. Such right must be exercised in accordance with Section 3(b) to the
extent the procedures in Section 3(b) are consistent with the special provisions
of this Section 4. Exercise of such conversion right shall be irrevocable and no
dividends on the Convertible Preferred Stock tendered for conversion shall be
payable in respect of the period from the list dividend payment date preceding
the conversion date through the conversion date. The conversion date with
respect to the exercise of a special conversion right arising upon a Change of
Control or Fundamental Change shall be the 30th day after the mailing of the
Special Conversion Notice.
(e) DEFINITIONS. The following definitions shall apply to terms
used in this Section 4:
(i) A "Change of Control" with respect to the Corporation
shall be deemed to have occurred at such time as any person (within the
meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act)),
including a group (within the meaning of Rule 13d-5 under the Exchange
Act), together with any of its Affiliates or Associates, files or
becomes obligated to file a report (or any amendment or supplement
thereto) on Schedule 13D or 14D-1 pursuant to the Exchange Act,
disclosing that such person has become the beneficial owner of either
(A) 50% or more of the shares of Common Stock of the Corporation then
outstanding or (B) securities representing 50% or more of the combined
voting power of the Voting Stock (as defined below) of the Corporation
then outstanding; provided a Change of Control shall not be deemed to
have occurred (i) with respect to any transaction that constitutes a
Fundamental Change, (ii) as a result of a person becoming or being
deemed the beneficial owner of Common Stock because such person or an
affiliate of such person is or becomes a party to the Stockholders'
Agreement among the Callon Family and NOCO Enterprises, L.P., dated
September 16,1994 as amended from time to time (the "Stockholders'
Agreement"), or (iii) as a result of a person currently a party to the
Stockholders' Agreement or an affiliate of such person acquiring
beneficial ownership of Common Stock. As used herein, a person shall be
deemed to have "beneficial ownership" with respect to, and shall be
deemed to "beneficially own," any securities of the Corporation in
accordance with Section 13 of the Exchange Act and the rules and
regulations (including Rule 13d-3, Rule 13d-5 and any successor rules)
promulgated by the Securities and Exchange Commission thereunder;
-14-
provided that a person shall be deemed to have beneficial ownership of
all securities that any such person has a right to acquire whether such
right is exercisable immediately or only after the passage of time and
without regard to the 60-day limitation referred to in Rule 13d-3 and,
provided further, that a beneficial owner of Convertible Preferred
Stock shall not be deemed to beneficially own the Common Stock into
which such Convertible Preferred Stock is convertible solely by reason
of ownership of the Convertible Preferred Stock. An "Affiliate" of a
specified person is a person that directly or indirectly controls, or
is controlled by or is under common control with, the person specified.
AN "Associate" of a person means (i) any corporation or organization,
other than the Corporation or any subsidiary of the Corporation, of
which the person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust or estate in which the person has a
substantial beneficial interest or as to which the person serves as
trustee or in a similar fiduciary capacity; and (iii) any relative or
spouse of the person or any relative of the spouse, who has the same
home as the person or who is a director or officer of the person or any
of its parents or subsidiaries.
(ii) "Exchange Act" means the Securities Exchange Act of
1934, as amended, and as in effect on the date hereof.
(iii) A "Fundamental Change" with respect to the
Corporation means (A) the occurrence of any transaction or event in
connection with which all or substantially all of the Common Stock of
the Corporation shall be exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or
other assets (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) or (B) the conveyance, sale, lease,
assignment, transfer or other disposal of all or substantially all for
the Corporation's property, business or assets; provided, however, that
a Fundamental Change shall not be deemed to have occurred with respect
to either of the following transactions or events: (1) any transaction
or event in which more than 50% (by value as determined in good faith
by the Board of Directors) of the consideration received by holders of
Common Stock consists of Marketable Stock (as defined below); or (2)
any consolidation or merger of the Corporation in which the holders of
Common Stock of the Corporation immediately prior to such transaction
own, directly or indirectly, (x) 50% or more of the common stock of the
surviving corporation (or of the ultimate parent of such surviving
corporation) outstanding at the time immediately after such
consolidation or merger and (y) securities representing 50% or more of
the combined voting power of the surviving corporation's Voting Stock
(or for the Voting Stock of the ultimate parent of such surviving
corporation) outstanding at such time. The phrase "all or substantially
-15-
all" as used in this definition in reference to the Common Stock shall
mean 66% or more of the aggregate outstanding Common Stock.
(iv) "Voting Stock" means, with respect to any person,
capital stock of such person having general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of such person (irrespective of whether or not at
the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
(v) The "Market Value" of the Common Stock or any other
Marketable Stock shall be the average of the last reported sales prices
of the Common Stock or such other Marketable Stock, as the case may be,
for the five business days ending on the last business day preceding
the date of the Change of Control or Fundamental Change; provided,
however, that if the Marketable Stock is not traded on any national
securities exchange or similar quotation system as described in the
definition of "Marketable Stock" during such period, then the Market
Value of such Marketable Stock shall be the average of the last
reported sales' prices per share of such Marketable Stock during the
first five business days commencing with the first day after the date
on which such Marketable Stock was first distributed to the general
public and traded on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market or any similar system of automated
dissemination of quotations of securities prices in the United States.
(vi) "Marketable Stock" shall mean Common Stock or common
stock of any corporation that is the successor (or of the ultimate
parent of such successor) to all or substantially all of the business
or assets of the Corporation as a result of a Fundamental Change, which
is (or will, upon distribution thereof, be) listed or quoted on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq National
Market or any similar system of automated dissemination of quotations
of securities prices in the United States.
SECTION 5. GENERAL CLASS AND SERIES VOTING RIGHTS. Except as provided
in this Section 5 and in Section 6 hereof or as specifically required by the
laws of the State of Delaware or by the provisions of the Certificate of
Incorporation of the Corporation, as amended, the Convertible Preferred Stock
shall have no voting rights. The shares of Convertible Preferred Stock shall
have the following voting rights:
(a) So long as any shares of Convertible Preferred Stock remain
outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Convertible Preferred Stock outstanding at the time (voting separately
as a class) given in person or by
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proxy, either in writing or at any special or annual meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more of the
following:
(i) The authorization, creation or issuance, or any
increase in the authorized or issued amount, of any class or series of
stock (including any class or series of preferred stock) ranking prior
(as that term is hereinafter defined in this Section 5) to the
Convertible Preferred Stock; or
(ii) The amendment, alteration or repeal, whether by
merger, consolidation or otherwise, of any of the provisions of the
Certificate of Incorporation or of these resolutions which would alter,
change or repeal the powers, preferences, or special rights of the
shares of the Convertible Preferred Stock so as to affect them
adversely.
(b) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote would otherwise
be required shall be effected, all outstanding shares of Convertible Preferred
Stock shall have been redeemed or sufficient funds and/or shares of Common Stock
shall have been deposited in trust to effect such redemption.
(c) For purposes of this resolution, any class or series of stock
of the Corporation shall be deemed to rank:
(i) prior to the Convertible Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution
or winding up, if the holders of such class or series shall be entitled
to the receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or
priority to the holders of Convertible Preferred Stock;
(ii) on a parity with the Convertible Preferred Stock as
to dividends or as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates, or redemption or liquidation prices per share thereof
shall be different from those of the Convertible Preferred Stock, if
the holders of such class or series of stock and the Convertible
Preferred Stock shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
liquidation prices, without preference or priority one over the other;
and
(iii) junior to the Convertible Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution
or winding up, if such class or series shall be Common Stock or if the
holders of the Convertible Preferred
-17-
Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case
may be, in preference or priority to the holders of shares of such
class or series.
(d) The holders of Convertible Preferred Stock shall also be
entitled to vote on certain amendments or supplements to the Indenture
establishing the 8.5% Convertible Subordinated Debentures due 2010, of the
Corporation, for which the Convertible Preferred Stock may be exchanged as
described in Section 9 hereof and as provided in Article Nine of such Indenture.
SECTION 6. DEFAULT VOTING RIGHTS.
(a) ELECTION OF DIRECTORS. Whenever, at any time or times,
dividends payable on the shares of Convertible Preferred Stock shall be in
arrears in an amount equal to at least six quarterly dividends (whether or not
consecutive), the holders of the outstanding shares of Convertible Preferred
Stock shall have the exclusive right (voting separately as a class) to elect two
directors of the Corporation.
(b) VOTE PER SHARE. At elections for such directors, each holder
of Convertible Preferred Stock shall be entitled to one vote for each share of
Convertible Preferred Stock held. Upon the vesting of such right with the
holders of Convertible Preferred Stock, the maximum authorized number of members
of the Board of Directors shall automatically be increased by two, which shall
be of the class or classes selected by the Corporation's Board of Directors
which has the least number of director positions then currently filled, and the
two vacancies so created shall be filled by vote of the holders of the
outstanding shares of Convertible Preferred Stock as hereinafter set forth. The
right of the holders of Convertible Preferred Stock, voting separately as a
class to elect members of the Board of Directors of the Corporation shall
continue until such time as all dividends accrued and unpaid on the Convertible
Preferred Stock shall have been paid or declared and funds set aside to provide
for payment in full, at which time such right shall terminate, except as herein
or by law expressly provided, subject to revesting in the event of each and
every subsequent default of the character above mentioned.
(c) MEETINGS. Whenever the voting right described in subsection
(a) above shall have vested in the holders of the Convertible Preferred Stock,
the right may be exercised initially either at a special meeting of the holders
of the Convertible Preferred Stock called as hereinafter provided, or at any
annual meeting of stockholders held for the purpose of electing directors, and
thereafter at each successive annual meeting.
(d) CALL OF MEETING. At any time when the voting right described
in subsection (a) above shall have vested in the holders of the Convertible
Preferred Stock, and if the right shall not already have been initially
exercised, a proper officer of the Corporation
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shall, upon the written request of the holders of record of 10% in number of the
shares of the Convertible Preferred Stock then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of the holders of the
Convertible Preferred Stock for the purpose of electing directors. Such meeting
shall be held at the earliest practicable date upon the notice required for
annual meetings of stockholders at the place for holding of annual meetings of
stockholders of the Corporation, or, if none, at a place designated by the
Secretary of the Corporation. If the meeting shall not be called by the proper
officers of the Corporation within 30 days after the personal service of such
written request upon the Secretary of the Corporation, or within 30 days after
mailing it within the United States of America, by registered mail, addressed to
the Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
holders of record of 10% in number of the shares of the Convertible Preferred
Stock then outstanding may designate in writing one of their members to call
such meeting at the expense of the Corporation, and such meeting may be called
by such person so designated upon the notice required for annual meetings of
stockholders and shall be held at the same place as is elsewhere provided for in
this subsection (d). Any holder of the Convertible Preferred Stock shall have
access to the share transfer books of the Corporation as permitted under the
Delaware General Corporation Law for the purpose of causing a meeting of the
stockholders to be called pursuant to the provisions of this subsection (d).
Notwithstanding the provisions of this subsection (d), however, no such special
meeting shall be held during a period within 60 days immediately preceding the
date fixed for the next annual meeting of stockholders.
(e) QUORUM. At any meeting held for the purpose of electing
directors at which the holders of the Convertible Preferred Stock shall have the
right to elect directors as provided herein, the presence in person or by proxy
of the holders of 50% of the then outstanding shares of the Convertible
Preferred Stock shall be required and be sufficient to constitute a quorum of
the holders of the Convertible Preferred Stock for the election of directors. At
any such meeting or adjournment thereof (i) the absence of a quorum of the
holders of the Convertible Preferred Stock shall not prevent the election of
directors other than those to be elected by the holders of the Convertible
Preferred Stock and the absence of a quorum or quorums of the holders of other
classes or series of capital stock entitled to elect such other directors shall
not prevent the election of directors to be elected by the holders of the
Convertible Preferred Stock and (ii) in the absence of a quorum of the holders
of the Convertible Preferred Stock, a majority of the holders present in person
or by proxy of the Convertible Preferred Stock shall have the power to adjourn
the meeting, or appropriate portion thereof for the election of directors which
the holders of the Convertible Preferred Stock are entitled to elect, from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present. The Chairman of the Board or the President of the Corporation
shall preside at any such meeting.
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(f) TERM. Each director elected by the holders of shares of
Convertible Preferred Stock shall continue to serve as a director until such
time as all dividends accrued and unpaid on the Convertible Preferred shall have
been paid or declared and funds set aside to provide for payments in full, at
which time the term of office of all persons elected as directors by the holders
of shares of Convertible Preferred Stock shall forthwith terminate and the
number of members of the Board of Directors of the Corporation shall be reduced
accordingly. Whenever the term of office of the directors elected by the holders
of Convertible Preferred Stock voting as a class shall end and the special
voting powers vested in the holders of Convertible Preferred Stock as provided
in this Section 6 shall have expired, the number of directors shall be such
number as may be provided for in the By-Laws irrespective of any increase made
pursuant to the provisions of this Section 6.
SECTION 7. OPTIONAL REDEMPTION.
(a) REDEMPTION PRICE. The Corporation may at its option, at any
time during the twelve-month periods beginning on or after December 31, 1998, in
the years indicated below, redeem all, or any numbers less than all, of the
outstanding shares of Convertible Preferred Stock, provided that the Convertible
Preferred Stock may not be redeemed, in whole or in part, prior to December 31,
1998. All redemption of shares of Convertible Preferred Stock shall be effected
at the applicable redemption prices set forth below:
If Redemption Date During the Redemption Price
Twelve-Month Period Beginning Per Share
- ----------------------------- ----------------
1998.............................................. $ 26.488
1999.............................................. 26.275
2000.............................................. 26.063
2001.............................................. 25.850
2002.............................................. 25.638
2003.............................................. 25.425
2004.............................................. 25.213
2005 and thereafter .............................. 25.000
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plus, in each case, an amount equal to all dividends (whether or not declared)
accrued and unpaid on such share of Convertible Preferred Stock to the date
fixed for redemption (the price from time to time to redeem the Convertible
Preferred Stock excluding any dividends (whether or not declared) accrued and
unpaid, is referred to herein as the "Redemption Price").
(b) ACCRUED DIVIDENDS. The Corporation may not purchase, redeem or
otherwise acquire for value any shares of Convertible Preferred Stock or shares
of any other series of preferred stock then outstanding ranking on a parity with
or junior to the Convertible Preferred Stock unless all accrued dividends on all
shares of Convertible Preferred Stock then outstanding shall have been paid or
declared and a sum sufficient for the payment thereof set apart. No sinking find
shall be established for the Convertible Preferred Stock.
(c) NOTICE OF REDEMPTION. Notice of any proposed redemption of
shares of Convertible Preferred Stock shall be mailed to each record holder of
the shares of Convertible Preferred Stock to be redeemed at least 30 but not
more than 60 days prior to the date fixed for such redemption (herein referred
to as the "Redemption Date"). Each such notice shall set forth the following:
(i) the Redemption Date;
(ii) the Redemption Price per share;
(iii) the place for payment and for delivering the stock
certificate(s) and transfer instrument(s) in order to receive the
Redemption Price;
(iv) the shares of Convertible Preferred Stock to be
redeemed;
(v) the then effective Conversion Price;
(vi) the price of the Common Stock on the last trading day
prior to the date of the notice: and
(vii) that the right of holders of shares of Convertible
Preferred Stock being redeemed to exercise their conversion right shall
terminate as to such shares at the close of business on fifth business
day prior to the date fixed for redemption (provided that no default by
the Corporation in the payment of the applicable Redemption Price
(including any accrued and unpaid dividends) shall have occurred and be
continuing).
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Any notice mailed in such manner shall be conclusively deemed to have
been duly given regardless of whether such notice is in fact received. If less
than all the outstanding shares of Convertible Preferred Stock are to be
redeemed, the Corporation will select those to be redeemed ratably or by lot in
a manner determined by the Board of Directors. In order to facilitate the
redemption of the Convertible Preferred Stock, the Board of Directors may fix a
record date for determination of holders of Convertible Preferred Stock to be
redeemed, which shall not be more than 30 days prior to the Redemption Date with
respect thereto.
The holder of any shares of Convertible Preferred Stock redeemed
pursuant to this Section 7 upon any exercise of the Corporation's redemption
right shall not be entitled to receive payment of the Redemption Price for such
shares until such bolder shall cause to be delivered to the place specified in
the notice given with respect to such redemption (i) the certificate(s)
representing such share of Convertible Preferred Stock and (ii) transfer
instrument(s) sufficient to transfer such shares of Convertible Preferred Stock
to the Corporation free of any adverse interest. No interest shall accrue on the
Redemption Price of any share of Convertible Preferred Stock after the
Redemption Date.
At the close of business on the Redemption Date for any share of
Convertible Preferred Stock, such share shall (provided the Redemption Price
(including any accrued and unpaid dividends to the Redemption Date) of such
shares has been paid or properly provided for) be deemed to cease to be
outstanding and all rights of any person other than the Corporation in such
share shall be extinguished on the Redemption Date for such share (including all
rights to receive future dividends with respect to such share) except for the
right to receive the Redemption Price (including any accrued and unpaid
dividends to the Redemption Date), without interest for such share in accordance
with the provisions of this Section 7, subject to applicable escheat laws.
In the event that any shares of Convertible Preferred Stock shall be
converted into Common Stock prior to the Redemption Date pursuant to Section 3
or 4, then (i) the Corporation shall not have the right to redeem such shares
and (ii) any funds, securities or other property which shall have been deposited
for the payment of the Redemption Price for such shares shall be returned to the
Corporation immediately after such conversion (subject to declared dividends
payable to holders of shares of Convertible Preferred Stock on the record date
for such dividends being so payable, to the extent set forth in Section 3
hereof, regardless of whether such shares are converted subsequent to such
record date and prior to the related Dividend Payment Date) and any shares of
Common Stock reserved for issuance upon redemption of such converted shares need
no longer be so reserved.
Notwithstanding the foregoing provisions of this Section 7, and subject
to the provisions of Section 2 hereof, if a dividend upon any shares of
Convertible Preferred Stock is past due, (i) no share of the Convertible
Preferred Stock may be redeemed, except by
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means of a redemption pursuant to which all outstanding shares of the
Convertible Preferred Stock are simultaneously redeemed and all accrued
dividends paid and (ii) the Corporation shall not purchase or otherwise acquire
any shares of the Convertible Preferred Stock, except pursuant to a purchase or
exchange offer made on the same terms to all holders of the Convertible
Preferred Stock.
SECTION 8. RANK; LIQUIDATION. Upon any voluntary or involuntary
dissolution, liquidation or winding up of the Corporation (for the purposes of
this Section 8, a "Liquidation"), the holders of Convertible Preferred Stock
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, an amount equal to $25.00 per share of
Convertible Preferred Stock then held by such stockholder plus all dividends
(whether or not declared or due) accrued and unpaid on such share on the date
fixed for the distribution of assets of the Corporation to the holders of
Convertible Preferred Stock. The shares of Convertible Preferred Stock shall
rank prior to the shares of Common Stock and any other class or series of stock
of the Corporation ranking junior to the Convertible Preferred Stock, so that
the holders of the Convertible Preferred Stock shall receive the full amount to
which they shall be entitled before any distribution of assets shall be made to
the holders of the Common Stock or the holders of any other stock that ranks
junior to the Convertible Preferred Stock in respect of distributions upon the
Liquidation of the Corporation.
If upon any Liquidation of the Corporation, the assets available for
distribution to the holders of Convertible Preferred Stock and any other stock
of the Corporation ranking on a parity with the Convertible Preferred Stock upon
Liquidation which shall then be outstanding (hereinafter in this paragraph
called the "Total Amount Available") shall be insufficient to pay the holders of
all outstanding shares of Convertible Preferred Stock and all other such parity
stock the full amounts (including all dividends accrued and unpaid) to which
they shall be entitled by reason of such Liquidation of the Corporation, then
there shall be paid to the holders of the Convertible Preferred Stock in
connection with such Liquidation of the Corporation, an amount equal to the
product derived by multiplying the Total Amount Available times a fraction, the
numerator of which shall be the full amount to which the holders of the
Convertible Preferred Stock shall be entitled under the terms of the preceding
paragraph by reason of such Liquidation of the Corporation and the denominator
of which shall be the total amount which would have been distributed by reason
of such Liquidation of the Corporation with respect to the Convertible Preferred
Stock and all other stock ranking on a parity with the Convertible Preferred
Stock upon Liquidation then outstanding had the Corporation possessed sufficient
assets to pay the maximum amount which the holders of all such stock would be
entitled to receive in connection with such Liquidation of the Corporation.
The voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all of the property or assets of the Corporation, or the merger or
consolidation of the
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Corporation into or with any other corporation, or the merger of any other
corporation into the Corporation, or any purchase or redemption of some or all
of the shares of any class or series of stock of the Corporation, shall not be
deemed to be a Liquidation of the Corporation of the purposes of this Section 8
(unless in connection therewith the Liquidation of the Corporation is
specifically approved).
The holder of any shares of Convertible Preferred Stock shall not be
entitled to receive any payment owed for such shares under this Section 8 until
such holder shall cause to be delivered to the Corporation (i) the
certificate(s) representing such shares of Convertible Preferred Stock and (ii)
transfer instrument(s) satisfactory to the Corporation and sufficient to
transfer such shares of Convertible Preferred Stock to the Corporation free of
any adverse interest. No interest shall accrue on any payment upon Liquidation
after the due date thereof.
After payment of the full amount of the liquidating distribution to
which they are entitled, the holders of shares of the Convertible Preferred
Stock will not be entitled to any further participation in any distribution of
assets by the Corporation.
SECTION 9. EXCHANGE.
(a) EXCHANGE FOR DEBENTURES. The shares of Convertible Preferred
Stock may be exchanged, in whole but not in part, at the option of the
Corporation, for its 8.5% Convertible Subordinated Debentures due 2010 (the
"Debentures") on any Dividend Payment Date commencing on January 15,1998. The
Debentures are to be issued under an Indenture (the "Indenture") between the
Corporation and Bank One, Columbus, N.A., as trustee (together with any
successor trustee, the "Trustee"), substantially in the form filed as an exhibit
to the Corporation's Registration Statement on Form S-1 (Registration No.
33-96700) as filed with the Securities and Exchange Commission, completed as set
forth therein and with such changes as may be required by law or usage. Holders
of the outstanding shares of Convertible Preferred Stock will be entitled to
receive $25.00 principal amount of the Debentures in exchange for each share of
Convertible Preferred Stock held by them at the time of exchange, provided that
such exchange may not occur unless all accrued and unpaid dividends on the
Convertible Preferred Stock through the Dividend Payment Date established as the
exchange date have been paid or set aside for payment. Any such exchange shall
be effected in the same manner and, upon the same notice, as a redemption of the
Convertible Preferred Stock pursuant to Section 7, as aforesaid. Upon any such
exchange, the shares of Convertible Preferred Stock shall (provided such
exchange is duly and properly effected) be deemed to cease to be outstanding as
of the close of business on the date established for such exchange, and all
rights of any holder thereof shall be extinguished except the right to receive
Debentures in exchange therefore and the right to receive accrued and unpaid
dividends on such shares of Convertible Preferred Stock to the date established
for such exchange. As in the case of a redemption of shares of
-24-
Convertible Preferred Stock pursuant to Section 7, holders of shares of
Convertible Preferred Stock must surrender such shares a order to receive the
Debentures for which such shares have been exchanged, but upon such surrender
such holders will be entitled to receive all interest accrued and unpaid on such
Debentures from the date of exchange at the time and in the manner that such
interest would be paid in the ordinary course pursuant to the Indenture pursuant
to which such Debentures shall be issued. Dividends due on the shares of
Convertible Preferred Stock on the Dividend Payment Date on which the exchange
is effected will be mailed to holders in the regular course.
(b) DELIVERY OF DOCUMENTS. No exchange of the Convertible
Preferred Stock for Debentures may be effected unless prior to such exchange the
Corporation causes to be delivered to the Trustee the documents specified in
Section 303 the Indenture.
SECTION 10. PAYMENTS. The Corporation may provide funds for any
payment of the Redemption Price for any shares of Convertible Preferred Stock or
any amount distributable with respect to any Convertible Preferred Stock under
Sections 7 and 8 hereof by depositing such funds with a bank or trust company
selected by the Corporation having a net worth of at least $50,000,000, in trust
for the benefit of the holders of such shares of Convertible Preferred Stock
under arrangements providing irrevocably for payment upon satisfaction of any
conditions to such payments by the holders of such shares of Convertible
Preferred Stock which shall reasonably be required by the Corporation. The
Corporation shall be entitled to make any deposit of funds contemplated by this
Section 10 under arrangements designed to permit such funds to generate interest
or other income for the Corporation, and the Corporation shall be entitled to
receive all interest and other income earned by any funds while they shall be
deposited as contemplated by this Section 10, provided that the Corporation
shall maintain on deposit funds sufficient to satisfy all payments which the
deposit arrangement shall require to be paid by the Corporation.
Any payment which may be owed for the payment of the Redemption Price
for any shares of Convertible Preferred Stock pursuant to Section 7 or the
payment of any amount distributable with respect to any shares of Convertible
Preferred Stock under Section 8 shall be deemed to have been "paid or properly
provided for" upon the earlier to occur of: (i) the date upon which such funds
sufficient to make such payment shall be deposited in a manner contemplated by
the preceding paragraph or (ii) the date upon which a check payable to the
person entitled to receive such payment shall be delivered to such person or
mailed to such person at either the address of such person then appearing on the
books of the Corporation or such other address as the Corporation shall deem
reasonable. The Corporation may deposit Debentures or shares of Common Stock to
be exchanged for shares of Convertible Preferred Stock in the manner
contemplated by the preceding paragraph, but, with respect to Debentures, the
interest accruing on such Debentures shall accrue to the former holders of the
Convertible Preferred Stock entitled thereto.
-25-
Subject to applicable escheat laws, if the conditions precedent to the
disbursement of any funds deposited by the Corporation pursuant to this Section
10 shall not have been satisfied within six months after the establishment of
the trust for such funds, then (i) such funds shall be returned to the
Corporation upon its request; (ii) after such return, such funds shall be free
of any trust which shall have been impressed upon them; (iii) the person
entitled to this payment for which such funds shall have been originally
intended shall have the right to look only to the Corporation for such payment,
subject to applicable escheat laws; and (iv) the trustee which shall have held
such funds shall be relieved of any responsibility for such funds upon the
return of such funds to the Corporation.
SECTION 11. STATUS OF REACQUIRED SHARES. Shares of Convertible
Preferred Stock issued and reacquired by the Corporation (including, without
limitation, shares of Convertible Preferred Stock which have been redeemed
pursuant to the terms of Section 7 hereof; shares of Convertible Preferred Stock
which have been converted into shares of Common Stock and shares of Convertible
Preferred Stock which have been exchanged for Debentures) shall have the status
of authorized and unissued shares of preferred stock, undesignated as to series,
subject to later issuance.
SECTION 12. PREEMPTIVE RIGHTS. The Convertible Preferred Stock is not
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.
SECTION 13. MISCELLANEOUS.
(a) TRANSFER TAXES. The Corporation shall pay any and all stock
transfer and documentary stamp taxes that may be payable in respect of any
issuance and delivery of shares of Convertible Preferred Stock or shares of
Common Stock or other securities issued on account of Convertible Preferred
Stock pursuant hereto or certificates or instruments evidencing such shares or
securities. The Corporation shall not, however, be required to pay any such tax
which may be payable in respect of any transfer involved in the issuance or
delivery of shares of Convertible Preferred Stock or Common Stock or other
securities in a name other than that in which the shares of Convertible
Preferred Stock with respect to which such shares or other securities are issued
or delivered were registered, or in respect of any payment to any person with
respect to any such shares or securities other than a payment to the registered
holder thereof; and shall not be required to make any such issuance, delivery or
payment unless and until the person otherwise entitled to such issuance,
delivery or payment has paid to the Corporation the amount of any such tax or
has established, to the satisfaction of the Corporation, that such tax has been
paid or is not payable.
(b) FAILURE TO DESIGNATE STOCKHOLDER OR PAYEE. In the event that a
holder of shares of Convertible Preferred Stock shall not by written notice
designate the name in
-26-
which shares of Common Stock to be issued upon conversion or redemption of such
shares, or Debentures to be issued upon exchange of such shares, should be
registered or to whom payment upon redemption of shares of Convertible Preferred
Stock should be made or the address to which the certificates or instruments
evidencing such shares, Debentures or such payment should be sent, the
Corporation shall be entitled to register such shares or Debentures and make
such payment in the name of the holder of such Convertible Preferred Stock as
shown on the records of the Corporation and to send the certificates or
instruments evidencing such shares or such payment to the address of such holder
shown on the records of the Corporation.
(c) REGISTRAR AND TRANSFER AGENT. The Corporation may appoint, and
from time to time discharge and change, a transfer agent for the Convertible
Preferred Stock.
(d) SEVERABILITY. Whenever possible, each provision hereof shall
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.
IN WITNESS WHEREOF, this Statement of Designation establishing a series
of shares has been made under the hand of the undersigned, the President of the
Corporation, this 22nd day of November, 1995.
CALLON PETROLEUM COMPANY
By /s/ Fred L. Callon
-------------------------
Fred L. Callon, President
Attest
By /s/ H. Michael Tatum, Jr.
-----------------------------
H. Michael Tatum, Jr.
Secretary
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STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 11/27/1995
950274310 - 2390003
CERTIFICATE OF CORRECTION
CALLON PETROLEUM COMPANY
Callon Petroleum Company, a corporation organized and existing under
and by virtue of The General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
1. That the Corporation filed a Certificate of Designations (the
"Original Certificate") with the Delaware Secretary of State on November 22,
1995, setting forth the resolutions, establishing and designating a series of
shares and fixing and determining the designations, preferences, limitations and
relative rights thereof, for the Corporation's $2.125 Convertible Exchangeable
Preferred Stock, Series A (the "Convertible Preferred Stock"); and
2. That the Original Certificate contained certain inaccuracies
in Section 3 (a), Section 3(c)(vi), Section 6(f), the third paragraph of Section
8 and the third paragraph of Section 10 that the Corporation desires to correct
with this Certificate of Correction pursuant to Section 103(f) of The General
Corporation Law of the State of Delaware; and
3. That, as corrected, Section 3(a) of the Original Certificate
shall be and read as follows:
(a) RIGHT OF CONVERSION. Each share of Convertible
Preferred Stock shall be convertible at the option of the holder
thereof at any time prior to the close of business on the day prior to
the date fixed for redemption of such share as herein provided, into
fully paid and nonassessable shares of Common Stock, at a rate per full
share of Convertible Preferred Stock determined by dividing $25.00 by
the conversion price per share of Common Stock in effect on the date
such share is surrendered for conversion, or into such additional or
other securities, cash or property and at such other rates as required
in accordance with the provisions of this Section 3. For purposes of
this resolution, the "conversion price" per share of Common Stock shall
initially be $11.00 and shall be adjusted from tine to time in
accordance with the provisions of this Section 3. Each share of
Convertible Preferred Stock may be converted in whole or in part.
4. That, as corrected, Section 3(c)(vi) of the Original
Certificate shall be and read as follows:
(vi) For the purpose of any computation under paragraph
(ii), (iii), (iv) or (v) of this Section 3(c), the current market price
per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices for the five consecutive trading days
ending with and including the date in question; provided, however, that
(A) if the "ex" date (as hereinafter
defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the
conversion price pursuant to paragraph (i), (ii), (iii), (iv) or (v)
above ("Other Event") occurs after the third trading day prior to the
date in question and prior to the "ex" date for the issuance or
distribution requiring such computation (the "Current Event"), the
closing price for each trading day prior to the "ex" date for such
Other Event shall be adjusted by multiplying such closing price by the
same fraction by which the conversion price is so required to be
adjusted as a result of such Other Event, (B) if the "ex" date for any
Other Event occurs after the "ex" date for the Current Event and on or
prior to the date in question, the closing price for each trading day
on and after the "ex" date for such Other Event shall be adjusted by
multiplying such closing price by the reciprocal of the fraction by
which the conversion price is so required to be adjusted as a result of
such Other Event, (C) if the "ex" date for any Other Event occurs on
the "ex" date for the Current Event, one of those events shall be
deemed for purposes of clauses (A) and (B) of this proviso to have an
"ex" date occurring prior to the "ex" date for the other event, and (D)
if the "ex" date for the Current Event is on or prior to the date in
question, after taking into account any adjustment required pursuant to
clause (B) of this proviso, the closing price for each trading day on
or after such "ex" date shall be adjusted by adding thereto the amount
of any cash and the fair market value on the date in question (as
determined in good faith by the Board of Directors in a manner
consistent with any determination of such value for purposes of
paragraph (iv) or (v) of this Section 3(c), whose determination shall
be conclusive and described in a resolution of the Board of Directors)
of the portion of the rights, warrants, evidences of indebtedness,
shares of capital stock or assets being distributed applicable to one
share of Common Stock. For purposes of this paragraph, the term "ex"
date, (1) when used with respect to any issuance or distribution, means
the first date on which the Common Stock trades regular way on the
relevant exchange or in the relevant market from which the closing
price was obtained without the right to receive such issuance or
distribution and (2) when used with respect to any subdivision or
combination of shares of Common Stock, means the first date on which
the Common Stock trades regular way on such exchange or in such market
after the time at which such subdivision or combination becomes
effective.
5. That, as corrected, Section 6(f) of the Original Certificate
shall be and read as follows:
(f) TERM. Each director elected by the holders of shares
of Convertible Preferred Stock shall continue to serve as a director
until such time as (i) his successor shall have been duly elected and
shall qualify or (ii)
-2-
all dividends accrued and unpaid on the Convertible Preferred Stock
shall have been paid or declared and funds set aside to provide for
payment in full, at which time the term of office of all persons
elected as directors by the holders of shares of Convertible Preferred
Stock shall forthwith terminate and the number of members of the Board
of Directors of the Corporation shall be reduced accordingly. Whenever
the term of office of the directors elected by the holders of
Convertible Preferred Stock voting as a class shall end and the special
voting powers vested in the holders of Convertible Preferred Stock as
provided in this Section 6 shall have expired, the number of directors
shall be such number as may be provided for in the By-Laws irrespective
of any increase made pursuant to the provisions of this Section 6.
6. That, as corrected, the third paragraph of Section 8 of the
Original Certificate shall be and read as follows:
The voluntary sale, conveyance, lease, exchange or transfer of
all or substantially all of the property or assets of the Corporation,
or the merger or consolidation of the Corporation into or with any
other corporation, or the merger of any other corporation into the
Corporation, or any purchase or redemption of some or all of the shares
of any class or series of stock of the Corporation, shall not be deemed
to be a Liquidation of the Corporation for purposes of this Section 8
(unless in connection therewith the Liquidation of the Corporation is
specifically approved).
7. That, as corrected, the third paragraph of Section 10 of the
Original Certificate shall be and read as follows:
Subject to applicable escheat laws, if the conditions
precedent to the disbursement of any funds deposited by the Corporation
pursuant to this Section 10 shall not have been satisfied within six
months after the later of (a) the redemption payment date and (b) the
establishment of the trust for such funds, then (i) such funds shall be
returned to the Corporation upon its request; (ii) after such return,
such funds shall be free of any trust which shall have been impressed
upon them; (iii) the person entitled to this payment for which such
funds shall have been originally intended shall have the right to look
only to the Corporation for such payment, subject to applicable escheat
laws; and (iv) the trustee which shall have held such funds shall be
relieved of any responsibility for such funds upon the return of such
funds to the Corporation.
-3-
IN WITNESS WHEREOF, this Statement of Correction has been made under
the hand of the undersigned, the President of the Corporation, this 27th day of
November, 1995.
CALLON PETROLEUM COMPANY
By /s/ Fred L. Callon
-------------------------
Fred L. Callon, President
Attest
By /s/ H. Michael Tatum, Jr.
--------------------------
H. Michael Tatum, Jr.
Secretary
-4-
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 01:00 PM 04/07/2000
001178331 - 2390003
CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES B PREFERRED STOCK
OF
CALLON PETROLEUM COMPANY
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware
We, Fred L. Callon, President, and Robert A. Mayfield, Secretary, of
Callon Petroleum Company (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (UK "GCL"),
in accordance with the provisions of Section 103 of the GCL, DO HEREBY CERTIFY;
That pursuant to the authority conferred upon the Board of Directors
(the "Board") by the Certificate of Incorporation of the Corporation, as
amended, the said Board on March 30, 2000, adopted the following resolutions
creating a series of one hundred thousand shares of Preferred Stock, par value
$0.01 per share, designated as Series B Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board In
accordance with the provisions of its Certificate of Incorporation, as amended,
the Board does hereby create, authorize and provide for the issuance upon the
exercise of the Corporation's Preferred Stock Purchase Rights, of a series of
Preferred Stock of the Corporation, and does hereby fix and state that the
designations, amounts, powers, preferences and relative and other special rights
and the qualifications, limitations or restrictions thereof are as follows:
SERIES B PREFERRED STOCK
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as Series B Preferred Stock and the number of shares
constituting such series shall be 100,000.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock ranking prior and
superior to the shares of Series B Preferred Stock with respect to dividends,
the holders of shares of Series B Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for that purpose, quarterly dividends payable to cash on the 1st day
of July, October, January, April, in each year commencing July 1, 2000 (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series B Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $0.01 or (b)
subject to the provision for adjustment hereinafter set forth, one thousand
(1,000) times the aggregate per share amount of all cash dividends, and one
thousand (1,000) times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions other than a dividend payable in
shares of the common stock of the Corporation, par value $0.01 per share ("the
Common Stock"), or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise),
declared on the Common Stock, since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series B
Preferred Stock. In the event the Corporation shall at any time after March 30,
2000 (the "Rights Declaration Date") (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
than in each such case the amount to which holders of shares of Series B
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or
distribution on the Series B Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the
Series B Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series B
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series B Preferred
Stock entitled to receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such dividends shall begin to
accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of Series
B Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than thirty
(30) days prior to the date fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. The holders of shares of Series B
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter
set forth, share of Series B Preferred Stock shall entitle the holder thereof to
one thousand (1,000) votes on all matters submitted to a vote of the
stockholder of the Corporation. In the event the Corporation Shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series B Preferred Stock were entitled immediately prior to such event shall
be adjusted by multiplying such number by a fraction the numerator of which is
the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of sham
of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the
holders of shares of Series B Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation. Except as otherwise provided herein or by
law, the holders of the shares of Series B Preferred Stock shall not be entitled
to vote as a separate class on any matters submitted to a vote of the
stockholders.
(C) (i) If at any time dividends on any Series B
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the holders of the Series B Preferred Stock, voting at a
separate series from all other series of Preferred Stock and classes of capital
stock, shall be entitled to elect two members of the Board of Directors in
addition to any directors elected by any other series, class or classes of
securities, and the authorized number of directors will automatically be
increased by two. Promptly thereafter, the Board of Directors of this
Corporation shall, as soon as may be practicable, call a special meeting of
holders of Series B Preferred Stock for the purpose of electing such members of
the Board of Directors. Said special meeting shall in any event be held within
45 days of the occurrence of such arrearage.
(ii) During any period when the holders of Series
B Preferred Stock, voting as a separate series, shall be entitled and shall have
exercised their right to elect two directors, then and during such time as such
right continues (a) the then authorized number of directors shall be increased
by two, and the holders of Series B Preferred Stock, voting as a separate
series, shall be entitled to elect the additional directors so provided for, and
(b) each such additional director shall not be a member of any existing class of
the Board of Directors, but shall serve until the next annual meeting of
stockholders for the election directors, or until his successor shall be elected
and shall qualify, or until his right to hold such office terminates pursuant to
the provisions of this Section 3(C).
(iii) A director elected pursuant to the terms
hereof may be removed with or without cause by the holders of Series B Preferred
Stock entitled to vote in an election of such Director.
(iv) If during any interval between annual
meetings of stockholders for the election of directors and while the holders of
Series B Preferred Stock shall be entitled to elect two directors, there is no
such director in office by reason of resignation, death or removal, then,
promptly thereafter, the Board of Directors shall call a special meeting of the
holders of Series B Preferred Stock for the purpose of filling such vacancy and
such vacancy shall be filled at such special meeting. Such special meeting shall
in any event be held within 90 days of the occurrence of such vacancy, unless an
annual meeting of stockholders is scheduled during such 90-day period.
(v) At such time as the arrearage is My cured,
and all dividends accumulated and unpaid on any shares of Series B Preferred
Stock outstanding are paid, and, in addition thereto, at least one regular
dividend has been paid subsequent to curing such arrearage, the term of office
of any directors elected pursuant to this Section 3(C), or his successor, shall
automatically terminates, and the authorized number of directors shall
automatically decrease by two, the rights of the holders of the shares of the
Series B Preferred Stock to vote as provided in
this Section 3(C) shall cease, subject to renewal from time to time upon the
same terms and conditions, and the holders of shares of the Series B Preferred
Stock shall have only the limited voting rights elsewhere herein set forth.
(D) Except as set forth herein, holders of Series A Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series B Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series B Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of (stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to, the Series B Preferred Stock:
(ii) declare or pay dividends on, or make any
other distributions on, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series B
Preferred Stock, except dividends paid ratably on the Series B Preferred Stock
and all such junior stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either is to dividends or
upon liquidation, dissolution or winding up) with the Series B Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series B Preferred Stock; or
(iv) purchase not otherwise acquire for
consideration any shares of Series B Preferred Stock, or any shares of stock
ranking on a parity with the Series B Preferred Stock, except in accordance with
purchase offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series B Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Corporation, no distribution shall be made to
the holders of shares of stock ranting junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Stock unless,
prior thereto, the holders of shares of Series B Preferred Stock shall have
received $180 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment
(the "Series B Liquidation Preference"), plus the Series B Pro Rata Liquidation
Preference, as defined below. The "Series B Pro Rata Liquidation Preference"
means the ratable and proportionate share of to assets to be distributed to the
holders of Series B Preferred Stock after subtracting (i) the amount of the
Series B Liquidation Preference to be distributed to the holders of shares of
Series B Preferred Stock as provided in the previous sentence and (ii) the
amount of the Common Adjustment to be distributed to the holders of shares of
Common Stock, as provided in the next sentence, in the ratio of the Adjustment
Number (as defined below) to one (1) with respect to all outstanding shares of
Preferred Stock and Common Stock, on a per share basis, respectively. Following
the payment of the full amount of me Series B Liquidation Preference and the
Series B Pro Rata Liquidation Preference, the holders of shares of Common Stock
shall receive an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series B Liquidation Preference by (ii)
one thousand (1,000) (as appropriately adjusted as set forth in paragraph (C) of
this Section to reflect such events as stock spirits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii)
immediately above being referred to as the "Adjustment Number"). Following the
payment of the full amount of the Series B Liquidation Preference, the Series B
Pro Rata Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series B Preferred Stock and Common Stock, respectively,
holders of shares of Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series B Liquidation
Preference and the liquidation preferences of all other series of preferred
stock, if any, which rank on a parity with the Series B Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In me event,
however, that there are not sufficient assets available to permit payment in
full of fee Common Adjustment, than such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
SECTION 7. CONSOLIDATION, MERGER, ETC. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock an exchanged for or changed into other stock,
securities, cash or any other property, then in any such case the shares of
Series B Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to one thousand (1,000) times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (ii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series B Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
SECTIONS 8. REDEMPTION. The outstanding shares of Series B
Preferred Stock may be redeemed at the option of the Board of Directors as a
whole, but not in part, at any time, or from to time to time, at a cash price
per share equal to one hundred five percent (105%) of (i) the product of the
Adjustment Number times the Average Market Value (as such term hereinafter
defined) of the Common Stock, plus (ii) all dividends which on the redemption
date have accrued on the shares to be redeemed and have not been paid, or
declared and a sum sufficient for the payment thereof set apart, without
interest The "Average Market Value" is the average of the closing sale prices of
the Common Stock during the thirty (30) day period immediately preceding the
date before the redemption date on the Composite Tape for New York Stock
Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934, as amended, on which such stock is listed,
or, if such stock is not listed on any such exchange, the average of the closing
sale prices with respect to a share of Common Stock during such thirty (30) day
period, as quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in use, or if no such quotations
are available, the fair market value of the Common Stock as determined by the
Board of Directors in good faith.
SECTION 9. RANKING. The Series B Preferred Stock shall rank
junior to all other series of the Corporation's Preferred Stock as to the
payment at dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
SECTION 10. AMENDMENT. Except as otherwise provided in the
Certificate of Incorporation, as amended, or by law, the Certificate of
Incorporation of the Corporation, as amended, shall not be further amended in
any manner which would materially after or change the powers, preferences or
special rights of the Series B Pretend Stock so as to affect them
diversely without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series B Preferred Stock, voting separately as a
class.
SECTION 11. FRACTIONAL SHARES. At the Corporation's sole
discretion, Series B Preferred Stock may be issued in fractions of a share which
shall entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series B Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true as of March 30, 2000.
/s/ Fred L. Callon
------------------------------
Fred L. Callon, President
Attest:
/s/ Robert A. Mayfield
- -----------------------------
Robert A. Mayfield, Secretary
EXHIBIT 3.3
AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CALLON PETROLEUM COMPANY
The undersigned, Robert A. Mayfield, Corporate Secretary of Callon
Petroleum Company, a corporation organized and existing under the laws of the
State of Delaware (the "CORPORATION"), does hereby certify as follows:
FIRST: The name of the Corporation is Callon Petroleum Company
SECOND: This Amendment (the "AMENDMENT") to the Certificate of
Incorporation of the Corporation (the "CERTIFICATE") was duly adopted in
accordance with the provisions of Section 242 of the Delaware General
Corporation Law. The Board of Directors has duly adopted resolutions setting
forth and declaring advisable this Amendment and the holders of a majority of
the outstanding stock of the Corporation entitled to vote at the special meeting
of the stockholders called for the purpose of voting on the Amendment have voted
in favor of this Amendment.
THIRD: The Certificate is hereby amended by amending and restating
the first sentence of Article Four to be and read as follows:
"The Corporation shall have authority to issue two classes of stock,
and the total number authorized shall be 30,000,000 shares of Common
Stock, par value $.01 per share, and 2,500,000 shares of Preferred
Stock, par value $.01 per share."
IN WITNESS WHEREOF, the undersigned has executed this Amendment on
behalf of the Corporation and has attested such execution and does verify and
affirm, under penalty of perjury, that this Amendment is the act and deed of the
Corporation and that the facts stated herein are true as of this 23rd day of
January, 2004.
CALLON PETROLEUM COMPANY
By: /s/ Robert A. Mayfield
----------------------------
Robert A. Mayfield, Corporate Secretary
Exhibit 4.14
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
CALLON PETROLEUM COMPANY
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT"), NOR HAS IT BEEN APPROVED BY THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY
OF ANY STATE. NEITHER THESE WARRANTS NOR ANY INTEREST THEREIN MAY BE OFFERED FOR
SALE, SOLD, MORTGAGED, PLEDGED, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED
OF WITHOUT REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.
No. FRK[ ] Warrant to Purchase [ ] Shares
December [ ] 2003 of Common Stock, $0.01 Per Share
WARRANT TO PURCHASE COMMON STOCK
of
CALLON PETROLEUM COMPANY,
a Delaware corporation
Void after the date set forth in the first paragraph hereof
This certifies that, for value received, [ ], a [ ],
or registered assigns ("Holder") is entitled, subject to the terms set forth
below, to purchase from Callon Petroleum Company, a Delaware corporation (the
"Company"), [ ] shares of Common Stock, $0.01 par value, of the Company
(such class of stock being referred to herein as "Common Stock"), as constituted
on December [ ], 2003 (the "Issue Date"), upon compliance with the exercise
provisions set forth in Section 1 hereof, at the price of $10.00 per share (the
"Exercise Price"). This Warrant must be exercised, if at all, prior to the
earlier to occur of (i) 3:00 p.m., Eastern Standard Time on December [ ], 2010
or (ii) the termination of the Warrant pursuant to Section 2. The shares of
Common Stock issued or issuable upon exercise of this Warrant are sometimes
referred to as the "Warrant Shares." The term "Warrants" as used herein shall
include this Warrant and any warrants delivered in substitution or exchange
therefor as provided herein.
1. Exercise of Warrant.
1.1 This Warrant may be exercised at any time or from time to
time, on any business day, for all or part of (in multiples of at least 1,000
shares) the full number of Warrant Shares during the period of time described
above, by (i) delivery of a written notice, in the form of the subscription
notice attached hereto or a reasonable facsimile thereof (the "Exercise
Notice"), to the Company, of Holder's election to exercise all or a portion of
this Warrant, which notice shall specify the number of Warrant Shares to be
purchased, (ii) (A) payment to the Company of an amount equal to the Exercise
Price multiplied by the number of Warrant Shares as to which this Warrant is
being exercised (the "Aggregate Exercise Price") in cash or delivery of a
certified check or bank draft payable to the order of the Company or wire
transfer of immediately available funds or (B) notification to the Company that
this Warrant is being exercised pursuant to a Cashless Exercise (as defined in
Section 1.2 of this Warrant), and (iii) the surrender of this Warrant to a
common carrier for overnight delivery to the Company on the date the Exercise
Notice is delivered to the Company (or evidence of lost Warrant, in accordance
with Section 7). No other form of consideration shall be acceptable for the
exercise of this Warrant. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of delivery of the
Exercise Notice, this Warrant and Aggregate Exercise Price referred to in clause
(ii)(A) above or notification to the Company of a Cashless Exercise referred to
in Section 1.2 of this Warrant, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the record holder of such shares as of the close of business on such date. As
soon as practicable on or after such date, and in any event within 10 days
thereof, the Company shall issue and deliver to the person or persons entitled
to receive the same a certificate or certificates for the number of shares of
Common Stock issuable upon such exercise. Upon any partial exercise, the Company
will issue and deliver to Holder a new Warrant with respect to the Warrant
Shares not previously purchased. No fractional shares of Common Stock shall be
issued upon exercise of a Warrant. In lieu of any fractional share to which
Holder would be entitled upon exercise, the Company shall pay cash equal to the
product of such fraction multiplied by the then current fair market value of one
share of Common Stock, as determined in good faith by the Company.
1.2 Notwithstanding anything contained herein to the contrary,
Holder may, at its election exercised in its sole discretion, exercise this
Warrant as to all or a portion of the Warrant Shares and, in lieu of making the
cash payment otherwise contemplated to be made to the Company upon such exercise
in payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the "Net Number" of shares of Common Stock determined according to the
following formula (a "Cashless Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
- 2 -
For purposes of the foregoing formula:
A= the total number of shares with respect to which this Warrant
is then being exercised.
B= the closing sale price of the Common Stock on the trading day
immediately preceding the date of the Exercise Notice.
C= the Exercise Price then in effect for the applicable Warrant
Shares at the time of such exercise.
2. Mandatory Termination. At any time after the third anniversary of
the Issue Date, if the closing sale price per share of the Common Stock has
exceeded one hundred sixty percent (160%) of the Exercise Price then in effect
for any twenty (20) trading days within a period of thirty (30) consecutive
trading days (the "Determination Period"), then the Company may, at its option,
terminate the Warrants. By following procedure set forth below, the Company may
exercise this right of termination only if, within ten (10) days following the
Determination Period, the Company shall mail or cause to be mailed a notice of
such termination (the "Termination Notice") to Holder. Such mailing shall be by
first class. Each such notice of termination shall identify the Warrant, the
Termination Date, as defined below, that the Warrants may not be exercised after
3:00 p.m., Eastern Standard Time on the Termination Date and the current
Exercise Price.
If all the conditions described in the preceding paragraph have been
met, any Warrant not exercised before 3:00 p.m., Eastern Standard Time on the
sixtieth (60th) day after the mailing of Termination Notice (such sixtieth day,
the "Termination Date") shall automatically be deemed exercised in accordance
with Section 1.2 as of the Termination Date and the Company will deliver the
Warrant Shares to Holder upon receipt of a completed Exercise Notice along with
the original copy of the Warrant for cancellation (or evidence of lost Warrant,
in accordance with Section 7).
3. Payment of Taxes. All shares of Common Stock issued upon the
exercise of a Warrant shall be duly authorized, validly issued and outstanding,
fully paid and non-assessable. Holder shall pay all taxes and other governmental
charges that may be imposed in respect of the issue or delivery thereof and any
tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for shares of Common Stock in any name other than that
of the registered Holder of the Warrant surrendered in connection with the
purchase of such shares, and in such case the Company shall not be required to
issue or deliver any stock certificate until such tax or other charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
4. Transfer and Exchange. Subject to the restrictions set forth in
Section 10.1(d), this Warrant and all rights hereunder are transferable, in
whole or in part,
- 3 -
but only in increments of not less than 5,000 shares. This Warrant is
transferable on the books of the Company maintained for such purpose at its
principal office by Holder in person or by duly authorized attorney, upon
surrender of this Warrant properly endorsed and upon payment of any necessary
transfer tax or other governmental charge imposed upon such transfer. Each taker
and holder of this Warrant, by taking or holding the same, consents and agrees
that this Warrant, when endorsed in blank, shall be deemed negotiable and that
when this Warrant shall have been so endorsed, the Holder hereof may be treated
by the Company and all other persons dealing with this Warrant as the absolute
owner hereof for any purpose and as the person entitled to exercise the rights
represented hereby or to the transfer hereof on the books of the Company, any
notice to the contrary notwithstanding; but until such transfer on such books,
the Company may treat the registered Holder hereof as the owner for all
purposes.
5. Certain Adjustments.
5.1 Adjustment for Reorganization, Consolidation, Merger. In
case of any reclassification of the Common Stock, or other securities issuable
upon exercise of this Warrant, or in case of any reorganization of the Company
(or, in each case, any other corporation, the stock or other securities of which
are at the time receivable on the exercise of this Warrant) after the Issue
Date, or in case, after such date, the Company (or any such other corporation)
shall consolidate with or merge into another corporation, then and in each such
case Holder, upon the exercise hereof as provided in Section 1 at any time after
the consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the stock receivable upon the exercise
of this Warrant prior to such consummation, the stock or other securities or
property to which such Holder would have been entitled upon such consummation if
such Holder had exercised this Warrant immediately prior thereto.
5.2 Adjustments for Dividends in Common Stock. If the Company
at any time or from time to time after the Issue Date makes, or fixes a record
date for the determination of holders of Common Stock entitled to receive, a
dividend payable in additional shares of Common Stock, then and in each such
event the Exercise Price then in effect shall be decreased as of the time of
such issuance or, in the event such record date is fixed, as of the close of
business on such record date, by multiplying the Exercise Price then in effect
by a fraction (1) the numerator of which is the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date, and (2) the denominator of which
shall be the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in payment of
such dividend; provided, however, that if such record date is fixed and such
dividend is not fully paid on the date fixed therefor, the Exercise Price shall
be recomputed accordingly as of the close of business on such record date and
thereafter the Exercise Price shall be adjusted pursuant to this Section 5.2 as
of the time of actual payment of such dividends.
- 4 -
5.3 Stock Split and Reverse Stock Split. If the Company at any
time or from time to time after the Issue Date effects a subdivision of the
outstanding Common Stock, the Exercise Price then in effect immediately before
that subdivision shall be proportionately decreased and the number of shares of
Common Stock theretofore receivable upon the exercise of this Warrant shall be
proportionately increased. If the Company at any time or from time to time after
the Issue Date combines the outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price then in effect immediately before that
combination shall be proportionately increased and the number of shares of
Common Stock theretofore receivable upon the exercise of this Warrant shall be
proportionately decreased. Each adjustment under this Section 5.3 shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
5.4 Adjustments for Cash Dividends. If the Company at any time
or from time to time after the Issue Date makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a dividend payable
in cash, then and in each such event the Exercise Price then in effect shall be
decreased as of the time of such issuance or, in the event such record date is
fixed, as of the close of business on such record date, by reducing the Exercise
Price then in effect by the amount of such cash dividend per share of Common
Stock; provided, however, that if such record date is fixed and such dividend is
not fully paid on the date fixed therefor, the Exercise Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Exercise Price shall be adjusted pursuant to this Section 5.4 as
of the time of actual payment of such dividends.
6. Registration of Warrant Shares.
6.1 Registration.
(a) Any time after September 30, 2004, the Holder or any
holder of other warrants the same series as the Warrant ("Other Holders" and
collectively with the Holder, "Holders"), with or without the joinder of other
Holders, may submit a written request (a "Registration Request") to the Company
at any time seeking the registration of not less than 300,000 Warrant Shares
(or, in the case of Other Holders, warrant shares issuable upon exercise of
warrants held by such Other Holders (collectively with the Warrant Shares, the
"Holders' Shares")) with the Securities and Exchange Commission (the "SEC");
provided that (x) the Holders, in the aggregate, may only submit three (3)
Registration Requests pursuant to this Section 6.1, and (y) only one
Registration Request may be made by Holders of less than 500,000 Holders' Shares
pursuant to this Section 6.1. The Company will promptly give written notice of
such a Registration Request by the Holder or Other Holders to all registered
Holders. Each of the Holders may elect to include its Holders' Shares any
registration under the Securities Act of 1933, as amended (the "Securities Act")
to be effected pursuant to a Registration Request by providing the Company with
written notice within ten (10) days of the
- 5 -
Company's notice of receipt of a Registration Request ("Piggy-Back Notice"). The
Company will use its best efforts to effect the registration under the
Securities Act of the Holders' Shares which the Company has been so requested to
be registered pursuant to the Registration Request and the Piggy-Back Notices.
Within thirty (30) days of receipt of a Registration Request, the Company shall
prepare and file a registration statement on Form S-3 under the Securities Act,
covering the Holders' Shares specified in the Registration Request and the
Piggy-Back Notices and shall use its best efforts to cause such registration
statement to become effective as expeditiously as possible and to remain
effective until the earliest to occur of (i) the date the Holders' Shares
covered thereby have been sold or (ii) the date by which all Holders' Shares
covered thereby may be sold under Rule 144 without restriction as to volume.
(b) Following the effectiveness of a registration
statement filed pursuant to this section, the Company may, at any time, suspend
the effectiveness of such registration for up to forty-five (45) days, as
appropriate (a "Suspension Period"), by giving notice to Holders, if the Company
shall have determined that the Company may be required to disclose any material
corporate development which disclosure may have a material adverse effect on the
Company. Notwithstanding the foregoing, no more than two Suspension Periods may
occur during any twelve-month period. The Company shall use its best efforts to
limit the duration and number of any Suspension Periods. Holder agrees that,
upon receipt of any notice from the Company of a Suspension Period, Holder shall
forthwith discontinue disposition of Warrant Shares covered by such registration
statement or prospectus until Holder (i) is advised in writing by the Company
that the use of the applicable prospectus may be resumed, (ii) has received
copies of a supplemental or amended prospectus, if applicable, and (iii) has
received copies of any additional or supplemental filings which are incorporated
or deemed to be incorporated by reference into such prospectus.
6.2 Registration Procedures. When the Company effects the
registration of the Warrant Shares under the Securities Act pursuant to Section
6.1(a) hereof, the Company will, at its expense, as expeditiously as possible:
(a) In accordance with the Securities Act and the rules
and regulations of the SEC, prepare and file in accordance with Section 6.1(a),
with the SEC a registration statement with respect to the Holders' Shares and
use its best efforts to cause such registration statement to become and remain
effective for the period described herein, and prepare and file with the SEC
such amendments to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration statement
effective for such period and such registration statement and prospectus
accurate and complete for such period;
(b) Furnish to Holder such reasonable number of copies
of the registration statement, preliminary prospectus, final prospectus and such
other
- 6 -
documents as Holder may reasonably request in order to facilitate the public
offering of the Warrant Shares;
(c) Use its best efforts to register or qualify the
Holders' Shares covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as Holder may reasonably
request within twenty (20) days following the original filing of such
registration statement, except that the Company shall not for any purpose be
required to execute a general consent to service of process or to qualify to do
business as a foreign corporation in any jurisdiction where it is not so
qualified;
(d) Notify Holder, promptly after it shall receive
notice thereof, of the date and time when such registration statement and each
post-effective amendment thereto has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(e) Notify Holder promptly of any request by the SEC for
the amending or supplementing of such registration statement or prospectus or
for additional information;
(f) Prepare and file with the SEC, promptly upon the
request of Holder, any amendments or supplements to such registration statement
or prospectus which, in the opinion of counsel for Holder, is required under the
Securities Act or the rules and regulations thereunder in connection with the
distribution of the Warrant Shares by Holder;
(g) Prepare and promptly file with the SEC, and promptly
notify Holder of the filing of, such amendments or supplements to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading; and
(h) Advise Holder, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
6.3 Expenses. With respect to any registration effected
pursuant to Section 6.1 hereof, all fees, costs and expenses of and incidental
to such registration and the public offering in connection therewith shall be
borne by the Company; provided, however, that, Holder shall bear its share of
any underwriting
- 7 -
discounts or commissions, if any, related to a sale of Warrant Shares under the
registration statement.
6.4 Indemnification.
(a) The Company will indemnify and hold harmless Holder
pursuant to the provisions of Section 6 hereof and any underwriter (as defined
in the Securities Act) for Holder, and any person who controls Holder or such
underwriter within the meaning of the Securities Act, and any officer, director,
employee, agent, partner, member or affiliate of Holder (for purposes of this
Section 6.4(a), the "Indemnified Parties"), from and against, and will reimburse
Holder and each such Indemnified Party with respect to, any and all claims,
actions, demands, losses, damages, liabilities, costs and expenses to which
Holder or any such Indemnified Party may become subject under the Securities Act
or otherwise, insofar as such claims, actions, demands, losses, damages,
liabilities, costs or expenses arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any breach of
any representation, warranty, agreement or covenant of the Company contained
herein; provided, however, that the Company will not be liable in any such case
to the extent that any such claim, action, demand, loss, damage, liability, cost
or expense is caused by an untrue statement or alleged untrue statement or
omission or alleged omission based on information regarding any Holders
furnished by Holders or such Indemnified Party in writing specifically for use
in the preparation thereof. The indemnification contained in this paragraph
shall not inure to the benefit of any Holder (or to the benefit of any person
controlling such Holder) on account of any claim, action, demand, loss, damage,
liability, cost or expense caused by any untrue statement or alleged untrue
statement or omission or alleged omission made in any preliminary prospectus
provided in each case the Company has performed its obligations under Sections
6.2(a) and (b) if either (A) (i) such Holder failed to send or deliver a copy of
the prospectus with or prior to the delivery of written confirmation of the sale
by such Holder to the person asserting the claim from which such losses, claims,
damages or liabilities arise and (ii) the prospectus would have corrected such
untrue statement or alleged untrue statement or such omission or alleged
omission, or (B) (x) such untrue statement or alleged untrue statement, omission
or alleged omission is corrected in an amendment or supplement to the prospectus
and (y) having previously been furnished by or on behalf of the Company with
copies of the prospectus as so amended or supplemented, such Holder thereafter
fails to deliver such prospectus as so amended or supplemented, with or prior to
the delivery of written confirmation of the sale of Warrant Shares to the person
asserting the claim from which such claim, action, demand, loss, damage,
liability, cost or expense arise
- 8 -
(b) Holder will indemnify and hold harmless the Company,
and any Person who controls the Company within the meaning of the Securities
Act, from and against, and will reimburse the Company and such controlling
Persons with respect to, any and all losses, damages, liabilities, costs or
expenses to which the Company or such controlling Person may become subject
under the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue or alleged untrue
statement of any material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement thereto, or are
caused by the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made solely in reliance
upon written information furnished by Holder specifically for use in the
preparation thereof; provided, however, that the liability of Holder pursuant to
this subsection (b) shall be limited to an amount not to exceed the net proceeds
received by Holder pursuant to the registration statement which gives rise to
such obligation to indemnify.
(c) Promptly after receipt by a party indemnified
pursuant to the provisions of paragraph (a) or (b) of this Section 6.4 of notice
of the commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of paragraph (a)
or (b), notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 6.4 and shall not relieve the indemnifying party from liability under
this Section 6.4 unless such indemnifying party is prejudiced by such omission.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party pursuant to the provisions of such paragraph
(a) or (b) for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall be liable to an indemnified
party for any settlement of any action or claim without the consent of the
indemnifying party. No indemnifying party will consent to entry of any judgment
or enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
- 9 -
(d) If the indemnification provided for in subsection
(a) or (b) of this Section 6.4 is held by a court of competent jurisdiction to
be unavailable to a party to be indemnified with respect to any claims, actions,
demands, losses, damages, liabilities, costs or expenses referred to therein,
then each indemnifying party under any such subsection, in lieu of indemnifying
such indemnified party thereunder, hereby agrees to contribute to the amount
paid or payable by such indemnified party as a result of such claims, actions,
demands, losses, damages, liabilities, costs or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such claims, actions, demands, losses,
damages, liabilities, costs or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount Holder shall be obligated to
contribute pursuant to this subsection (d) shall be limited to an amount not to
exceed the net proceeds received by Holder pursuant to the registration
statement which gives rise to such obligation to contribute. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution hereunder from any person who
was not guilty of such fraudulent misrepresentation.
6.5 Reporting Requirements Under the Exchange Act. The Company
shall timely file such information, documents and reports as the SEC may require
or prescribe under Section 13 of the Securities Exchange Act of 1934. The
Company acknowledges and agrees that the purposes of the requirements contained
in this Section 6.5 are to enable Holder to comply with the current public
information requirement contained in paragraph (c) of Rule 144 should Holder
ever wish to dispose of any of the Warrant Shares without registration under the
Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision).
6.6 Stockholder Information. The Company may require Holder to
furnish the Company such information with respect to Holder and the distribution
of its Warrant Shares as the Company may from time to time reasonably request in
writing as shall be required by law or by the SEC in connection therewith.
7. Loss or Mutilation. Upon receipt by the Company of evidence
satisfactory to it (in the exercise of reasonable discretion) of the ownership
of and the loss, theft, destruction or mutilation of any Warrant and (in the
case of loss, theft or destruction) of indemnity satisfactory to it (in the
exercise of reasonable discretion), and (in the case of mutilation) upon
surrender and cancellation thereof, the Company will execute and deliver in lieu
thereof a new Warrant of like tenor.
- 10 -
8. Reservation of Common Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the exercise of the Warrant, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect exercise of the Warrant; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect such exercise,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
9. Notices of Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation (other
than a merger of a wholly owned subsidiary into the Company), or any transfer of
all or substantially all of the assets of the Company to any other person or any
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the Company shall provide to the Holder, at least ten (10) days prior to the
record date specified therein, a notice specifying (1) the date on which any
such record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (2) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (3) the date, if
any, that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
10. Investment Representation and Restriction on Transfer.
10.1 Securities Law Requirements.
(a) By its acceptance of this Warrant, Holder hereby
represents and warrants to the Company that this Warrant and the Warrant Shares
will be acquired for investment for its own account, not as a nominee or agent,
and not with a view to the sale or distribution of any part thereof, and that it
has no present intention of selling, granting participations in or otherwise
distributing the same. By acceptance of this Warrant, Holder further represents
and warrants that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to any
person, with respect to this Warrant or the Warrant Shares.
(b) By its acceptance of this Warrant, Holder
understands that this Warrant is not, and the Warrant Shares will not be,
registered under the Securities Act, on the basis that the issuance of this
Warrant and the Warrant Shares
- 11 -
are exempt from registration under the Act pursuant to Section 4(2) thereof, and
that the Company's reliance on such exemption is predicated on Holder's
representations and warranties set forth herein.
(c) By its acceptance of this Warrant, Holder
understands that the Warrant and the Warrant Shares may not be sold,
transferred, or otherwise disposed of without registration under the Act, or an
exemption therefrom, and that in the absence of an effective registration
statement covering the Warrant and the Warrant Shares or an available exemption
from registration under the Act, the Warrant and the Warrant Shares must be held
indefinitely. In particular, Holder is aware that the Warrant and the Warrant
Shares may not be sold pursuant to Rule 144 promulgated under the Act unless all
of the conditions of Rule 144 are satisfied. Among the conditions for use of
Rule 144 are the availability of current information about the Company to the
public, prescribed holding periods which will commence only upon Holder's
payment for the securities being sold, manner of sale restrictions, volume
limitations and certain other restrictions. By its acceptance of this Warrant,
Holder represents and warrants that, in the absence of an effective registration
statement covering the Warrant or the Warrant Shares, it will sell, transfer or
otherwise dispose of the Warrant and the Warrant Shares only in a manner
consistent with its representations and warranties set forth herein and then
only in accordance with the provisions of Section 10.1(d).
(d) By its acceptance of this Warrant, Holder agrees
that in no event will it transfer or dispose of any of the Warrants or the
Warrant Shares other than pursuant to an effective registration statement under
the Act, unless and until (i) Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the disposition, and (ii) if requested by the
Company, at the expense of the Holder or transferee, it shall have furnished to
the Company an opinion of counsel, reasonably satisfactory to the Company, to
the effect that (A) such transfer may be made without registration under the Act
and (B) such transfer or disposition will not cause the termination or the
non-applicability of any exemption to the registration and prospectus delivery
requirements of the Act or to the qualification or registration requirements of
the securities laws of any other jurisdiction on which the Company relied in
issuing the Warrant or the Warrant Shares.
(e) Holder represents and warrants that it is a
"qualified institutional buyer" as defined in Rule 144A promulgated under the
Securities Act.
10.2 Legends; Stop Transfer.
(a) All certificates evidencing the Warrant Shares shall
bear a legend in substantially the following form:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 or under any
- 12 -
state securities laws. These securities have been acquired for
investment and not with a view to distribution and may not be
offered for sale, sold, pledged or otherwise transferred in the
absence of an effective registration statement for such securities
under the Securities Act of 1933 and applicable state securities
laws or an opinion of counsel reasonably satisfactory in form and
content to the issuer that such registration is not required under
such Act.
(b) The certificates evidencing the Warrant Shares shall
also bear any legend required by any applicable state securities law.
(c) In addition, the Company shall make, or cause its
transfer agent to make, a notation regarding the transfer restrictions of the
Warrant and the Warrant Shares in its stock books, and the Warrant and the
Warrant Shares shall be transferred on the books of the Company only if
transferred or sold pursuant to an effective registration statement under the
Securities Act covering the same or pursuant to and in compliance with the
provisions of Section 4 and Section 10.1(d).
11. Notices. All notices and other communications from the Company
to the Holder of this Warrant shall be mailed by hand delivery, by telecopier,
by courier guaranteeing overnight delivery or by first-class mail, return
receipt requested, and shall be deemed given (i) when made, if made by hand
delivery, (ii) upon confirmation, if made by telecopier, (iii) one (1) Business
Day after being deposited with such courier, if made by overnight courier or
(iv) on the date indicated on the notice of receipt, if made by first-class
mail.
12. Change; Waiver. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
13. Headings. The headings in this Warrant are for purposes of
convenience in reference only, and shall not be deemed to constitute a part
hereof.
14. Governing Law. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws, and not the law of conflicts,
of the State of New York; provided however, that to the extent that an issue of
determination is one of corporation law, then Delaware General Corporation Law
shall govern.
[SIGNATURE PAGE FOLLOWS]
- 13 -
This Warrant was executed as of the date first written above.
CALLON PETROLEUM COMPANY,
a Delaware corporation
By:
-------------------------------------------------
John S. Weatherly
Senior Vice President and Chief Financial Officer
SUBSCRIPTION NOTICE
(To be executed only upon exercise of Warrant)
The undersigned, registered owner of this Warrant, irrevocably
exercises this Warrant and purchases ____________ of the number of shares of
Common Stock, $0.01 par value ("Warrant Shares"), of Callon Petroleum Company, a
Delaware corporation (the "Company"), purchasable with the attached Warrant (the
"Warrant"). Capitalized terms used herein and not otherwise defined shall have
the respective meanings set forth in the Warrant.
1. Form of Exercise Price: Holder intends that payment of the
Exercise Price shall be made as:
_______ "Cash Exercise" with respect to ________ Warrant Shares;
and/or
_______ "Cashless Exercise" with respect to ________ Warrant Shares
(to the extent permitted by the terms of the Warrant)
2. Payment of Exercise Price: In the event that Holder has elected a
Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, Holder shall pay the sum of $________________ to the Company in
accordance with the terms of the Warrant.
DATED: ______________
__________________________________________
(Signature of Holder)
__________________________________________
(Street Address)
__________________________________________
(City) (State) (Zip)
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned, registered owner of this
Warrant, hereby sells, assigns and transfers unto the Assignee named below all
of the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock, $0.01 par value, set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint _________________________
_________________________________________________ Attorney to make such transfer
on the books of Callon Petroleum Company, a Delaware corporation, maintained for
the purpose, with full power of substitution in the premises.
DATED: ___________________
__________________________________________
(Signature)
__________________________________________
(Witness)
================================================================================
EXHIBIT 10.18
AMENDED AND RESTATED SENIOR UNSECURED
CREDIT AGREEMENT
AMONG
CALLON PETROLEUM COMPANY,
AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION
AS ADMINISTRATIVE AGENT,
AND
THE LENDERS SIGNATORY HERETO
================================================================================
CONVERTIBLE TERM LOAN
================================================================================
DATED AS OF DECEMBER 8, 2003
AMENDED AND RESTATED AS OF DECEMBER 23, 2003
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above...................................................................... 1
Section 1.02 Certain Defined Terms.................................................................... 1
Section 1.03 Accounting Terms and Determinations...................................................... 30
ARTICLE II
COMMITMENTS
Section 2.01 Loans.................................................................................... 30
Section 2.02 Option to Issue Additional Notes......................................................... 30
Section 2.03 Notes.................................................................................... 31
Section 2.04 Prepayments.............................................................................. 33
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans....................................................................... 34
Section 3.02 Interest................................................................................. 34
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 Payments................................................................................. 34
Section 4.02 Pro Rata Treatment....................................................................... 35
Section 4.03 Computations............................................................................. 35
Section 4.04 Set-off, Sharing of Payments, Etc........................................................ 35
Section 4.05 Taxes.................................................................................... 36
ARTICLE V
CONVERSION OF NOTES
Section 5.01 Conversion under Rule 144A............................................................... 39
Section 5.02 Remedies for Certain Events.............................................................. 40
i
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Documents to be Delivered on Amendment and Restatement Date.............................. 41
Section 6.02 Conditions Precedent to Funding.......................................................... 42
Section 6.03 Conditions Precedent for the Benefit of Lenders.......................................... 42
Section 6.04 No Waiver................................................................................ 42
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Corporate Existence; Capitalization...................................................... 42
Section 7.02 Financial Condition...................................................................... 43
Section 7.03 Litigation............................................................................... 44
Section 7.04 No Breach................................................................................ 44
Section 7.05 Authority................................................................................ 44
Section 7.06 Approvals................................................................................ 44
Section 7.07 Use of Loans............................................................................. 44
Section 7.08 ERISA.................................................................................... 45
Section 7.09 Taxes.................................................................................... 46
Section 7.10 Titles, Property, etc.................................................................... 46
Section 7.11 No Material Misstatements................................................................ 47
Section 7.12 Investment Company Act................................................................... 47
Section 7.13 Public Utility Holding Company Act....................................................... 47
Section 7.14 Subsidiaries............................................................................. 47
Section 7.15 Location of Business and Offices......................................................... 48
Section 7.16 Defaults................................................................................. 48
Section 7.17 Environmental Matters.................................................................... 49
Section 7.18 Compliance with the Law.................................................................. 50
Section 7.19 Insurance................................................................................ 50
Section 7.20 Hedging Agreements....................................................................... 50
Section 7.21 Material Agreements...................................................................... 51
Section 7.22 Gas Imbalances........................................................................... 51
Section 7.23 Labor Relations.......................................................................... 51
ii
Section 7.24 Intellectual Property.................................................................... 52
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 Reporting Requirements................................................................... 52
Section 8.02 Litigation............................................................................... 54
Section 8.03 Maintenance, Etc......................................................................... 54
Section 8.04 Environmental Matters.................................................................... 55
Section 8.05 Further Assurances....................................................................... 55
Section 8.06 Performance of Obligations............................................................... 56
Section 8.07 ERISA Information and Compliance......................................................... 56
Section 8.08 Restricted Subsidiaries.................................................................. 56
Section 8.09 Use of Proceeds of Qualified Offering.................................................... 56
Section 8.10 Rating................................................................................... 57
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 Debt Incurrence.......................................................................... 57
Section 9.02 Liens.................................................................................... 57
Section 9.03 Restricted Investments; Restrictive Agreements........................................... 58
Section 9.04 Sales and Leasebacks..................................................................... 63
Section 9.05 Nature of Business....................................................................... 63
Section 9.06 Limitation on Leases..................................................................... 63
Section 9.07 Consolidation and Merger................................................................. 64
Section 9.08 Proceeds of Notes and Loans.............................................................. 64
Section 9.09 ERISA Compliance......................................................................... 64
Section 9.10 Sale or Discount of Receivables.......................................................... 65
Section 9.11 Sale of Property......................................................................... 65
Section 9.12 Environmental Matters.................................................................... 68
Section 9.13 Transactions with Affiliates............................................................. 68
Section 9.14 Subordinated Debt........................................................................ 68
Section 9.15 Issuance and Sale of Capital Stock....................................................... 68
Section 9.16 Modification of Agreements............................................................... 68
iii
Section 9.17 Guarantees............................................................................... 69
Section 9.18 Limitation on Additional Debt............................................................ 69
Section 9.19 Permitted Medusa Transactions............................................................ 69
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default........................................................................ 69
Section 10.02 Remedies................................................................................. 71
ARTICLE XI
THE ADMINISTRATIVE AGENT
Section 11.01 Appointment, Powers and Immunities....................................................... 71
Section 11.02 Reliance by Administrative Agent......................................................... 72
Section 11.03 Defaults................................................................................. 72
Section 11.04 INDEMNIFICATION.......................................................................... 73
Section 11.05 Non-Reliance on Administrative Agent and other Lenders................................... 73
Section 11.06 Action by Administrative Agent........................................................... 73
Section 11.07 Resignation or Removal of Administrative Agent........................................... 74
ARTICLE XII
MISCELLANEOUS
Section 12.01 Waiver................................................................................... 74
Section 12.02 Notices.................................................................................. 75
Section 12.03 Payment of Expenses, Indemnities, etc.................................................... 75
Section 12.04 Amendments, Etc.......................................................................... 78
Section 12.05 Successors and Assigns................................................................... 78
Section 12.06 Assignments and Participations........................................................... 78
Section 12.07 Invalidity............................................................................... 79
Section 12.08 Counterparts............................................................................. 79
Section 12.09 References............................................................................... 79
Section 12.10 Survival................................................................................. 79
Section 12.11 Captions................................................................................. 79
Section 12.12 No Oral Agreements....................................................................... 79
Annex I - List of Commitments
Exhibit A - Form of Note
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Responsible Officer's Certificate
Exhibit D - Form of Assignment Agreement
Exhibit E-1 - Form of Maximum Credit Amount Increase Certificate
Exhibit E-2 - Form of Additional Lender Certificate
Schedule 7.01(b) - Capitalization
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, Property, etc.
Schedule 7.14 - Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Hedging Agreements
Schedule 7.21 - Material Agreements
Schedule 7.22 - Gas Imbalances
Schedule 9.01 - Debt
Schedule 9.02 - Liens
vi
THIS CREDIT AGREEMENT, dated as of December 8, 2003, and amended and
restated as of December 23, 2003, is made by and among CALLON PETROLEUM COMPANY,
a Delaware corporation (the "BORROWER"); each of the lenders that is a signatory
hereto or which becomes a signatory hereto pursuant to Section 2.02 or as
provided in SECTION 12.06 (individually, together with its successors and
assigns, a "LENDER" and, collectively, the "LENDERS"); each of the new lenders
that is a signatory hereto or which becomes a signatory hereto as provided in
SECTION 12.06 (individually, together with its successors and assigns, a "NEW
LENDER" and, collectively, the "NEW LENDERS"); and Wells Fargo Bank, National
Association, a national banking association, as administrative agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"ADMINISTRATIVE AGENT").
RECITALS
A. The Lenders have made certain loans subject to the terms and
conditions of the Credit Agreement between Borrower and the Lenders dated
December 8, 2003 in the amount of $100,000,000 (the "CREDIT AGREEMENT").
B. The Borrower and the Lenders desire to amend and restate the
Credit Agreement and increase the amount of the loans to $185,000,000 by adding
New Lenders.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans and commitments hereinafter referred to, the parties
hereto agree that the Credit Agreement is hereby amended and restated as
follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
SECTION 1.01 TERMS DEFINED ABOVE. As used in this Agreement, the
terms "ADMINISTRATIVE AGENT," "BORROWER," "CREDIT Agreement," "LENDER,"
"LENDERS," "NEW LENDER" and "NEW LENDERS" shall have the meanings indicated
above and, unless the context otherwise requires, the terms Lender and Lenders
shall include the terms New Lender and New Lenders, respectively.
SECTION 1.02 CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (all terms defined in this ARTICLE I or
in other provisions of this Agreement in the singular to have equivalent
meanings when used in the plural and vice versa):
"ADDITIONAL LENDER" shall have the meaning assigned to such term in
SECTION 2.02(a).
"ADDITIONAL LENDER CERTIFICATE" shall have the meaning assigned to
such term in SECTION 2.02(b).
"ADDITIONAL LOANS" shall have the meaning assigned to such term in
SECTION 2.01(a).
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" shall mean (without
duplication), as of the date of determination, the remainder of:
(a) the sum of:
(1) discounted future net revenue from proved oil and
gas reserves of Borrower and its Restricted Subsidiaries calculated
in accordance with SEC guidelines but (x) using average prices
received by Borrower and its Restricted Subsidiaries during the
preceding year ( or, for purposes of any calculation made pursuant
to SECTION 9.01(b), NYMEX Strip Price on the date of such
calculation) and (y) before any state, federal or foreign income
taxes, as estimated by Borrower in a reserve report prepared as of
the end of Borrower's most recently completed fiscal year for which
audited financial statements are available, and any other Oil and
Gas Property in which Borrower or any Restricted Subsidiary
maintains an interest in oil and gas reserves, as increased by, as
of the date of determination, the estimated discounted future net
revenues from:
(A) estimated proved oil and gas reserves of
Borrower, its Restricted Subsidiaries and Borrower's and its
Restricted Subsidiaries' share of Oil and Gas Properties
acquired since such year end (including, for purposes of any
calculation made pursuant to SECTION 9.01(b) any Oil and Gas
Properties to be acquired in connection with such incurrence
of Debt), which reserves were not reflected in such year end
reserve report, and
(B) estimated oil and gas reserves of Borrower,
its Restricted Subsidiaries and Borrower's and its Restricted
Subsidiaries' share of Oil and Gas Properties attributable to
extensions, discoveries and other additions and upward
revisions of estimates of proved oil and gas reserves since
such year end due to exploration, development, exploitation or
production activities, in each case calculated in accordance
with SEC guidelines (utilizing the prices utilized in such
year end reserve report), and decreased by, as of the date of
determination, the estimated discounted future net revenues
from:
(C) estimated proved oil and gas reserves of
Borrower, its Restricted Subsidiaries and Borrower's and its
Restricted Subsidiaries' share of Oil and Gas Properties
produced or disposed of since such year end, and
(D) estimated oil and gas reserves of Borrower,
its Restricted Subsidiaries and Borrower's and its Restricted
Subsidiaries' share of Oil and Gas Properties attributable to
downward revisions of estimates of proved oil and gas reserves
since such year end due to changes in geological conditions or
other factors which would, in accordance with standard
industry practice, cause such revisions, in each
2
case calculated on a pre-tax basis and substantially in
accordance with SEC guidelines (utilizing the prices utilized
in such year end reserve report), in each case as estimated by
Borrower's petroleum engineers or any independent petroleum
engineers engaged by Borrower for that purpose;
(2) the capitalized costs that are attributable to Oil
and Gas Properties of Borrower, its Restricted Subsidiaries and
Borrower's and its Restricted Subsidiaries' share of Oil and Gas
Properties to which no proved oil and gas reserves are attributable,
based on Borrower's books and records as of a date no earlier than
the date of Borrower's latest available annual or quarterly
financial statements;
(3) the consolidated net working capital of Borrower and
its Restricted Subsidiaries on a date no earlier than the date of
Borrower's latest annual or quarterly financial statements; and
(4) the greater of:
(A) the net book value of other tangible assets of
Borrower and its Restricted Subsidiaries, as of a date no
earlier than the date of Borrower's latest annual or quarterly
financial statements, and
(B) the appraised value, as estimated by
independent appraisers (reasonably acceptable to the
Administrative Agent), of other tangible assets of Borrower
and its Restricted Subsidiaries, as of a date no earlier than
the date of Borrower's latest audited financial statements;
minus
(b) the sum of:
(1) minority interests;
(2) to the extent included in (a)(1) above, any net gas
balancing liabilities of Borrower and its Restricted Subsidiaries
reflected in Borrower's latest audited financial statements;
(3) to the extent included in (a)(1) above, the
discounted future net revenues, calculated in accordance with SEC
guidelines (utilizing the prices utilized in Borrower's most recent
year end reserve report), attributable to reserves which are
required to be delivered to third parties to fully satisfy the
obligations of Borrower and its Restricted Subsidiaries with respect
to Volumetric Production Payments (determined, if applicable, using
the schedules specified with respect thereto); and
(4) the discounted future net revenues, calculated in
accordance with SEC guidelines, attributable to reserves subject to
Dollar-Denominated Production Payments which, based on the estimates
of production
3
and price assumptions included in determining the discounted future
net revenues specified in (a)(1) above, would be necessary to fully
satisfy the payment obligations of Borrower and its Restricted
Subsidiaries with respect to Dollar-Denominated Production Payments
(determined, if applicable, using the schedules specified with
respect thereto).
"AFFILIATE" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, (ii) any director or officer of such first Person or of any Person
referred to in clause (i) above and (iii) if any Person in clause (i) above is
an individual, any member of the immediate family (including parents, spouse and
children) of such individual and any trust whose principal beneficiary is such
individual or one or more members of such immediate family and any Person who is
controlled by any such member or trust. For purposes of this definition, any
Person which owns directly or indirectly 15% or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation or 15% or more of the partnership or other ownership interests of
any other Person (other than as a limited partner of such other Person) will be
deemed to "control" (including, with its correlative meanings, "controlled by"
and "under common control with") such corporation or other Person.
"AGREEMENT" shall mean this Amended and Restated Credit Agreement,
as the same may from time to time be amended or supplemented.
"AMENDMENT AND RESTATEMENT DATE" shall mean December 23, 2003.
"ASSET DISPOSITION" shall mean any direct or indirect sale, lease
(other than an operating lease entered into in the ordinary course of business),
transfer, issuance or other disposition, or a series of related sales, leases,
transfers, issuances or dispositions that are part of a common plan, of shares
of capital stock of a Subsidiary (other than directors' qualifying shares) or
other Property (each referred to for the purposes of this definition as a
"disposition") by Borrower or any of its Restricted Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction.
Notwithstanding the preceding, the following items shall not be
deemed to be Asset Dispositions:
(a) a disposition by a Restricted Subsidiary to Borrower or by
Borrower or a Restricted Subsidiary to a Wholly-Owned Subsidiary;
(b) the sale of Cash Equivalents in the ordinary course of
business;
(c) a disposition of Hydrocarbons in the ordinary course of
business;
(d) a disposition or abandonment of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the
business of Borrower and its Restricted Subsidiaries and that is disposed
of in each case in the ordinary course of business;
(e) transactions permitted under SECTION 9.07;
4
(f) an issuance of capital stock by a Restricted Subsidiary of
Borrower to Borrower or to a Wholly-Owned Subsidiary;
(g) for purposes of this definition only, the making of a
Permitted Investment or a disposition subject to SECTION 9.03;
(h) dispositions of assets of Borrower designated by Borrower
as not constituting an Asset Disposition with an aggregate fair market
value since the Closing Date of less than $5,000,000;
(i) dispositions in connection with Liens permitted under
SECTION 9.02;
(j) the licensing or sublicensing of intellectual property or
other general intangibles and licenses, leases or subleases of other
property in the ordinary course of business which do not materially
interfere with the business of Borrower and its Restricted Subsidiaries;
(k) foreclosure on assets;
(l) sale, transfer or abandonment (whether or not in the
ordinary course of business) of Oil and Gas Properties or direct or
indirect interests in Property; provided that at the time of such sale or
transfer such Properties do not have associated with them any material
proved reserves;
(m) the abandonment, farm-out, lease or sublease of developed
or undeveloped Oil and Gas Properties in the ordinary course of business;
(n) the trade or exchange by Borrower or any Restricted
Subsidiary of any Oil and Gas Properties owned or held by Borrower or such
Restricted Subsidiary for Oil and Gas Properties owned or held by another
Person, including any cash or Cash Equivalents necessary in order to
achieve an exchange of equivalent value; provided that any such cash or
Cash Equivalents received by Borrower or such Restricted Subsidiary will
be subject to the provisions described in SECTION 9.11, which the board of
directors of Borrower determines in good faith by resolution to be of
approximately equivalent value.
"ASSET DISPOSITION OFFER" shall have the meaning assigned such term
in SECTION 9.11(b).
"ASSET DISPOSITION OFFER AMOUNT" shall have the meaning assigned
such term in SECTION 9.11(b).
"ASSET DISPOSITION OFFER PERIOD" shall have the meaning assigned
such term in SECTION 9.11(b).
"ASSET DISPOSITION PURCHASE DATE" shall have the meaning assigned
such term in SECTION 9.11(b).
5
"ASSIGNMENT" shall have the meaning assigned such term in SECTION
12.06(b).
"BORROWER INTELLECTUAL PROPERTY" shall have the meaning assigned
such term in SECTION 7.24.
"BUSINESS DAY" shall mean any day other than a day on which
commercial banks are authorized or required to close in Minnesota, Texas or New
York.
"CASH EQUIVALENTS" shall mean:
(a) securities issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
of the United States of America (provided that the full faith and credit
of the United States of America is pledged in support thereof), having
maturities of not more than one year from the date of acquisition; (b)
marketable general obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition and, at the time of acquisition of the United States of
America (provided that the full faith and credit of the United States of
America is pledged in support thereof), having a credit rating of "A" or
better from either Standard & Poor's Ratings Services or Moody's Investors
Service, Inc.;
(c) certificates of deposit, time deposits, eurodollar time
deposits, overnight bank deposits or bankers' acceptances having
maturities of not more than one year from the date of acquisition thereof
issued by any commercial bank the long-term debt of which is rated at the
time of acquisition thereof at least "A" or the equivalent thereof by
Standard & Poor's Ratings Services, or "A" or the equivalent thereof by
Moody's Investors Service, Inc., and having combined capital and surplus
in excess of $500,000,000;
(d) repurchase obligations with a term of not more than seven
(7) days for underlying securities of the types described in clauses (a),
(b) and (c) above entered into with any bank meeting the qualifications
specified in clause (c) above;
(e) commercial paper rated at the time of acquisition thereof
at least "A-2" or the equivalent thereof by Standard & Poor's Ratings
Services or "P-2" or the equivalent thereof by Moody's Investors Service,
Inc., or carrying an equivalent rating by a nationally recognized rating
agency, if both of the two named rating agencies cease publishing ratings
of investments, and in any case maturing within one year after the date of
acquisition thereof; and
(f) interests in any investment company or money market fund
which invests solely in instruments of the type specified in clauses (a)
through (e) above.
"CHANGE IN CONTROL" shall mean (a) the acquisition of ownership,
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities
6
Exchange Act of 1934 and the rules of the SEC thereunder as in effect on the
date hereof) of shares representing more than 35% of the aggregate ordinary
voting power represented by the issued and outstanding capital stock of
Borrower; or (b) occupation of a majority of the seats on the board of directors
of Borrower by Persons who were neither (i) nominated by the board of directors
of Borrower nor (ii) appointed by directors so nominated.
"CLOSING DATE" shall mean December 8, 2003.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
"COMMITMENT" shall mean, for any Lender party to the Credit
Agreement, its obligation to have made the Loan on the Closing Date under the
Credit Agreement and, for any new Lender, its obligation to make the Loan on the
Amendment and Restatement Date, or on a later date pursuant to SECTION 2.02 in
the amount set forth opposite such Lender's name on Annex I.
"CONSOLIDATED NET INCOME" shall mean with respect to Borrower and
its Restricted Subsidiaries, for any period, the aggregate of the net income (or
loss) of Borrower and its Restricted Subsidiaries after allowances for taxes for
such period, determined on a consolidated basis in accordance with GAAP;
provided that there shall be excluded from the calculation of net income (to the
extent otherwise included in the calculation) the following: (i) the net income
of any Person in which Borrower or any Restricted Subsidiary has an interest
(which interest does not cause the net income of such other Person to be
consolidated with the net income of Borrower and its Restricted Subsidiaries in
accordance with GAAP), except to the extent of the amount of dividends or
distributions actually paid in such period by such other Person to Borrower or
to a Restricted Subsidiary, as the case may be; (ii) the net income (but not
loss) of any Restricted Subsidiary to the extent that the declaration or payment
of dividends or similar distributions or transfers or loans by that Restricted
Subsidiary is not at the time permitted by operation of the terms of its charter
or any agreement, instrument or Governmental Requirement applicable to such
Restricted Subsidiary, or is otherwise restricted or prohibited in each case
determined in accordance with GAAP; (iii) any extraordinary gains or losses,
including gains or losses attributable to Property sales not in the ordinary
course of business; (iv) the cumulative effect of a change in accounting
principles; and (v) any gains or losses attributable to write-ups or write downs
of assets.
"CONSOLIDATED SUBSIDIARIES" shall mean each Subsidiary of Borrower
(whether now existing or hereafter created or acquired) the financial statements
of which shall be (or should have been) consolidated with the financial
statements of Borrower in accordance with GAAP.
"DEBT" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments (including principal,
interest, fees and charges); (ii) all obligations of such Person (whether
contingent or otherwise) in respect of bankers' acceptances, letters of credit,
surety or other bonds and similar instruments; (iii) all obligations of such
Person to pay the deferred purchase price of Property (except trade payables),
which payment is due more than
7
six months after the date of placing such Property in service; (iv) all
obligations under leases which shall have been, or should have been, in
accordance with GAAP, recorded as capital leases in respect of which such Person
is liable (whether contingent or otherwise); (v) all obligations under operating
leases which require such Person to make payments over the term of such lease
based on the purchase price or appraised value of the Property subject to such
lease plus a marginal interest rate, and used primarily as a financing vehicle
for, or to monetize, such Property; (vi) all Debt (as described in the other
clauses of this definition) and other obligations of others secured by a Lien on
any Property of such Person, whether or not such Debt is assumed by such Person;
(vii) all Debt (as described in the other clauses of this definition) and other
obligations of others guaranteed by such Person or in which such Person
otherwise assures a creditor against loss of the debtor or obligations of
others; (viii) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of others or to
purchase the Debt or Property of others; (ix) obligations to deliver goods or
services including Hydrocarbons in consideration of advance payments; (x)
obligations to pay for goods or services whether or not such goods or services
are actually received or utilized by such Person; (xi) any capital stock of such
Person in which such Person has a mandatory obligation to redeem such stock
prior to the maturity of the Loans; (xii) any Debt of a Special Entity for which
such Person is liable either by agreement or because of a Governmental
Requirement; (xiii) the undischarged balance of any production payment created
by such Person or for the creation of which such Person directly or indirectly
received payment; and (xiv) all obligations of such Person under Hedging
Agreements; provided that Debt shall not include (i) any debt arising in
connection with the Permitted Medusa Transaction, or (ii) any asset retirement
obligations arising under Financial Accounting Standards Board Statement No.
143, Accounting for Asset Retirement Obligations.
"DEBT COVERAGE RATIO" shall mean as of any date of determination,
with respect to Borrower and its Restricted Subsidiaries, the ratio of (x) the
aggregate amount of Debt to (y) EBITDA for such four calendar quarters;
provided, however, that:
(a) for purposes of clause (x) of the introductory paragraph
of this definition, Debt shall only include the obligations listed in
clauses (i) through (v), (vii), and (ix) through (xi) of the definition of
Debt in this SECTION 1.02;
(b) if Borrower or any Restricted Subsidiary:
(1) has incurred any Debt since the beginning of such
period that remains outstanding on such date of determination or if
the transaction giving rise to the need to calculate the Debt
Coverage Ratio is an incurrence of Debt, EBITDA and Interest Expense
for such period will be calculated after giving effect on a pro
forma basis to such Debt as if such Debt has been incurred on the
first day of such period (except that in making such computation,
the amount of Debt under any revolving credit facility existing on
the date of such calculation will be computed based on the average
daily balance of such Debt during such period; provided that, for
purposes of SECTION 9.01(a), the average daily balance deemed
outstanding during such period under a revolving credit facility
being repaid in whole or in part with the proceeds of such Debt
shall be the lesser of (i) the actual average daily balance of such
revolving indebtedness outstanding during such period and (ii) the
amount of such revolving indebtedness outstanding
8
immediately before the application of the proceeds of such Debt to
repay such revolving indebtedness) and the discharge of any other
Debt repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Debt as if such discharge had occurred on the
first day of such period; or
(2) has repaid, repurchased, defeased or otherwise
discharged any Debt since the beginning of the period that is no
longer outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Debt Coverage
Ratio involves a discharge of Debt, EBITDA and Interest Expense for
such period will be calculated after giving effect on a pro forma
basis to such discharge of such Debt, including with the proceeds of
such new Debt, as if such discharge had occurred on the first day of
such period;
(c) if since the beginning of such period Borrower or any
Restricted Subsidiary will h3ave sold or otherwise disposed of any
material Property or other asset or if the transaction giving rise to the
need to calculate the Debt Coverage Ratio is such a sale or disposition:
(1) the EBITDA for such period will be reduced by an
amount equal to the EBITDA (if positive) directly attributable to
the assets which are the subject of such sale or disposition for
such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period; and
(2) Interest Expense for such period will be reduced by
an amount equal to the Interest Expense directly attributable to any
Debt of Borrower or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to Borrower and its
continuing Restricted Subsidiaries in connection with such sale or
disposition for such period (or, if the capital stock of any
Restricted Subsidiary is sold, the Interest Expense for such period
directly attributable to the Debt of such Restricted Subsidiary to
the extent Borrower and its continuing Restricted Subsidiaries are
no longer liable for such Debt after such sale);
(d) if since the beginning of such period Borrower or any Restricted
Subsidiary (by merger or otherwise) will have made an investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary or is
merged with or into Borrower) or an acquisition of material Properties or other
assets, including any acquisition of assets occurring in connection with a
transaction causing a calculation to be made hereunder, EBITDA and Interest
Expense for such period will be calculated after giving pro forma effect thereto
(including the incurrence of any Debt) as if such investment or acquisition
occurred on the first day of such period; and
(e) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into Borrower
or any Restricted Subsidiary since the beginning of such period) will have sold
or otherwise disposed of any material property or other asset or any investment
or acquisition of assets that would
9
have required an adjustment pursuant to clause (b) or (c) above if made by
Borrower or a Restricted Subsidiary during such period, EBITDA and Interest
Expense for such period will be calculated after giving pro forma effect thereto
as if such asset disposition or investment or acquisition of assets occurred on
the first day of such period.
For purposes of this definition, whenever pro forma effect is to be
given to any calculation under this definition, the pro forma calculations will
be determined in good faith by a responsible financial or accounting officer of
Borrower (including pro forma expense and cost reductions calculated in good
faith by Borrower). If any Debt bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Debt will be calculated as
if the rate in effect on the date of determination has been the applicable rate
for the entire period (taking into account any interest rate agreement
applicable to such Debt if such interest rate agreement has a remaining term in
excess of 12 months).
For the purposes of this definition an imputed interest rate for any
outstanding or proposed production payment, project financing and other
non-recourse debt will be included in the calculation of Interest Expense and
the corresponding EBITDA, if any and to the extent lowered, will be grossed up,
in a corresponding manner.
"DEFAULT" shall mean an Event of Default or an event which with
notice or lapse of time or both would become an Event of Default.
"DEFERRED COMPENSATION PLAN" shall mean the Borrower Deferred
Compensation Plan dated as of December 1, 1996 and the letter to employees dated
December 13, 1996 relating thereto.
"DISQUALIFIED STOCK" shall mean, with respect to any Person, any
capital stock of such Person which by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable) or upon the
happening of any event:
(a) matures or is mandatorily redeemable pursuant to a sinking
fund obligation or otherwise;
(b) is convertible or exchangeable for Debt or Disqualified
Stock (excluding capital stock which is convertible or exchangeable solely
at the option of Borrower or a Restricted Subsidiary); or
(c) is redeemable at the option of the holder thereof, in
whole or in part,
in each case on or prior to the date that is ninety-one (91) days after the date
(i) on which the Notes mature; provided that only the portion of capital stock
which so matures or is mandatorily redeemable, is so convertible or exchangeable
or is so redeemable at the option of the holder thereof prior to such date will
be deemed to be Disqualified Stock; provided, further, that any capital stock
that would constitute Disqualified Stock solely because the holders thereof have
the right to require Borrower to repurchase such capital stock upon the
occurrence of a change of control or asset disposition (each defined in a
substantially identical manner to the corresponding definitions herein) shall
not constitute Disqualified Stock if the terms of such capital stock (and all
such securities into which it is convertible or for which it is ratable or
exchangeable) provide that Borrower may not repurchase or redeem any such
capital stock (and
10
all such securities into which it is convertible or for which it is ratable or
exchangeable) pursuant to such provision prior to compliance by Borrower with
the provisions hereof described under SECTIONS 2.04(b), 9.03 and 9.11.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" shall mean production
payment obligations recorded as liabilities in accordance with GAAP, together
with all undertakings and obligations in connection therewith.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"DUKE CREDIT FACILITY" shall mean that certain credit facility
pursuant to the Credit Agreement dated June 29, 2001, by and among the Borrower,
Duke Capital Partners, LLC, as Administrative Agent, and the lenders signatory
thereto, as amended from time to time.
"EBITDA" shall mean, for the period of the most recent four
consecutive calendar quarters ending prior to the date of determination for
which financial statements are available, the sum of Consolidated Net Income for
such period plus the following expenses or charges to the extent deducted from
Consolidated Net Income in such period: Interest Expense, taxes, depreciation,
depletion, amortization and non-cash compensation expense; for the purposes of
this definition (when used in the calculation of the Interest Coverage Ratio and
the Debt Coverage Ratio) EBITDA, if any and to the extent lowered, relating to
any production payment, project financing and other non-recourse debt and in
which an imputed interest rate has been calculated and used in the definition of
Interest Expense, will be grossed up by a corresponding amount.
"ENVIRONMENTAL LAWS" shall mean any and all Governmental
Requirements pertaining to health or the environment in effect in any and all
jurisdictions in which Borrower or any Subsidiary is conducting or at any time
has conducted business, or where any Property of Borrower or any Subsidiary is
located, including without limitation, the Oil Pollution Act of 1990 ("OPA"),
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and Reauthorization
Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended,
and other environmental conservation or protection laws. The term "oil" shall
have the meaning specified in OPA, the terms "hazardous substance" and "release"
(or "threatened release") have the meanings specified in CERCLA, and the terms
"solid waste" and "disposal" (or "disposed") have the meanings specified in
RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is
amended so as to broaden the meaning of any term defined thereby, such broader
meaning shall apply subsequent to the effective date of such amendment and (ii)
to the extent the laws of the state in which any Property of Borrower or any
Subsidiary is located establish a meaning for "oil," "hazardous substance,"
"release," "solid waste" or "disposal" which is broader than that specified in
either OPA, CERCLA or RCRA, such broader meaning shall apply.
11
"EQUIPMENT FINANCING SUBSIDIARY" shall mean a Subsidiary of Borrower
formed for the sole purpose of owning equipment purchased in a Permitted
Equipment Financing and related assets and that has no substantial operations
and conducts no substantial activities other than those related to the ownership
of such equipment.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time and any successor statute.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with Borrower or any Subsidiary would be deemed to
be a "single employer" within the meaning of section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.
"ERISA EVENT" shall mean (i) a "reportable event" described in
Section 4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal
of Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan
year in which it was a "substantial employer" as defined in Section 4001(a)(2)
of ERISA, (iii) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv)
the institution of proceedings to terminate a Plan by the PBGC or (v) any other
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan.
"EVENT OF DEFAULT" shall have the meaning assigned such term in
SECTION 10.01.
"EXCESS PROCEEDS" shall have the meaning assigned such term in
SECTION 9.11(b).
"EXCHANGED PROPERTIES" shall mean Properties used or useful in the
oil and gas business and received by Borrower or a Consolidated Subsidiary in
exchange for other Properties owned by it, whether directly or indirectly
through the acquisition of the capital stock of a Person holding such Properties
so that such Person becomes a Wholly-Owned and Consolidated Subsidiary of
Borrower, in trade or as a portion of the total consideration for such other
Properties.
"EXISTING SUBORDINATED DEBT" shall mean the 2005 Senior Subordinated
Notes.
"FINAL MATURITY DATE" shall mean December 8, 2010.
"FINANCIAL STATEMENTS" shall have the meaning assigned such term in
SECTION 7.02.
"FORM W-8BEN CERTIFICATION" shall have the meaning assigned such
term in SECTION 4.05(D)(1).
"FORM W-8ECI CERTIFICATION" shall have the meaning assigned such
term in SECTION 4.05(D)(1).
"FUNDING" shall mean the funding of the Loan upon satisfaction of
the conditions set forth in SECTION 6.01.
12
"GAAP" shall mean generally accepted accounting principles in the
United States of America (i) as in effect on the date hereof with regard to
SECTIONS 9.01 and 9.03 (ii) otherwise as in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall mean the country, the state, county,
city and political subdivisions in which any Person or such Person's Property is
located or which exercises valid jurisdiction over any such Person or such
Person's Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which exercises
valid jurisdiction over any such Person or such Person's Property. Unless
otherwise specified, all references to Governmental Authority herein shall mean
a Governmental Authority having jurisdiction over, where applicable, Borrower,
its Subsidiaries or any of their Property or the Administrative Agent or any
Lender.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other directive or
requirement (whether or not having the force of law), including, without
limitation, Environmental Laws, energy regulations and occupational, safety and
health standards or controls, of any Governmental Authority.
"HEDGING AGREEMENTS" shall mean any commodity, interest rate or
currency swap, cap, floor, collar, forward agreement or other exchange or
protection agreements or any option with respect to any such transaction.
"HIGHEST LAWFUL RATE" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received on the Notes under
laws applicable to such Lender which are currently in effect or, to the extent
allowed by law, under such applicable laws which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate than applicable laws now
allow.
"HYDROCARBON INTERESTS" shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas and
mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserved or residual interests of
whatever nature.
"HYDROCARBONS" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom.
"INDEMNIFIED PARTIES" shall have the meaning assigned such term in
SECTION 12.03(a)(2).
"INDEMNITY MATTERS" shall mean any and all actions, suits,
proceedings (including any investigations, litigation or inquiries), claims,
demands and causes of action made or threatened against a Person and, in
connection therewith, all losses, liabilities, damages (including, without
limitation, consequential damages) or reasonable costs and expenses of any
13
kind or nature whatsoever incurred by such Person whether caused by the sole or
concurrent negligence of such Person seeking indemnification.
"INDENTURE" shall have the meaning assigned such term in SECTION
5.01(a).
"INDENTURE NOTES" shall have the meaning assigned such term in
SECTION 5.01(a).
"INTEREST COVERAGE RATIO" shall mean as of any date of
determination, with respect to Borrower and its Restricted Subsidiaries, the
ratio of (x) the aggregate amount of EBITDA to (y) Interest Expense for such
four calendar quarters; provided, however, that:
(a) if Borrower or any Restricted Subsidiary:
(1) has incurred any Debt since the beginning of such
period that remains outstanding on such date of determination or if
the transaction giving rise to the need to calculate the Interest
Coverage Ratio is an incurrence of Debt, EBITDA and Interest Expense
for such period will be calculated after giving effect on a pro
forma basis to such Debt as if such Debt has been incurred on the
first day of such period (except that in making such computation,
the amount of Debt under any revolving credit facility existing on
the date of such calculation will be computed based on the average
daily balance of such Debt during such period; provided that, for
purposes of SECTION 9.01, the average daily balance deemed
outstanding during such period under a revolving credit facility
being repaid in whole or in part with the proceeds of such Debt
shall be the lesser of (i) the actual average daily balance of such
revolving indebtedness outstanding during such period and (ii) the
amount of such revolving indebtedness outstanding immediately before
the application of the proceeds of such Debt to repay such revolving
indebtedness) and the discharge of any other Debt repaid,
repurchased, defeased or otherwise discharged with the proceeds of
such new Debt as if such discharge had occurred on the first day of
such period; or
(2) has repaid, repurchased, defeased or otherwise
discharged any Debt since the beginning of the period that is no
longer outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Interest
Coverage Ratio involves a discharge of Debt (in each case other than
Debt incurred under any revolving credit facility unless such Debt
has been permanently repaid and the related commitment terminated;
provided, that for purposes of SECTION 9.01, this parenthetical
clause shall not apply), EBITDA and Interest Expense for such period
will be calculated after giving effect on a pro forma basis to such
discharge of such Debt, including with the proceeds of such new
Debt, as if such discharge had occurred on the first day of such
period;
(b) if since the beginning of such period Borrower or any
Restricted Subsidiary will have sold or otherwise disposed of any material
Property or other asset or if the transaction giving rise to the need to
calculate the Interest Coverage Ratio is such a sale or disposition:
14
(1) the EBITDA for such period will be reduced by an
amount equal to the EBITDA (if positive) directly attributable to
the assets which are the subject of such sale or disposition for
such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period; and
(2) Interest Expense for such period will be reduced by
an amount equal to the Interest Expense directly attributable to any
Debt of Borrower or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to Borrower and its
continuing Restricted Subsidiaries in connection with such sale or
disposition for such period (or, if the capital stock of any
Restricted Subsidiary is sold, the Interest Expense for such period
directly attributable to the Debt of such Restricted Subsidiary to
the extent Borrower and its continuing Restricted Subsidiaries are
no longer liable for such Debt after such sale);
(c) if since the beginning of such period Borrower or any
Restricted Subsidiary (by merger or otherwise) will have made an
investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary or is merged with or into Borrower) or an
acquisition of material Properties or other assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, EBITDA and Interest Expense for such
period will be calculated after giving pro forma effect thereto (including
the incurrence of any Debt) as if such investment or acquisition occurred
on the first day of such period; and
(d) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
Borrower or any Restricted Subsidiary since the beginning of such period)
will have sold or otherwise disposed of any material property or other
asset or any investment or acquisition of assets that would have required
an adjustment pursuant to clause (b) or (c) above if made by Borrower or a
Restricted Subsidiary during such period, EBITDA and Interest Expense for
such period will be calculated after giving pro forma effect thereto as if
such asset disposition or investment or acquisition of assets occurred on
the first day of such period.
For purposes of this definition, whenever pro forma effect is to be
given to any calculation under this definition, the pro forma calculations will
be determined in good faith by a responsible financial or accounting officer of
Borrower (including pro forma expense and cost reductions calculated in good
faith by Borrower). If any Debt bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Debt will be calculated as
if the rate in effect on the date of determination has been the applicable rate
for the entire period (taking into account any interest rate agreement
applicable to such Debt if such interest rate agreement has a remaining term in
excess of 12 months).
For the purposes of this definition an imputed interest rate for any
outstanding or proposed production payment, project financing and other
non-recourse debt will be included in the calculation of Interest Expense and
the corresponding EBITDA, if any and to the extent lowered, will be grossed up,
in a corresponding manner.
15
"INTEREST EXPENSE" shall mean, for the period of the most recent
four consecutive calendar quarters ending prior to the date of determination for
which financial statements are available, the total cash interest expense of
Borrower and its Restricted Subsidiaries determined in accordance with GAAP,
plus, to the extent not included in such interest expense (without duplication):
(a) interest expense attributable to capitalized lease
obligations and the interest portion of rent expense associated with Debt
in respect of the relevant lease giving rise thereto, determined as if
such lease were a capitalized lease in accordance with GAAP and the
interest component of any deferred payment obligations to the extent not
accrued in a prior period;
(b) imputed interest expense attributable to any production
payment, project financing by vendors and other non-recourse debt, but not
including any amounts arising out of the Permitted Medusa Transaction;
(c) interest actually paid by Borrower or any Restricted
Subsidiary under any guarantee of Debt or other obligation of any other
person;
(d) net costs associated with Hedging Agreements for the
purpose of ameliorating interest rate fluctuation risk or any kind of
interest rate agreement (excluding amortization of fees);
(e) the consolidated cash interest expense of Borrower and its
Restricted Subsidiaries that was capitalized during such period; and
(f) the cash contributions to any employee stock ownership
plan or similar trust to the extent such contributions are used by such
plan or trust to pay interest or fees to any Person (other than Borrower
or its Restricted Subsidiaries) in connection with Debt incurred by such
plan or trust; provided, however, that there will be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Debt is not guaranteed or paid by Borrower or any Restricted
Subsidiary.
For purposes of the foregoing, total Interest Expense will be
determined after giving effect to any net payments made or received by Borrower
and its Restricted Subsidiaries with respect to interest rate agreements;
provided, however, that Interest Expense shall not include (a) to the extent
included in total Interest Expense, amortization or write-off of deferred
financial costs or discount accretion of such Person or (b) accretion of
interest charges on future plugging and abandonment obligations, future
retirement benefits and other obligations that do not constitute Debt.
"INVESTMENT" shall mean, with respect to any Person, all investments
by such Person in other Persons (including Affiliates) in the form of any direct
or indirect advance, loan (other than advances to customers in the ordinary
course of business) or other extension of credit (including by way of guarantee
or similar arrangement, but excluding any Debt or extension of credit
represented by a bank deposit other than a time deposit) or capital contribution
to (by means of any transfer of cash or other Property to others or any payment
for Property or services for the account or use of others), or any purchase or
acquisition of capital stock, Debt or other
16
similar instruments issued by, such Person and all other items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP; provided that none of the following will be deemed to be an Investment:
(a) Hedging Agreements entered into in the ordinary course of
business and in compliance herewith;
(b) endorsements of negotiable instruments and documents in
the ordinary course of business; and
(c) an acquisition of assets, capital stock or other
securities by Borrower or a Subsidiary for consideration to the extent
such consideration consists exclusively of common equity securities of
Borrower.
For purposes of this definition:
(i) "INVESTMENT" shall mean the portion (proportionate to
Borrower's equity interest in a Restricted Subsidiary to be designated as
an Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of Borrower at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
Borrower will be deemed to continue to have a permanent "INVESTMENT" in an
Unrestricted Subsidiary in an amount (if positive) equal to (a) Borrower's
"INVESTMENT" in such Subsidiary at the time of such redesignation less (b)
the portion (proportionate to Borrower's equity interest in such
Subsidiary) of the fair market value of the net assets (as conclusively
determined by the Board of Directors of Borrower in good faith) of such
Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary; and
(ii) any Property transferred to or from an Unrestricted
Subsidiary will be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the board of
directors of Borrower.
"LIEN" shall mean any interest in Property securing an obligation
owed to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to (i)
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes or (ii) production payments and the like payable
out of Oil and Gas Properties. The term "Lien" shall also mean reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purposes of this Agreement, Borrower or any Subsidiary shall
be deemed to be the owner of any Property which it has acquired or holds subject
to a conditional sale agreement, or leases under a financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person in a transaction intended to create a financing.
"LOAN INCREASE CERTIFICATE" shall have the meaning assigned to such
term in SECTION 2.02(b)(4).
17
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, any
Assignment and any other agreements or documents executed in connection
herewith.
"LOAN" shall mean the loans as provided for by SECTION 2.01, and
unless the context otherwise requires, the term "Loans" shall include the
Additional Loans.
"MAJORITY LENDERS" shall mean Lenders holding at least 75% of the
outstanding aggregate principal amount of the Loan.
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse effect
on (i) the assets, liabilities, financial condition, business, operations or
affairs of Borrower and its Subsidiaries taken as a whole, or (ii) the ability
of Borrower and its Subsidiaries taken as a whole to carry out their business or
meet their obligations under the Loan Documents on a timely basis.
"MATERIAL AGREEMENT" shall have the meaning assigned such term in
SECTION 7.21.
"MULTIEMPLOYER PLAN" shall mean a Plan defined as such in Section
3(37) or 4001(a)(3) of ERISA.
"NET AVAILABLE CASH" from an Asset Disposition shall mean cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring person of Debt or other obligations
relating to the Properties that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of:
(a) all legal, accounting, investment banking, title and
recording tax expenses, commissions and other fees and expenses incurred,
and all federal, state, provincial, foreign and local taxes required to be
paid or accrued as a liability under GAAP (after taking into account any
available tax credits or deductions and any tax sharing agreements), as a
consequence of such Asset Disposition;
(b) all payments made on any Debt which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law
be repaid out of the proceeds from such Asset Disposition;
(c) all distributions and other payments required to be made
to minority interest holders in Subsidiaries or joint ventures as a result
of such Asset Disposition; and
(d) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition and
retained by Borrower or any Consolidated Subsidiary after such Asset
Disposition.
18
"NET CASH PROCEEDS," with respect to any issuance or sale of capital
stock, shall mean the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents'
fees, listing fees, discounts or commissions and brokerage, consultant and
other fees and charges actually incurred in connection with such issuance
or sale and net of taxes paid or payable as a result of such issuance or
sale (after taking into account any available tax credit or deductions and
any tax sharing arrangements).
"NOTES" shall mean the Notes described in and provided for by
SECTION 2.03, together with any and all renewals, extensions for any period,
increases, rearrangements, substitutions or modifications thereof.
"NYMEX STRIP PRICE" shall mean the average closing price of
contracts for future delivery for the next occurring 24 months as of the close
of trading on the New York Mercantile Exchange ("NYMEX") on the date of any
calculation. For crude oil, the reference contract will be light sweet crude
oil, the NYMEX symbol for which is currently "CL." For natural gas, the
reference contract will be natural gas delivered at the Henry Hub in Louisiana,
the NYMEX symbol for which is currently "NG." To the extent that reference
prices are not available for the entire 24 month period, prices will be
determined on the average of the contracts which are available during such 24
month period.
"OIL AND GAS PROPERTIES" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and declarations of
pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any Governmental Authority)
which may affect all or any portion of the Hydrocarbon Interests; all operating
agreements, contracts and other agreements which relate to any of the
Hydrocarbon Interests or the production, sale, purchase, exchange or processing
of Hydrocarbons from or attributable to such Hydrocarbon Interests; all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, the lands covered thereby
and all rents, issues, profits, proceeds, products, revenues and other incomes
from or attributable to the Hydrocarbon Interests; all tenements, hereditaments,
appurtenances and Properties in any manner appertaining, belonging, affixed or
incidental to the Hydrocarbon Interests; and all Properties, rights, titles,
interests and estates described or referred to above, including any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used, held for use or useful in connection with the operating, working or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs, automotive equipment or other personal property which may be on such
premises for the purpose of drilling a well or for other similar temporary uses)
and including any and all oil wells, gas wells, injection wells or other wells,
buildings, structures, fuel separators, liquid extraction plants, plant
compressors, pumps, pumping units, field gathering systems, tanks and tank
batteries, fixtures, valves, fittings, machinery and parts, engines, boilers,
meters, apparatus, equipment, appliances, tools, implements, cables, wires,
towers, casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing. Unless otherwise indicated, Oil
and Gas Properties shall mean such Property of Borrower and its Restricted
Subsidiaries.
19
"OTHER TAXES" shall have the meaning assigned such term in SECTION
4.05(b).
"PARI PASSU NOTES" shall have the meaning assigned such term in
SECTION 9.11(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
Person succeeding to any or all of its functions.
"PERCENTAGE SHARE" shall mean the percentage of the aggregate Loans
to be provided by a Lender under this Agreement as indicated on Annex I hereto,
as modified from time to time to reflect any assignments permitted by SECTION
12.06(b).
"PERMITTED BUSINESS INVESTMENT" shall mean any Investment made in
the ordinary course of, and of a nature that is or shall have become customary
in, the Related Business including investments or expenditures for exploiting,
exploring for, acquiring, developing, producing, processing, gathering,
marketing or transporting oil and gas through agreements, transactions,
interests or arrangements which permit one to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of the Related Business jointly with
third parties, including (i) ownership interests in oil and gas properties,
processing facilities, gathering systems, pipelines or ancillary real property
interests and (ii) Investments in the form of or pursuant to operating
agreements, processing agreements, farm-in agreements, farm-out agreements,
development agreements, area of mutual interest agreements, unitization
agreements, pooling agreements, joint bidding agreements, service contracts,
joint venture agreements, partnership agreements (whether general or limited),
subscription agreements, stock purchase agreements and other similar agreements
(including for limited liability companies) with third parties, excluding,
however, Investments in corporations other than Restricted Subsidiaries.
"PERMITTED CONSIDERATION" shall have the meaning assigned such term
in SECTION 9.11.
"PERMITTED EQUIPMENT FINANCING" shall mean any Debt incurred by
Borrower or any Subsidiary of Borrower to finance or refinance the acquisition,
after the Closing Date, from a third party that is not an Affiliate of Borrower
of any equipment and related assets to be used in a Related Business; provided
that (i) the aggregate amount of all such Debt shall not exceed 50% of the
cumulative amount of capital expenditures made by Borrower and its Restricted
Subsidiaries after the Closing Date for capital equipment to be used in a
Related Business, together with any taxes, duties, installation costs or similar
costs related thereto, and (ii) such Debt shall be non-recourse to Borrower and
each Subsidiary of Borrower other than an Equipment Financing Subsidiary related
to such acquired equipment.
"PERMITTED INDEBTEDNESS" shall mean:
(a) the Notes and any additional Notes under SECTION 2.02 or
any guaranty of or suretyship arrangement for the Notes;
20
(b) Debt (other than that associated with the Senior Secured
Credit Facility and the Duke Credit Facility) of Borrower existing on the
Amendment and Restatement Date which is reflected in the Financial
Statements or is disclosed in Schedule 9.01, and any renewals or
extensions (but not increases) thereof;
(c) accounts payable (for the deferred purchase price of
Property or services) from time to time incurred in the ordinary course of
business which, if greater than ninety (90) days past the invoice or
billing date, are being contested in good faith by appropriate proceedings
if reserves adequate under GAAP shall have been established therefor;
(d) Debt under capital leases (as required to be reported on
the financial statements of Borrower pursuant to GAAP) in addition to any
obligations that are Debt as permitted under SECTION 9.06;
(e) Debt associated with bonds or surety obligations required
by Governmental Requirements in connection with the operation of the Oil
and Gas Properties;
(f) Hedging Agreements covering (A) oil and gas production of
proved developed producing Oil and Gas Properties of Borrower or any
Consolidated Subsidiary; provided, however, that such Hedging Agreements
related to oil or gas production shall not, either individually or in the
aggregate, cover more than 80% of estimated production on the date such
hedges are entered into of oil or gas of Borrower and the Consolidated
Subsidiaries for each individual period covered by the Hedging Agreements,
(B) fluctuations in interest rates for notional principal amounts not to
exceed at any time outstanding 80% of the Debt for borrowed money of
Borrower and its Consolidated Subsidiaries, and (C) foreign exchange risk;
(g) Debt arising out of the Deferred Compensation Plan to the
extent such Debt can be satisfied out of the investments held by such plan
and the proceeds thereof;
(h) Debt arising under the Senior Secured Credit Facility in a
total principal amount outstanding not greater than $125,000,000;
(i) Debt arising under the Duke Credit Facility in a total
principal amount outstanding not greater than $95,000,000, less the amount
of any repayment of principal required pursuant to SECTION 7.07 or 8.09;
(j) Debt of a Restricted Subsidiary incurred and outstanding
on the date on which such Restricted Subsidiary is acquired by Borrower
(other than Debt incurred (i) to provide all or any portion of the funds
utilized to consummate the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was otherwise acquired by Borrower or (ii) otherwise in
connection with, or in contemplation of, such acquisition); provided,
however, that at the time such Restricted Subsidiary is acquired by
Borrower, Borrower would have been
21
able to incur $1.00 of additional Debt pursuant to SECTION 9.01(a) after
giving effect to the incurrence of such Debt pursuant to this clause (j);
(k) Debt incurred in respect of workers' compensation claims,
self-insurance obligations, performance, bid, surety and similar bonds,
letters of credit and guarantees supporting such performance, bid, surety
and similar bonds and completion guarantees provided by Borrower or a
Restricted Subsidiary in the ordinary course of business;
(l) Debt arising from agreements of Borrower or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, incurred or assumed in connection with
the disposition of any business, assets or capital stock of a Restricted
Subsidiary, provided that the maximum aggregate liability in respect of
all such Debt other than Debt related to environmental liabilities to
governmental agencies shall at no time exceed the gross proceeds actually
received by Borrower and its Restricted Subsidiaries in connection with
such disposition;
(m) Debt arising from the honoring by a bank or other
financial institution of a check, draft of similar instrument (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Debt is
extinguished within five (5) Business Days of incurrence;
(n) obligations relating to net gas balancing positions
arising in the ordinary course of business and consistent with past
practice;
(o) non-recourse debt not to exceed $10,000,000 in the
aggregate at any one time outstanding;
(p) the issuance of Debt issued in a Qualified Offering (other
than Debt issued in exchange for Notes converted under ARTICLE V subject
to SECTION 8.09), provided that the sum of any Debt issued pursuant to
SECTION 2.02 plus all Debt issued in a Qualified Offering (other than Debt
issued in exchange for Notes converted under ARTICLE V) shall not exceed
$165,000,000;
(q) Permitted Equipment Financing;
(r) in addition to the items referred to in clauses (a)
through (q) above, Debt of Borrower and its Restricted Subsidiaries in an
aggregate outstanding principal amount which, when taken together with the
principal amount of all other indebtedness incurred pursuant to this
clause (s) and then outstanding, will not exceed $10,000,000; and
(s) renewals or extensions of any Debt referred to in clauses
(a) through (f) above.
"PERMITTED INVESTMENT" shall mean an Investment by Borrower or any
Restricted Subsidiary in:
22
(a) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(b) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, Borrower or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business;
(c) cash and Cash Equivalents;
(d) receivables owing to Borrower or any Restricted Subsidiary
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as
Borrower or any such Restricted Subsidiary deems reasonable under the
circumstances;
(e) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business;
(f) loans or advances to employees made in the ordinary course
of business consistent with past practices of Borrower or such Restricted
Subsidiary;
(g) stock, obligations or securities received in settlement of
Debts created in the ordinary course of business and owing to Borrower or
any Restricted Subsidiary or in satisfaction of judgments or pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(h) Investments made as a result of the receipt of non-cash
consideration from an Asset Disposition that was made pursuant to and in
compliance with SECTION 9.11;
(i) Investments in existence on the date hereof;
(j) Hedging Agreements which transactions or obligations are
incurred in compliance with SECTION 9.01;
(k) Investments by Borrower or any of its Restricted
Subsidiaries, together with all other Investments pursuant to this clause
(k), in an aggregate amount at the time of such Investment not to exceed
$10,000,000; outstanding at any one time;
(l) guarantees issued in accordance with SECTION 9.01;
(m) Investments representing deferred compensation of
employees and earnings thereon under Borrower's KEYSOP plan;
23
(n) any investment arising out of the Permitted Medusa
Transaction; and
(o) Permitted Business Investments.
"PERMITTED LIEN" shall mean with respect to any Person:
(a) Liens securing the obligations of Borrower under the
Senior Secured Credit Facility, any other Senior Secured Debt permitted
under SECTION 9.01(b) or the Duke Credit Facility and related Hedging
Agreements and Liens on assets of Restricted Subsidiaries securing Debt
and other obligations of Borrower or such Restricted Subsidiaries under
the Senior Secured Credit Facility and the Duke Credit Facility;
(b) pledges or deposits by such Person under workmen's
compensation laws, unemployment insurance laws or similar legislation, or
good faith deposits in connection with bids, tenders, contracts or leases
to which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import or customs duties or
for the payment of rent, in each case incurred in the ordinary course of
business;
(c) Liens imposed by law, including carriers', warehousemen's,
mechanics', materialmen's and operator's Liens, (including Liens arising
pursuant to Article 9.319 of the Texas Uniform Commercial Code or other
similar statutory provisions of other states with respect to production
purchased from others) in each case for sums not yet due or being
contested in good faith by appropriate proceedings if a reserve or other
appropriate provisions, if any, as shall be required by GAAP shall have
been made in respect thereof;
(d) Liens for taxes, assessments or other governmental charges
not yet subject to penalties for non-payment or which are being contested
in good faith by appropriate proceedings provided appropriate reserves
required pursuant to GAAP have been made in respect thereof;
(e) Liens in favor of issuers of surety or performance bonds
or letters of credit or bankers' acceptances issued pursuant to the
request of and for the account of such Person in the ordinary course of
its business; provided, however, that such letters of credit do not
constitute Debt;
(f) encumbrances, easements or reservations of, or rights of
others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines, pipelines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to the
conduct of the business of such Person or to the ownership of its
properties which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation
of the business of such Person;
24
(g) Liens securing Hedging Agreements so long as the related
Debt is, and is permitted to be under this Agreement, secured by a Lien on
the same property securing such Hedging Agreement;
(h) leases and subleases of real property which do not
materially interfere with the ordinary conduct of the business of Borrower
or any of its Restricted Subsidiaries;
(i) judgment Liens not giving rise to an Event of Default so
long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
judgment have not been finally terminated or the period within which such
proceedings may be initiated has not expired;
(j) Liens for the purpose of securing the payment of all or a
part of the purchase price of, or capitalized lease obligations with
respect to, assets or property acquired or constructed in the ordinary
course of business, provided that:
(1) the aggregate principal amount of Debt secured by
such Liens is otherwise permitted to be incurred hereunder and does
not exceed the cost of the assets or property so acquired or
constructed; and
(2) such Liens are created within one hundred eighty
(180) days of construction or acquisition of such Property and do
not encumber any other Property of Borrower or any Restricted
Subsidiary other than such Property affixed or appurtenant thereto;
(k) Liens arising solely by virtue of any statutory or common
law provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with
a depositary institution; provided that:
(1) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access
by Borrower in excess of those set forth by regulations promulgated
by the Federal Reserve Board; and
(2) such deposit account is not intended by Borrower or
any Restricted Subsidiary to provide collateral to the depository
institution;
(l) Liens arising from Uniform Commercial Code financing
statement filings regarding operating leases entered into by Borrower and
its Restricted Subsidiaries in the ordinary course of business;
(m) Liens existing on the Closing Date;
(n) Liens on property or shares of stock of a Person at the
time such Person becomes a Restricted Subsidiary; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming a Restricted Subsidiary;
provided further, however, that any such Lien may not extend to any other
property owned by Borrower or any Restricted Subsidiary;
25
(o) Liens on property at the time Borrower or a Restricted
Subsidiary acquired the property, including any acquisition by means of a
merger or consolidation with or into Borrower or any Restricted
Subsidiary; provided, however, that such Liens are not created, incurred
or assumed in connection with, or in contemplation of, such acquisition;
provided further, however, that such Liens may not extend to any other
property owned by Borrower or any Restricted Subsidiary;
(p) Liens securing Debt or other obligations of a Restricted
Subsidiary owing to Borrower or a Wholly-Owned Subsidiary;
(q) Liens securing the Notes or the obligations under this
Agreement;
(r) Liens securing refinancing indebtedness incurred to
refinance Debt that was previously so secured, provided that any such Lien
is limited to all or part of the same Property (plus improvements, future
interests and additional acquired interests in the same Property
apportionment thereto, accessions, proceeds or dividends or distributions
in respect thereof) that secured (or, under the written arrangements under
which the original Lien arose, could secure) the Debt being refinanced or
is in respect of Property that is the security for a Permitted Lien
hereunder;
(s) Liens upon specific Properties of Borrower or any of its
Subsidiaries securing Debt incurred in the ordinary course of business to
provide all or part of the funds for the exploration, drilling, production
or development of those Properties;
(t) Liens in respect of production payments and reserve sales;
(u) farm-out, farm-in, seismic, carried working interests,
areas of mutual interests, joint operating, joint exploration,
unitization, gas balancing, royalty, overriding royalty, bonus, rental,
sales and similar agreements relating to the exploration or development
of, or production from, oil and gas properties and related facilities
(production and transportation) entered into in the ordinary course of
business;
(v) Liens on the capital stock or other equity interests of
any Equipment Financing Subsidiary to secure Debt of such Equipment
Financing Subsidiary incurred in connection with a Permitted Equipment
Financing; and
(w) Liens with respect to Permitted Indebtedness on the
capital stock or other equity interests of any Unrestricted Subsidiary to
secure Debt of such Unrestricted Subsidiary which is non-recourse to
Borrower or any Restricted Subsidiary.
"PERMITTED MEDUSA TRANSACTION" shall have the meaning ascribed to
such term in the credit agreement for the Senior Secured Credit Facility in
effect on the date hereof.
"PERSON" shall mean any individual, corporation, company,
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
26
"PLAN" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained
or contributed to by Borrower, any Subsidiary or an ERISA Affiliate or (ii) was
at any time during the preceding six calendar years sponsored, maintained or
contributed to, by Borrower, any Subsidiary or an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any
Loan or any other amount payable by Borrower under this Agreement or any other
Loan Document, a rate per annum during the period commencing on the date of
occurrence of an Event of Default until such amount is paid in full or all
Events of Default then existing are cured or waived equal to 11.75% per annum,
but in no event to exceed the Highest Lawful Rate.
"PREFERRED STOCK," as applied to the capital stock of any Person,
shall mean capital stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over shares of capital stock of any other class of such Person.
"PROPERTY" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"QUARTERLY DATE" shall mean the last day of each March, June,
September, and December, in each year, the first of which shall be March 31,
2004; provided, however, that if any such day is not a Business Day, such
Quarterly Date shall be the next succeeding Business Day.
"QUALIFIED OFFERING" shall mean each of the following transactions
(or any combination thereof), provided that no Debt incurred in such Qualified
Offering shall be amortized or mature on a date earlier than the date on which
the Loans are paid in full:
(a) an offering by Borrower (which may be guaranteed by one or
more Subsidiaries) of debt securities of Borrower that are registered with
the SEC under the Securities Act pursuant to an effective registration
statement; or
(b) an offering by Borrower (which may be guaranteed by one or
more Subsidiaries) of debt securities of Borrower to "qualified
institutional buyers," without registration under the Securities Act in
reliance on Rule 144A (provided that a Qualified Offering may also include
a simultaneous offering of such debt securities to Persons outside of the
United States in reliance on Regulation S promulgated under the Securities
Act and to a limited number of institutional accredited investors in
reliance on Regulation D promulgated under the Securities Act); provided,
that such securities sold to qualified institutional buyers in the United
States shall be eligible for trading on The PORTAL Market.
"RELATED BUSINESS" shall mean any business which is the same as or
related, ancillary or complementary to any of the businesses of Borrower and its
Restricted Subsidiaries on the date hereof.
27
"RESPONSIBLE OFFICER" shall mean, as to any Person, the Chief
Executive Officer, the President or any Vice President of such Person and, with
respect to financial matters, the term "RESPONSIBLE OFFICER" shall include the
Chief Financial Officer of such Person. Unless otherwise specified, all
references to a Responsible Officer herein shall mean a Responsible Officer of
Borrower.
"RESTRICTED INVESTMENT" shall mean any Investment other than a
Permitted Investment.
"RESTRICTED PAYMENT" shall have the meaning assigned such term in
SECTION 9.03(a).
"RESTRICTED SUBSIDIARY" shall mean any Subsidiary identified as a
Restricted Subsidiary on Schedule 7.14 and any Subsidiary created after the date
hereof that Borrower does not designate as an Unrestricted Subsidiary.
"RULE 144A" shall mean Rule 144A as promulgated under the Securities
Act (including any successor rule thereof), as the same may be amended from time
to time, or any similar rule or regulation hereafter adopted by the SEC.
"SEC" shall mean the Securities and Exchange Commission or any
successor Governmental Authority.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SENIOR INDEBTEDNESS" shall mean, whether outstanding on the date
hereof or thereafter issued, created, incurred or assumed, the Senior Secured
Credit Facility Debt, the Duke Credit Facility Debt, and all other Debt of
Borrower, including accrued and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization relating
to Borrower at the rate specified in the documentation with respect thereto
whether or not a claim for post filing interest is allowed in such proceeding)
and fees relating thereto; provided, however, that Senior Indebtedness will not
include:
(a) any Debt which, in the instrument creating or evidencing
the same or pursuant to which the same is outstanding, it is provided that
the obligations in respect of such Debt are subordinate to payment of the
Notes;
(b) any obligation of Borrower to any Subsidiary;
(c) any liability for federal, state, foreign, local or other
taxes owed or owing by Borrower;
(d) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof
or instruments evidencing such liabilities);
28
(e) any Debt, guarantee or obligation of Borrower that is
expressly subordinate or junior in right of payment to any other Debt,
guarantee or obligation of Borrower, including, without limitation, any
Subordinated Debt; or
(f) any capital stock.
"SENIOR SECURED CREDIT FACILITY" shall mean Borrower's primary
senior revolving credit facility or facilities as constituted, amended, modified
or restated from time to time which allow Borrower to borrow and reborrow
amounts up to a borrowing base determined by the lenders thereunder, which is
currently the $75,000,000 Senior Secured Credit Facility among Borrower,
Wachovia Bank, National Association, as Administrative Agent and the other
lenders thereto.
"SENIOR SECURED DEBT" shall mean, whether outstanding on the date
hereof or thereafter issued, created, incurred or assumed, any Senior
Indebtedness of the Borrower or any Restricted Subsidiary secured by a Lien,
including, but not limited to the Senior Secured Credit Facility Debt.
"SPECIAL ENTITY" shall mean, with regard to a Person, any joint
venture, limited liability company or partnership, general or limited
partnership or any other type of partnership or company other than a corporation
in which such first Person or one or more of its other Subsidiaries is a member,
owner, partner or joint venturer and owns, directly or indirectly, at least a
majority of the equity of such entity or controls such entity, but excluding any
tax partnerships that are not classified as partnerships under state law.
"SUBORDINATED DEBT" shall mean any Debt of Borrower expressly
subordinated to the Loans, on terms including, without limitation, that payments
on such Debt shall be prohibited if a Default exists or would result from such
payment, and other terms and conditions substantially similar to those found in
the Existing Subordinated Debt.
"SUBORDINATED OBLIGATION" shall mean any Debt of Borrower (whether
outstanding on the date hereof or thereafter incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"SUBSIDIARY" shall mean, with regard to a Person, (i) any
corporation of which at least a majority of the outstanding shares of stock
having by the terms thereof ordinary voting power to elect a majority of the
board of directors of such corporation (irrespective of whether or not at the
time stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned or controlled by such Person or one or more of its
Subsidiaries and (ii) any Special Entity of which at least a majority of the
equity interests are owned directly or indirectly or controlled by such Person.
Unless otherwise indicated herein, each reference to the term "Subsidiary" shall
mean a Subsidiary of Borrower.
"SUBSIDIARY SECURITIES" shall have the meaning assigned such term in
SECTION 7.14.
"TAXES" shall have the meaning assigned such term in SECTION
4.05(a).
29
"UNRESTRICTED SUBSIDIARY" shall mean any Subsidiary of Borrower that
is not a Restricted Subsidiary.
"VOLUMETRIC PRODUCTION PAYMENTS" shall mean production payment
obligations recorded as defined revenue in accordance with GAAP, together with
all undertakings and obligations in connection therewith.
"WHOLLY-OWNED SUBSIDIARY" shall mean a Restricted Subsidiary of
Borrower, all of the capital stock of which (other than director's qualifying
shares) is owned by Borrower or one or more other Wholly-Owned Subsidiaries.
"2005 SENIOR SUBORDINATED NOTES" shall mean the 11% Senior
Subordinated Notes due 2005 issued by Borrower pursuant to that certain
Supplemental Indenture, dated as of October 26, 2000, to the Indenture dated
October 26, 2000 between Borrower and American Stock Transfer and Trust Company.
SECTION 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Administrative Agent or the Lenders hereunder
shall be prepared, in accordance with GAAP, applied on a basis consistent with
the audited financial statements of Borrower referred to in SECTION 7.02 (except
for changes concurred with by Borrower's independent public accountants).
ARTICLE II
COMMITMENTS
SECTION 2.01 LOANS.
(a) COMMITMENT TO MAKE THE LOANS AND THE AMENDED AND RESTATED
NOTES. Each Lender party to the Credit Agreement has made Loans to the
Borrower in the respective amount for each such Lender indicated on Annex
I as of the Closing Date in the aggregate principal amount of $100,000,000
and each New Lender severally agrees, subject to the terms and conditions
of this Agreement, to make the Loans to Borrower, on the Amendment and
Restatement Date, in the aggregate principal amount of $85,000,000 and in
the respective amount for each such Lender indicated on Annex I (the
"ADDITIONAL LOANS").
(b) TRANSFER OF FUNDS ON AMENDMENT AND RESTATEMENT DATE.
Subject to the terms and conditions of this Agreement, the Additional
Loans shall be made available to Borrower by the New Lenders by wire
transfer or other immediately available funds to the account of Borrower
in accordance with Borrower's wiring instructions provided prior to the
Amendment and Restatement Date.
SECTION 2.02 OPTION TO ISSUE ADDITIONAL NOTES.
30
(a) Subject to the conditions set forth in subsection (b)
below, the Borrower may issue additional Notes to a Lender or a Person
that at such time is not a Lender, provided such Person becomes a Lender
(an "ADDITIONAL LENDER").
(b) Any such new Notes shall be subject to the following
additional conditions:
(1) such additional Notes shall have a principal amount
of not less than $5,000,000, and no such increase shall be permitted
if after giving effect thereto the aggregate principal of all Notes
would exceed $200,000,000;
(2) no Default shall have occurred and be continuing at
the effective date of such increase;
(3) no Lender shall be required to issue additional
Notes without such Lender's consent;
(4) if a Lender elects to increase the amount of its
Loan pursuant to this SECTION 2.02, the Borrower and such Lender
shall execute and deliver to the Administrative Agent a certificate
substantially in the form of Exhibit E-1 (a "LOAN INCREASE
CERTIFICATE"), and the Borrower shall deliver a new Note in exchange
for the existing Note held by such Lender payable to the order of
such Lender in a principal amount equal to the sum of the principal
amount of the existing Note and the principal amount of additional
Debt the Lender has agreed to issue; and
(5) if the Borrower elects to issue additional Notes by
causing an Additional Lender to become a party to this Agreement,
then the Borrower and such Additional Lender shall execute and
deliver to the Administrative Agent a certificate substantially in
the form of Exhibit E-2 (an "ADDITIONAL LENDER CERTIFICATE"), and
the Borrower shall deliver a Note payable to the order of such
Additional Lender in a principal amount equal to the Notes such
Additional Lender has agreed to issue to Borrower.
(c) Subject to acceptance and recording thereof pursuant to
subsection (b) above, from and after the effective date specified in the
Loan Increase Certificate or the Additional Lender Certificate: (a) the
amount of the aggregate Commitments shall be increased as set forth
therein, and (b) in the case of an Additional Lender Certificate, any
Additional Lender party thereto shall be a party to this Agreement and the
other Loan Documents and have the rights and obligations of a Lender under
this Agreement and the other Loan Documents. Upon its receipt of a duly
completed Loan Increase Certificate or an Additional Lender Certificate,
executed by the Borrower and the Lender or the Borrower and the Additional
Lender party thereto, as applicable, the Administrative Agent shall accept
such Loan Increase Certificate or Additional Lender Certificate and record
the information contained therein in Annex I pursuant to SECTION 12.06(b).
SECTION 2.03 NOTES.
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(a) The Loan made by each Lender shall be evidenced by a
single promissory note (each a "NOTE") of Borrower in substantially the
form of Exhibit A, dated as of the Closing Date, or in the case of a New
Lender, such later date of issuance after the Amendment and Restatement
Date, payable to the order of such Lender for the principal amount of all
Loan outstanding and due such Lender, and otherwise duly completed.
(b) Restrictive Legends. Each of the Notes shall bear a legend
in substantially the following form:
THE ISSUANCE AND SALE OF THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER HEREOF, BY ITS
ACCEPTANCE OF THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE
MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE
EXPIRATION OF THE HOLDING PERIOD APPLICABLE THERETO UNDER RULE 144(k) UNDER THE
SECURITIES ACT WHICH IS APPLICABLE TO THIS NOTE (THE "RESALE RESTRICTION
TERMINATION DATE") OTHER THAN (1) TO THE COMPANY OR THEIR RESPECTIVE
SUBSIDIARIES, (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, IN EACH CASE TO WHOM NOTICE IS GIVEN THAT THE RESALE,
PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT), (4) TO A NON-"U.S. PERSON"
IN AN "OFFSHORE TRANSACTION" (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER
THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT,
(5) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT, IF AVAILABLE, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO
ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF
SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL,
AND SUBJECT TO THE RIGHT OF THE ADMINISTRATIVE AGENT OR THE COMPANY PRIOR TO ANY
SUCH SALE, PLEDGE OR OTHER TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF
32
THEM. THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER ON OR AFTER THE
RESALE RESTRICTION TERMINATION DATE.
SECTION 2.04 PREPAYMENTS.
(a) Voluntary Prepayments.
(1) Subject to the prepayment premiums provided for in
clause (2) of this SECTION 2.04(a), at any time after December 8,
2007, Borrower may prepay the Loans without premium or penalty upon
not less than one Business Day's prior notice to the Administrative
Agent (which shall promptly notify the Lenders), which notice shall
specify the prepayment date (which shall be a Business Day) and the
amount of the prepayment (which shall be at least $1,000,000 or the
remaining aggregate principal balance outstanding on the Notes) and
shall be irrevocable and effective only upon receipt by the
Administrative Agent, provided that interest on the principal
prepaid, accrued to the prepayment date, shall be paid on the
prepayment date.
(2) Voluntary prepayments made by Borrower pursuant to
SECTION 2.04(a)(1) shall be subject to the following prepayment
premiums:
(A) For any voluntary prepayment made after
December 8, 2007, but before December 8, 2008, Borrower shall
pay a prepayment premium equal to 5% of the amount prepaid;
(B) For any voluntary prepayment made after
December 8, 2008, but before December 8, 2009, Borrower shall
pay a prepayment premium equal to 3% of the amount prepaid;
and
(C) For any voluntary prepayment made after
December 8, 2009 but before the Final Maturity Date, Borrower
shall pay a prepayment premium equal to 1% of the amount
prepaid.
(b) Mandatory Prepayments. Upon the occurrence of a Change in
Control, each Lender shall have the right to require Borrower to prepay
the aggregate principal amount of its Loan outstanding on the date such
prepayment is made, together with accrued and unpaid interest, if any,
thereon to the date of such prepayment, plus a prepayment premium of 1% of
the principal amount prepaid. If a Lender elects to require such
prepayment, such Lender shall instruct the Administrative Agent to deliver
written notice thereof to Borrower, such prepayment to be made on or
before the date (which must be a Business Day at least two (2) days
following receipt of such notice) specified in such written notice.
(c) Generally. Any prepayment made pursuant to this SECTION
2.04 may not be reborrowed and shall be applied to the aggregate
outstanding principal amount of the Loans.
33
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
SECTION 3.01 REPAYMENT OF LOANS. On the Final Maturity Date,
Borrower shall repay the outstanding aggregate principal and accrued and unpaid
interest under the Notes and any other amounts due under the Loan Documents.
Such payment shall be made to the Administrative Agent, for the account of each
Lender.
SECTION 3.02 INTEREST.
(a) Interest on Notes. Borrower will pay to the Administrative
Agent, for the account of each Lender, interest on the unpaid principal
amount of the Loan made by such Lender for the period commencing on the
date such Loan was made (being either the Closing Date or, with respect to
the New Lenders, the date of the Notes issued to the New Lenders) up to,
but excluding the date such Loan shall be paid in full, at the simple rate
per annum equal to nine and seventy-five one-hundredths percent (9.75%),
but in no event to exceed the Highest Lawful Rate.
(b) Post-Default Rate. Notwithstanding the foregoing, Borrower
will pay to the Administrative Agent, for the account of each Lender,
interest at the applicable Post-Default Rate on any principal of the Loan
made by such Lender to the extent such principal is past due and owing for
the period commencing on the date of notice to Borrower of an Event of
Default until the same is paid in full or all Events of Default are cured
or waived.
(c) Due Dates. Accrued and unpaid interest on the Loans shall
be payable on each Quarterly Date commencing on March 31, 2004, and on the
Final Maturity Date.
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
SECTION 4.01 PAYMENTS. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by
Borrower under this Agreement and the Notes shall be made in Dollars, in
immediately available funds, to the Administrative Agent at such account as the
Administrative Agent shall specify by notice to Borrower at least three (3)
Business Days prior to the date such payment is due from time to time, not later
than 11:00 a.m. New York, New York time on the date on which such payments shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). Such payments shall be
made without (to the fullest extent permitted by applicable law) defense,
set-off or counterclaim. Each payment received by the Administrative Agent under
this Agreement or any Note for account of a Lender shall be paid promptly to
such Lender in immediately available funds. If the due date of any payment under
this Agreement or any Note would otherwise fall on a day which is not a Business
Day such date
34
shall be extended to the next succeeding Business Day and interest shall be
payable for any principal so extended for the period of such extension.
SECTION 4.02 PRO RATA TREATMENT. Except to the extent otherwise
provided herein each Lender agrees that: (a) the borrowing from the Lenders
hereunder shall be made from the Lenders pro rata in accordance with their
Percentage Share; (b) each payment of principal of the Loan by Borrower shall be
made for account of the Lenders pro rata in accordance with the respective
unpaid principal amount of the Loan held by the Lenders; and (c) each payment of
interest on the Loan by Borrower shall be made for account of the Lenders pro
rata in accordance with the amounts of interest due and payable to the
respective Lenders.
SECTION 4.03 COMPUTATIONS. Interest shall be computed on the basis
of a year of 365 or 366 days, as the case may be, and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which such interest is payable.
SECTION 4.04 SET-OFF, SHARING OF PAYMENTS, ETC.
(a) Borrower agrees that, in addition to (and without
limitation of) any right of set-off, bankers' lien or counterclaim a
Lender may otherwise have, each Lender shall have the right and be
entitled, at its option, to offset balances held by it or by any of its
Affiliates for account of Borrower or any Subsidiary at any of its
offices, in Dollars or in any other currency, against any principal of or
interest on any of such Lender's Loan, or any other amount payable to such
Lender hereunder, which is not paid when due (regardless of whether such
balances are then due to Borrower), in which case it shall promptly notify
Borrower and the Administrative Agent thereof, provided that such Lender's
failure to give such notice shall not affect the validity thereof.
(b) If any Lender shall obtain payment of any principal of or
interest on the Loan made by it to Borrower under this Agreement through
the exercise of any right of set-off, banker's lien or counterclaim or
similar right or otherwise, and, as a result of such payment, such Lender
shall have received a greater percentage of the principal or interest then
due hereunder by Borrower to such Lender than the percentage received by
any other Lenders, it shall promptly (1) notify the Administrative Agent
and each other Lender thereof and (2) purchase from such other Lenders
participations in (or, if and to the extent specified by such Lender,
direct interests in) the Loans made by such other Lenders (or in interest
due thereon, as the case may be) in such amounts, and make such other
adjustments from time to time as shall be equitable, to the end that all
the Lenders shall share the benefit of such excess payment (net of any
expenses which may be incurred by such Lender in obtaining or preserving
such excess payment) pro rata in accordance with the unpaid principal
and/or interest on the Loan held by each of the Lenders. To such end all
the Lenders shall make appropriate adjustments among themselves (by the
resale of participations sold or otherwise) if such payment is rescinded
or must otherwise be restored. Borrower agrees that any Lender so
purchasing a participation (or direct interest) in the Loan made by other
Lenders (or in interest due thereon, as the case may be) may exercise all
rights of set-off, banker's lien, counterclaim or similar rights with
respect to such participation as fully as if such Lender were a direct
holder of Loans in the amount of such participation. Nothing contained
herein shall
35
require any Lender to exercise any such right or shall affect the right of
any Lender to exercise, and retain the benefits of exercising, any such
right with respect to any other indebtedness or obligation of Borrower. If
under any applicable bankruptcy, insolvency or other similar law, any
Lender receives a secured claim in lieu of a set-off to which this SECTION
4.04 applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the
rights of the Lenders entitled under this SECTION 4.04 to share the
benefits of any recovery on such secured claim.
SECTION 4.05 TAXES.
(a) Payments Free and Clear. Any and all payments by Borrower
hereunder shall be made, in accordance with SECTION 4.01, free and clear
of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender and the
Administrative Agent, taxes imposed on its income, and franchise or
similar taxes imposed on it, by (1) any jurisdiction (or political
subdivision thereof) of which the Administrative Agent or such Lender, as
the case may be, is a citizen or resident or in which such Lender has an
office, (2) the jurisdiction (or any political subdivision thereof) in
which the Administrative Agent or such Lender is organized, or (3) any
jurisdiction (or political subdivision thereof) in which such Lender or
the Administrative Agent is presently doing business which taxes are
imposed solely as a result of doing business in such jurisdiction (all
such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "TAXES"). If
Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder to the Lenders or the Administrative Agent
(i) the sum payable shall be increased by the amount necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this SECTION 4.05) such Lender or the
Administrative Agent (as the case may be) shall receive an amount equal to
the sum it would have received had no such deductions been made, (ii)
Borrower shall make such deductions and (iii) Borrower shall pay the full
amount deducted to the relevant taxing authority or other Governmental
Authority in accordance with applicable law.
(b) Other Taxes. In addition, to the fullest extent permitted
by applicable law, Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or
similar levies that arise from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "OTHER
TAXES").
(c) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, BORROWER WILL INDEMNIFY EACH LENDER AND THE ADMINISTRATIVE
AGENT FOR THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT
LIMITED TO, ANY TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY
ON AMOUNTS PAYABLE UNDER THIS SECTION 4.05) PAID BY SUCH LENDER OR THE
ADMINISTRATIVE AGENT (ON THEIR BEHALF OR ON BEHALF OF
36
ANY LENDER), AS THE CASE MAY BE, AND ANY LIABILITY (INCLUDING PENALTIES,
INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER
OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED UNLESS
SUCH LENDER'S PAYMENT OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY PAYMENT PURSUANT TO SUCH
INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE ANY
LENDER OR THE ADMINISTRATIVE AGENT, AS THE CASE MAY BE, MAKES WRITTEN
DEMAND THEREFOR. IF ANY LENDER OR THE ADMINISTRATIVE AGENT RECEIVES A
REFUND OR CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH
LENDER OR THE ADMINISTRATIVE AGENT HAS RECEIVED PAYMENT FROM BORROWER IT
SHALL PROMPTLY NOTIFY BORROWER OF SUCH REFUND OR CREDIT AND SHALL, IF NO
DEFAULT HAS OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS AFTER
RECEIPT OF A REQUEST BY BORROWER (OR PROMPTLY UPON RECEIPT, IF BORROWER
HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT HERETO), PAY
AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO BORROWER WITHOUT INTEREST (BUT
WITH ANY INTEREST SO REFUNDED OR CREDITED), PROVIDED THAT BORROWER, UPON
THE REQUEST OF SUCH LENDER OR THE ADMINISTRATIVE AGENT, AGREES TO RETURN
SUCH REFUND OR CREDIT (PLUS PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH
LENDER OR THE ADMINISTRATIVE AGENT IN THE EVENT SUCH LENDER OR THE
ADMINISTRATIVE AGENT IS REQUIRED TO REPAY SUCH REFUND OR CREDIT.
(d) Lender Representations and Actions.
(1) Each Lender represents that it is either (A) a
banking association or corporation organized under the laws of the
United States of America or any state thereof or (B) it is entitled
to complete exemption from United States withholding tax imposed on
or with respect to any payments, including fees, to be made to it
pursuant to this Agreement (i) under an applicable provision of a
tax convention to which the United States of America is a party or
(ii) because it is acting through a branch, agency or office in the
United States of America and any payment to be received by it
hereunder is effectively connected with a trade or business in the
United States of America. Each Lender that is not a banking
association or corporation organized under the laws of the United
States of America or any state thereof agrees to provide to Borrower
and the Administrative Agent on the Amendment and Restatement Date,
or on the date of its delivery of the Assignment pursuant to which
it becomes a Lender, and at such other times as required by United
States law or as Borrower or the Administrative Agent shall
reasonably request, two accurate and complete original signed copies
of either (a) Internal Revenue Service Form W-8ECI (or successor
form) certifying that all payments to be made to it hereunder will
be effectively connected to a United States trade or business (the
"FORM W-8ECI CERTIFICATION") or (b) Internal Revenue Service Form
W-8BEN (or successor
37
form) certifying that it is entitled to the benefit of a provision
of a tax convention to which the United States of America is a party
which completely exempts from United States withholding tax all
payments to be made to it hereunder (the "FORM W-8BEN
CERTIFICATION"). In addition, each Lender agrees that if it
previously filed a Form W-8ECI Certification, it will deliver to
Borrower and the Administrative Agent a new Form W-8ECI
Certification prior to the first payment date occurring in each of
its subsequent taxable years; and if it previously filed a Form
W-8BEN Certification, it will deliver to Borrower and the
Administrative Agent a new certification prior to the first payment
date falling in the third year following the previous filing of such
certification. Each Lender also agrees to deliver to Borrower and
the Administrative Agent such other or supplemental forms as may at
any time be required as a result of changes in applicable law or
regulation in order to confirm or maintain in effect its entitlement
to exemption from United States withholding tax on any payments
hereunder, provided that the circumstances of such Lender at the
relevant time and applicable laws permit it to do so. If a Lender
determines, as a result of any change in either (i) a Governmental
Requirement or (ii) its circumstances, that it is unable to submit
any form or certificate that it is obligated to submit pursuant to
this SECTION 4.05, or that it is required to withdraw or cancel any
such form or certificate previously submitted, it shall promptly
notify Borrower and the Administrative Agent of such fact. If a
Lender is organized under the laws of a jurisdiction outside the
United States of America, unless Borrower and the Administrative
Agent have received a Form W-8BEN Certification or Form W-8ECI
Certification satisfactory to them indicating that all payments to
be made to such Lender hereunder are not subject to United States
withholding tax, Borrower shall withhold taxes from such payments at
the applicable statutory rate. Each Lender agrees to indemnify and
hold harmless Borrower or Administrative Agent, as applicable, from
any United States taxes, penalties, interest and other expenses,
costs and losses incurred or payable by (i) the Administrative Agent
as a result of such Lender's failure to submit any form or
certificate that it is required to provide pursuant to this SECTION
4.05 or (ii) Borrower or the Administrative Agent as a result of
their reliance on any such form or certificate which such Lender has
provided to them pursuant to this SECTION 4.05.
(2) For any period with respect to which a Lender has
failed to provide Borrower with the form required pursuant to this
SECTION 4.05, if any, (other than if such failure is due to a change
in a Governmental Requirement occurring subsequent to the date on
which a form originally was required to be provided), such Lender
shall not be entitled to indemnification under SECTION 4.05 with
respect to taxes imposed by the United States which taxes would not
have been imposed but for such failure to provide such forms;
provided, however, that if a Lender, which is otherwise exempt from
or subject to a reduced rate of withholding tax, becomes subject to
taxes because of its failure to deliver a form required hereunder,
Borrower shall take such steps as such Lender shall reasonably
request to assist such Lender to recover such taxes.
38
(3) Any Lender claiming any additional amounts payable
pursuant to this SECTION 4.05 shall use reasonable efforts
(consistent with legal and regulatory restrictions) to file any
certificate or document requested by Borrower or the Administrative
Agent or to change the jurisdiction of its applicable lending office
or to contest any tax imposed if the making of such a filing or
change or contesting such tax would avoid the need for or reduce the
amount of any such additional amounts that may thereafter accrue and
would not, in the sole determination of such Lender, be otherwise
disadvantageous to such Lender. The Administrative Agent, at the
written request of Borrower, shall use its commercially reasonable
best efforts to replace any Lender claiming such additional amounts.
No Lender may claim reimbursement for incurred costs more than
ninety (90) days from the date of written request to Borrower.
ARTICLE V
CONVERSION OF NOTES
SECTION 5.01 CONVERSION UNDER RULE 144A.
(a) Subject to the terms and conditions of this SECTION 5.01,
the Notes shall automatically be converted into notes ("INDENTURE NOTES")
issued pursuant to an indenture entered into between Borrower and a
designated trustee selected by Borrower and reasonably acceptable to the
Administrative Agent (the "INDENTURE"). Borrower will initiate the
conversion of the Notes under this SECTION 5.01 on or before January 31,
2004.
(b) Except as discussed below, the terms of the Indenture will
reflect substantially the same terms and conditions as this Agreement,
except that the limitations on additional Debt specified in SECTION 9.18
will not be incorporated and the Indenture Notes will have the same
ranking, interest rate, maturity and redemption terms as the Notes. The
Indenture will be acceptable to Borrower and the Majority Lenders, acting
reasonably, and will include the following additional provisions:
(1) the Indenture Notes will be issued without coupons,
in denominations of $1,000 and integral multiples thereof, and will
initially be issued as global securities in book-entry form. The
global securities shall be deposited with a custodian for the
Depository Trust Company ("DTC") and registered in the name of DTC
or a nominee for DTC (qualified institutional buyers shall be able
to hold their interests in a Rule 144A global security directly
through DTC, if they are DTC participants, or indirectly through
organizations that are DTC participants);
(2) the Indenture Notes shall be eligible for trading on
the PORTAL Market;
(3) Borrower shall furnish to the Lenders, upon their
request, the information required to be delivered pursuant to Rule
144A(d)(4) if, at any
39
time while the Indenture Notes are restricted securities within the
meaning of the Securities Act, Borrower is not subject to the
informational requirements of the Securities Exchange Act of 1934;
(4) Borrower and Lenders shall enter into a registration
rights agreement on or prior to the conversion of the Notes to
Indenture Notes. Pursuant to the registration rights agreement,
Borrower will agree (i) to file with the SEC within ninety (90) days
of the date on which it issues the Indenture Notes either (x) a
shelf registration statement on Form S-1 or Form S-3, if the use of
such form is then available, to cover resales of registrable
securities by the holders thereof who satisfy certain conditions
relating to the provision of information in connection with the
shelf registration statement or (y) an exchange offer registration
statement on Form S-4, (ii) to use its reasonable best efforts to
cause the registration statement to be declared effective by the SEC
within 180 days of the date on which it issues the Indenture Notes,
and (iii) to use its reasonable best efforts to keep (x) such shelf
registration statement continuously effective under the Securities
Act, subject to the Borrower's right to impose commercially
reasonable trading blackouts until such time as there are no longer
any registrable securities covered thereby or (y) such exchange
offer registration statement effective until the completion of the
exchange offer contemplated thereby; and
(5) such other terms and conditions as are usual and
customary for indentures related to offerings of notes pursuant to
Rule 144A including, without limitation, provisions related to the
transfer and redemption procedures applicable to the Indenture Notes
and delivery of customary legal opinions, including assurances as to
the adequacy of information provided to investors.
(c) In the event that a conversion of the Notes is initiated
under this SECTION 5.01, the Borrower and each Lender will use
commercially reasonable efforts to cause the conversion to be completed
within forty-five (45) days of its initiation.
(d) In connection with a conversion of the Notes under this
SECTION 5.01, prior to the issuance of Indenture Notes to a Lender, each
Lender will (i) represent and warrant that such Lender is an "accredited
investor" as such term is defined in Section 501 of Regulation D
promulgated under the Securities Act of 1933, as amended, and (ii) will
surrender its Notes to the Borrower.
SECTION 5.02 REMEDIES FOR CERTAIN EVENTS. If Borrower fails to
initiate conversion of the Notes on or before the date specified for such in
SECTION 5.01(a), (b) Borrower fails to use reasonable best efforts to cause the
conversion of the Notes on or before the date specified in SECTION 5.01(c), (c)
Borrower fails to file a registration statement with the SEC on or before the
date specified in SECTION 5.01(b), (d) Borrower fails to cause such registration
statement to be declared effective by the SEC on or prior to September 30, 2004,
or Borrower fails to use its reasonable best efforts to keep such registration
statement effective if the registration statement with respect to the Notes is
declared effective, then the interest rate on the Notes will increase
immediately following the occurrence of any default referred to in clauses (a)
40
through (e) above by 0.25% per annum. Following the cure of all such defaults,
the accrual of such additional interest will cease and the interest rate will
revert to the original rate.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01 DOCUMENTS TO BE DELIVERED ON AMENDMENT AND RESTATEMENT
DATE. The obligation of the New Lenders to fund the Additional Loans and of the
Lenders to execute this Agreement on the Amendment and Restatement Date is
subject to the receipt by the Administrative Agent of the following documents
and satisfaction of the other conditions provided for in SECTION 6.02 and this
SECTION 6.01, each of which shall be satisfactory to the Administrative Agent in
form and substance:
(a) A certificate of the Secretary or an Assistant Secretary
of Borrower setting forth (i) resolutions of its board of directors with
respect to the authorization of Borrower to execute and deliver this
Agreement and the Loan Documents and to enter into the transactions
contemplated thereby, (ii) the officers of Borrower (y) who are authorized
to sign the Loan Documents to which Borrower is a party and (z) who will,
until replaced by another officer or officers duly authorized for that
purpose, act as its representative for the purposes of signing documents
and giving notices and other communications in connection with this
Agreement and the transactions contemplated hereby, (iii) specimen
signatures of the authorized officers, and (iv) the articles or
certificate of incorporation and bylaws of Borrower, certified as being
true and complete. The Administrative Agent and the Lenders may
conclusively rely on such certificate until the Administrative Agent
receives notice in writing from Borrower to the contrary.
(b) Certificates of the appropriate state agencies with
respect to the existence, qualification and good standing of Borrower in
its state of incorporation and each jurisdiction where it is qualified as
a foreign corporation.
(c) A compliance certificate, which shall be substantially in
the form of Exhibit B, duly and properly executed by a Responsible Officer
and dated as of the date of the Amendment and Restatement Date.
(d) The Notes, duly completed and executed.
(e) An opinion of Haynes and Boone, LLP, counsel to Borrower,
in form and substance reasonably acceptable to the Majority Lenders as to
such matters incident to the transactions herein contemplated.
(f) Third Amendment to Senior Secured Credit Facility by
Wachovia Bank, National Association, as Administrative Agent, consenting
to the transactions contemplated by this Agreement.
(g) Waiver letter with respect to the Duke Credit Facility by
Ingalls & Snyder LLC, as Administrative Agent thereunder, consenting to
the transactions contemplated by this Agreement.
41
(h) The seven year warrants for the purchase of 15,000 shares
of Borrower's Common Stock at a purchase price of $10.00 per share for
each $1,000,000.00 in Notes to be issued to the New Lenders on the
Amendment and Restatement Date and on the date any Additional Lenders
purchase additional Notes pursuant to SECTION 2.02, issued to the Lenders
in proportion to each Lender's Loan as originally in effect, in form
reasonably acceptable to the Lenders. For the avoidance of doubt, warrants
to purchase 1,500,000 shares of Borrower's Common Stock have already been
issued to the Lenders party to the Credit Agreement and, assuming the
aggregate principal amount of Notes to be issued to New Lenders on the
Amendment and Restatement Date is $85,000,000.00, warrants to purchase
1,275,000 shares of the Borrower's Common Stock will be issued to the New
Lenders on the Amendment and Restatement Date.
(i) Such other documents as the Administrative Agent or any
Lender or special counsel to the Administrative Agent may reasonably
request.
(j) Executed guarantees of the Notes by each of Callon
Petroleum Operating Company, Callon Offshore Production, Inc. and
Mississippi Marketing, Inc.
SECTION 6.02 CONDITIONS PRECEDENT TO FUNDING. The obligation of the
New Lenders to make the Additional Loans to Borrower and of the Lenders to enter
into this Agreement on the Amendment and Restatement Date is subject to the
further conditions precedent that, as of the date of such Loans and after giving
effect thereto:
(a) no Default shall have occurred and be continuing; and
(b) the representations and warranties made by Borrower in
ARTICLE VII shall be true on and as of the Amendment and Restatement Date.
SECTION 6.03 CONDITIONS PRECEDENT FOR THE BENEFIT OF LENDERS. All
conditions precedent to the obligations of the Lenders to make the Loans are
imposed hereby solely for the benefit of the Lenders, and no other Person may
require satisfaction of any such condition precedent or be entitled to assume
that the Lenders will refuse to make the Loans in the absence of strict
compliance with such conditions precedent.
SECTION 6.04 NO WAIVER. No waiver of any condition precedent shall
preclude the Administrative Agent or the Lenders from thereafter declaring that
the failure of Borrower to satisfy such condition precedent constitutes a
Default.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Administrative Agent and the
Lenders each of the following matters.
SECTION 7.01 CORPORATE EXISTENCE; CAPITALIZATION.
42
(a) Each of Borrower and each Restricted Subsidiary: (i) is a
corporation duly organized, legally existing and in good standing under
the laws of the jurisdiction of its incorporation or legal existence; (ii)
has all requisite corporate power, and has all material governmental
permits, licenses, authorizations, consents and approvals necessary to own
its Property and carry on its business as now being or as proposed to be
conducted; and (iii) is qualified to do business in all jurisdictions in
which the nature of the business conducted by it makes such qualification
necessary and where failure so to qualify would have a Material Adverse
Effect.
(b) As of the Amendment and Restatement Date, the authorized
capital stock of Borrower consists solely of 20,000,000 shares of common
stock, par value $0.01 per share (the "COMMON STOCK"), of which 13,935,311
shares are issued and outstanding and 28,578 shares of which are held in
treasury, and 2,500,000 shares of preferred stock, par value $0.01 per
share, of which 600,861 shares of $2.125 Convertible Exchangeable
Preferred Stock, Series A, are issued and outstanding. Other than as set
forth on Schedule 7.01(b) or the certificate of designation for Borrower's
$2.125 Convertible Exchangeable Preferred Stock as of the Amendment and
Restatement Date, no subscription, warrant, option, convertible security,
stock appreciation or other rights (contingent or other) to purchase or
acquire any shares of any class of capital stock or, or any other equity
interest in, Borrower is authorized or outstanding, and there is not
outstanding any commitment of Borrower or any of its Subsidiaries to issue
any shares, warrants, options or other such rights or to distribute to
holders of any class of its capital stock any evidences of indebtedness or
assets. Except as set forth on SCHEDULE 7.01(b) or the certificate of
designation for Borrower's $2.125 Convertible Exchangeable Preferred Stock
as of the Amendment and Restatement Date, Borrower does not have any
contingent or other obligation to purchase, redeem or otherwise acquire
any shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof, and neither
Borrower nor any of its Subsidiaries is a party to any voting agreement,
voting trust or similar agreement or arrangement relating to its capital
stock or any agreement or arrangement relating to or providing for
registration rights with respect to its capital stock.
SECTION 7.02 FINANCIAL CONDITION. The audited consolidated balance
sheet of Borrower and its Consolidated Subsidiaries as at December 31, 2002 and
the related consolidated statement of income, stockholders' equity and cash flow
of Borrower and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon of Ernst & Young LLP heretofore furnished to each
of the Lenders and the unaudited consolidated balance sheet of Borrower and its
Consolidated Subsidiaries as at September 30, 2003 and their related
consolidated statements of income, stockholders' equity and cash flow of
Borrower and its Consolidated Subsidiaries for the three and nine month period
ended on such date heretofore furnished to the Administrative Agent
(collectively, the "FINANCIAL STATEMENTS"), are complete and correct and fairly
present the consolidated financial condition of Borrower and its Consolidated
Subsidiaries as at said dates and the results of its operations for the fiscal
year and the three month period on said dates, all in accordance with GAAP, as
applied on a consistent basis (subject, in the case of the interim financial
statements, to normal year-end adjustments). Neither Borrower nor any Subsidiary
has on the Amendment and Restatement Date any material Debt, contingent
liabilities, liabilities for taxes, unusual forward or long-term commitments or
43
unrealized or anticipated losses from any unfavorable commitments, except as
referred to or reflected or provided for in the Financial Statements or in
Schedule 7.02. Since September 30, 2003, there has been no change or event
having a Material Adverse Effect. Since the date of the Financial Statements,
neither the business nor the Properties of Borrower or any Subsidiary have been
materially and adversely affected as a result of any fire, explosion,
earthquake, flood, drought, windstorm, accident, strike or other labor
disturbance, embargo, requisition or taking of Property or cancellation of
contracts, permits or concessions by any Governmental Authority, riot,
activities of armed forces or acts of God or of any public enemy.
SECTION 7.03 LITIGATION. Except as disclosed to the Lenders in
SCHEDULE 7.03 hereto, at the Amendment and Restatement Date there is no
litigation, legal, administrative or arbitral proceeding, investigation or other
action of any nature pending or, to the knowledge of Borrower threatened against
or affecting Borrower or any Subsidiary which involves the possibility of any
judgment or liability against Borrower or any Subsidiary not fully covered by
insurance (except for normal deductibles), and which would be reasonably likely
to have a Material Adverse Effect.
SECTION 7.04 NO BREACH. Neither the execution and delivery of the
Loan Documents, nor compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent which has not
been obtained as of the Amendment and Restatement Date under, the respective
charter or by-laws of Borrower or any Restricted Subsidiary, or any Governmental
Requirement or any agreement or instrument to which Borrower or any Restricted
Subsidiary is a party or by which it is bound or to which it or its Properties
are subject, or constitute a default under any such agreement or instrument, or
result in the creation or imposition of any Lien upon any of the revenues or
assets of Borrower or any Restricted Subsidiary pursuant to the terms of any
such agreement or instrument other than the Liens created by the Loan Documents.
SECTION 7.05 AUTHORITY. Borrower has all necessary corporate power
and authority to execute, deliver and perform its obligations under the Loan
Documents to which it is a party; and the execution, delivery and performance by
Borrower of the Loan Documents to which it is a party, have been duly authorized
by all necessary corporate action on its part; and the Loan Documents constitute
the legal, valid and binding obligations of Borrower, enforceable in accordance
with their terms.
SECTION 7.06 APPROVALS. No authorizations, approvals or consents of,
and no filings or registrations with, any Governmental Authority are necessary
for the execution, delivery or performance by Borrower of the Loan Documents or
for the validity or enforceability thereof.
SECTION 7.07 USE OF LOANS. The net proceeds of the Additional Loans
shall be used (a) first to repay up to $95,000,000.00 in outstanding principal
amount under the Duke Credit Facility, and (b) any remainder following the
repayment of the entire outstanding principal amount under the Duke Credit
Facility, for general corporate purposes. Borrower is not engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose, whether immediate, incidental or ultimate, of buying or carrying
margin stock (within the meaning of Regulation T, U or X of the Board of
Governors of the Federal Reserve
44
System) and no part of the proceeds of any Loan hereunder will be used to buy or
carry any margin stock.
SECTION 7.08 ERISA.
(a) Borrower, each Subsidiary and each ERISA Affiliate have
complied in all material respects with ERISA and, where applicable, the
Code regarding each Plan.
(b) Each Plan is, and has been, maintained in substantial
compliance with ERISA and, where applicable, the Code.
(c) No act, omission or transaction has occurred which could
result in imposition on Borrower, any Subsidiary or any ERISA Affiliate
(whether directly or indirectly) of (i) either a civil penalty assessed
pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed pursuant
to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary duty
liability damages under section 409 of ERISA.
(d) No Plan (other than a defined contribution plan) or any
trust created under any such Plan has been terminated since September 2,
1974. No liability to the PBGC (other than for the payment of current
premiums which are not past due) by Borrower, any Subsidiary or any ERISA
Affiliate has been or is expected by Borrower, any Subsidiary or any ERISA
Affiliate to be incurred with respect to any Plan. No ERISA Event with
respect to any Plan has occurred.
(e) Full payment when due has been made of all amounts which
Borrower, any Subsidiary or any ERISA Affiliate is required under the
terms of each Plan or applicable law to have paid as contributions to such
Plan, and no accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code), whether or not waived, exists with
respect to any Plan.
(f) The actuarial present value of the benefit liabilities
under each Plan which is subject to Title IV of ERISA does not, as of the
end of Borrower's most recently ended fiscal year, exceed the current
value of the assets (computed on a plan termination basis in accordance
with Title IV of ERISA) of such Plan allocable to such benefit
liabilities. The term "actuarial present value of the benefit liabilities"
shall have the meaning specified in section 4041 of ERISA.
(g) None of Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit plan,
as defined in section 3(1) of ERISA, including, without limitation, any
such plan maintained to provide benefits to former employees of such
entities, that may not be terminated by Borrower, a Subsidiary or any
ERISA Affiliate in its sole discretion at any time without any material
liability.
(h) None of Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the preceding
six calendar years, sponsored, maintained or contributed to, any
Multiemployer Plan.
45
(i) None of Borrower, any Subsidiary or any ERISA Affiliate is
required to provide security under section 401(a)(29) of the Code due to a
Plan amendment that results in an increase in current liability for the
Plan.
SECTION 7.09 TAXES. Except as set out in SCHEDULE 7.09, each of
Borrower and its Subsidiaries has filed all United States Federal income
tax returns and all other tax returns which are required to be filed by
them and have paid all taxes due pursuant to such returns or pursuant to
any assessment received by Borrower or any Subsidiary. The charges,
accruals and reserves on the books of Borrower and its Subsidiaries in
respect of taxes and other governmental charges are, in the opinion of
Borrower, adequate. No tax lien has been filed and, to the knowledge of
Borrower, no claim is being asserted with respect to any such tax, fee or
other charge. There is no ongoing audit or examination or, to the
knowledge of Borrower, other investigation by any Governmental Authority
of the tax liability of Borrower or any of its Subsidiaries, and there is
no unresolved claim by any Governmental Authority concerning the tax
liability of Borrower or any Subsidiary for any period for which tax
returns have been or were required to have been filed, other than
unsecured claims for which adequate reserves have been established in
accordance with GAAP.
SECTION 7.10 TITLES, PROPERTY, ETC.
(a) Except as set out in SCHEDULE 7.10, each of Borrower and
its Restricted Subsidiaries has good and defensible title to its material
(individually or in the aggregate) Properties, free and clear of all
Liens, except Liens permitted by SECTION 9.02. Except as set forth in
SCHEDULE 7.10, after giving full effect to the Permitted Liens, Borrower
owns the net interests in production attributable to the Hydrocarbon
Interests reflected in the most recent balance sheet included with the
Financial Statements, and the ownership of such Properties shall not in
any material respect obligate Borrower to bear the costs and expenses
relating to the maintenance, development and operations of each such
Property in an amount in excess of the working interest of each Property.
(b) All leases and agreements necessary for the conduct of the
business of Borrower and its Restricted Subsidiaries are valid and
existing, in full force and effect and there exists no default or event or
circumstance which with the giving of notice or the passage of time or
both would give rise to a default under any such lease or leases, which
would affect in any material respect the conduct of the business of
Borrower and its Restricted Subsidiaries.
(c) The rights, Properties and other assets presently owned,
leased or licensed by Borrower and its Restricted Subsidiaries including,
without limitation, all easements and rights of way, include all rights,
Properties and other assets necessary to permit Borrower and its
Restricted Subsidiaries to conduct their business in all material respects
in the same manner as its business has been conducted prior to the
Amendment and Restatement Date.
(d) All of the assets and Properties of Borrower and its
Restricted Subsidiaries which are necessary for the operation of its
business are in good working
46
condition, normal wear and tear excepted, and are maintained in accordance
with prudent business standards.
(e) Borrowers' and its Restricted Subsidiaries' Oil and Gas
Properties (and properties unitized therewith) have been maintained,
operated and developed in a good and workmanlike manner and in conformity
with all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part
of the Hydrocarbon Interests and other contracts and agreements forming a
part of the Oil and Gas Properties; specifically in this connection, (i)
after the Amendment and Restatement Date, no Oil and Gas Property is
subject to having allowable production reduced below the full and regular
allowable (including the maximum permissible tolerance) because of any
overproduction (whether or not the same was permissible at the time) prior
to the Amendment and Restatement Date and (ii) none of the wells
comprising a part of the Oil and Gas Properties (or properties unitized
therewith) are deviated from the vertical more than the maximum permitted
by applicable laws, regulations, rules and orders, and such wells are, in
fact, bottomed under and are producing from, and the well bores are wholly
within, the Oil and Gas Properties (or in the case of wells located on
properties unitized therewith, such unitized properties).
SECTION 7.11 NO MATERIAL MISSTATEMENTS. No written information,
statement, exhibit, certificate, document or report furnished to the
Administrative Agent and the Lenders (or any of them) by Borrower or any
Subsidiary in connection with the negotiation of this Agreement contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statement contained therein not materially misleading in
the light of the circumstances in which made and with respect to Borrower and
its Subsidiaries taken as a whole. There is no fact peculiar to Borrower or any
Subsidiary which has a Material Adverse Effect or in the future is reasonably
likely to have (so far as Borrower can now foresee) a Material Adverse Effect.
SECTION 7.12 INVESTMENT COMPANY ACT. Neither Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither Borrower
nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
SECTION 7.14 SUBSIDIARIES.
(a) Except as set forth on SCHEDULE 7.14, as of the Amendment
and Restatement Date, Borrower has no Subsidiaries or Unrestricted
Subsidiaries.
(b) With respect to each Subsidiary of Borrower existing as of
the Amendment and Restatement Date, SCHEDULE 7.14 sets forth the following
information:
47
(1) the jurisdiction of formation and headquarters of
such Subsidiary;
(2) the identity of each other jurisdiction wherein such
Subsidiary is qualified to do business;
(3) the identity of each class of authorized capital
stock of such Subsidiary;
(4) the amount and ownership of the capital stock of
such Subsidiary that is issued and outstanding (collectively, the
"SUBSIDIARY SECURITIES"); and
(5) the identity of each Person or joint venture entity
in which such Subsidiary has an equity or similar interest.
All of the Subsidiary Securities have been duly authorized and validly issued
and are fully paid and nonassessable, to the extent such term is applicable
under local law. None of the Subsidiary Securities have been issued in violation
of any shareholder's preemptive rights.
(c) As of the Amendment and Restatement Date, and except as
disclosed on SCHEDULE 7.14, there are no contracts obligating Borrower or
any of its Affiliates to issue, sell, pledge, dispose of or encumber, nor
any options, warrants or rights of any kind to acquire, nor any securities
that are convertible into or exercisable or exchangeable for, any shares
of any class of capital stock of any Subsidiary. There are no contracts
obligating Borrower or any of its Affiliates to redeem, purchase or
acquire or offer to acquire any shares of any class of capital stock of
any Subsidiary. As of the Amendment and Restatement Date, and except as
disclosed on SCHEDULE 7.14, there are no contracts obligating any
Subsidiary to make any dividend or distribution of any kind.
(d) As of the Amendment and Restatement Date, and except as
disclosed on SCHEDULE 7.14, there are no shareholder agreements, voting
agreements, management agreements, proxies or other similar agreements or
understandings with respect to Borrower or any Subsidiary to which
Borrower or any of its Affiliates is a party. Except as described in the
Material Agreements listed on SCHEDULE 7.21, as of the Amendment and
Restatement Date there are no outstanding or authorized stock
appreciation, phantom stock, profit participation or similar rights
affecting the capital stock of Borrower or any Subsidiary with respect to
which Borrower or any of its Affiliates is a party or issuer.
SECTION 7.15 LOCATION OF BUSINESS AND OFFICES. As of the Amendment
and Restatement Date, Borrower's principal place of business and chief executive
offices are located at the address stated on the signature page of this
Agreement. As of the Amendment and Restatement Date, the principal place of
business and chief executive office of each Subsidiary are located at the
addresses stated on SCHEDULE 7.14.
SECTION 7.16 DEFAULTS. Neither Borrower nor any Restricted
Subsidiary is in default nor has any event or circumstance occurred which, but
for the expiration of any
48
applicable grace period or the giving of notice, or both, would constitute a
default under any material agreement or instrument to which Borrower or any
Restricted Subsidiary is a party or by which Borrower or any Restricted
Subsidiary is bound which default would be reasonably likely to have a Material
Adverse Effect. No Default hereunder has occurred and is continuing.
SECTION 7.17 ENVIRONMENTAL MATTERS. Except (i) as provided in
SCHEDULE 7.17 or (ii) as would not be reasonably likely to have a Material
Adverse Effect (or with respect to (c), (d) and (e) below, where the failure to
take such actions would not be reasonably likely to have a Material Adverse
Effect):
(a) Neither any Property now or previously owned or leased or
in the possession of or operated by or under the direction of Borrower or
any Subsidiary nor the operations now or previously conducted thereon
violate any order or requirement of any court or Governmental Authority or
any Environmental Laws;
(b) Without limitation of clause (a) above, no Property now or
previously owned or leased or in the possession of or operated by or under
the direction of Borrower or any Subsidiary nor the operations currently
conducted thereon or previously conducted thereon while in the ownership
of or under the operation, possession or direction of Borrower or any
Subsidiary, or, to the best knowledge of Borrower, by any prior owner or
operator of such Property or operation, are in violation of or subject to
any existing, pending or threatened action, suit, investigation, inquiry
or proceeding by or before any court or Governmental Authority or to any
remedial obligations under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations,
if any, required to be obtained or filed in connection with the operation
or use of any and all Property now or previously owned or leased or in the
possession of or operated by or under the direction of Borrower and each
Subsidiary, including without limitation all permits for the treatment,
storage, disposal or release of a hazardous substance or solid waste, have
been duly obtained or filed, and Borrower and each Subsidiary are in
compliance with the terms and conditions of all such notices, permits,
licenses and similar authorizations;
(d) All hazardous substances, solid waste, and oil and gas
exploration and production wastes, if any, generated at any and all
Property now or previously owned or leased or in the possession of or
operated by or under the direction of Borrower or any Subsidiary have in
the past been transported, treated or disposed of in accordance with
Environmental Laws, and, to the knowledge of Borrower, all such transport
carriers and treatment and disposal facilities are in compliance with
Environmental Laws, and are not the subject of any existing, pending or
threatened action, investigation or inquiry by any Governmental Authority
in connection with any Environmental Laws;
(e) Borrower has taken steps reasonably necessary to determine
and has determined that no hazardous substances, solid waste, or oil and
gas exploration and production wastes, have been disposed of or otherwise
released and there has been no threatened release of any hazardous
substances on or to any Property now or previously
49
owned or leased or in the possession of or operated by or under the
direction of Borrower or any Subsidiary except in compliance with
Environmental Laws;
(f) To the extent applicable, all Property owned, leased, in
the possession of or operated by or under the direction of Borrower and
each Subsidiary currently satisfies all design, operation, and equipment
requirements currently imposed by the OPA (as defined in the definition of
"ENVIRONMENTAL LAWS" herein), and Borrower does not have any reason to
believe that such Property, to the extent subject to OPA, will not be able
to maintain compliance with the OPA requirements during the term of this
Agreement; and
(g) To Borrower's knowledge, neither Borrower nor any
Subsidiary has any known contingent liability in connection with any
release or threatened release of any oil, hazardous substance or solid
waste into the environment.
SECTION 7.18 COMPLIANCE WITH THE LAW. Neither Borrower nor any
Restricted Subsidiary has violated any Governmental Requirement in any material
respect or failed to obtain any license, permit, franchise or other governmental
authorization reasonably necessary for the ownership of any of its Properties or
the conduct of its business as it is currently being conducted or proposed to be
conducted in the future. All such licenses, permits, franchises or other
governmental authorizations are currently in full force and effect.
SECTION 7.19 INSURANCE. SCHEDULE 7.19 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by Borrower
and each Subsidiary as of the Amendment and Restatement Date. All such policies
are in full force and effect, all premiums with respect thereto covering all
periods up to and including the Amendment and Restatement Date have been paid,
and no notice of cancellation or termination has been received with respect to
any such policy. Such policies are sufficient for compliance with all
requirements of law and of all agreements to which Borrower or any Restricted
Subsidiary is a party; are valid, outstanding and enforceable policies; provide
adequate insurance coverage in at least such amounts and against at least such
risks (but including in any event public liability) as are usually insured
against in the same general area by companies engaged in the same or a similar
business for the assets and operations of Borrower and each Restricted
Subsidiary; will remain in full force and effect through the respective dates
set forth in SCHEDULE 7.19 without the payment of additional premiums; and will
not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. As of the Amendment and Restatement
Date, neither Borrower nor any Restricted Subsidiary has been refused any
insurance with respect to its assets or operations, nor has its coverage been
limited below usual and customary policy limits, by an insurance carrier to
which it has applied for any such insurance or with which it has carried
insurance during the last three years.
SECTION 7.20 HEDGING AGREEMENTS. SCHEDULE 7.20 sets forth, as of the
Amendment and Restatement Date, a true and complete list of all Hedging
Agreements (including commodity price swap agreements, insurance swap or option
agreements, forward agreements for terms in excess of thirty (30) days or
contracts of sale which provide for prepayment for deferred shipment or delivery
of oil, gas or other commodities) of Borrower and
50
each Subsidiary, the material terms thereof (including the type, term, effective
date, termination date and notional amounts or volumes), the net mark to market
value thereof, all credit support agreements relating thereto (including any
margin required or supplied), and the counter party to each such agreement.
SECTION 7.21 MATERIAL AGREEMENTS. Set forth on SCHEDULE 7.21 hereto
is a complete and correct list of all material agreements, contracts, leases,
indentures, purchase agreements, obligations in respect of letters of credit,
guarantees, joint venture agreements, and other instruments in effect or to be
in effect as of the Amendment and Restatement Date (other than Hedging
Agreements and agreements relating to Debt of the type described in clause (iii)
in the definition of Debt or clause (vii) in the definition of Debt to the
extent relating to primary obligations of the type described in clause (iii) in
the definition of Debt) providing for, evidencing, securing or otherwise
relating to any Debt of Borrower or any of its Subsidiaries to the extent such
instrument evidences Debt in excess of $5,000,000, and all obligations of
Borrower or any of its Subsidiaries to issuers of surety or appeal bonds issued
for account of Borrower or any such Subsidiary in excess of $5,000,000
(collectively, the "MATERIAL AGREEMENTS"), and such list correctly sets forth
the names of the debtor or lessee and creditor or lessor with respect to the
Debt or lease obligations outstanding or to be outstanding and the Property
subject to any Lien securing such Debt or lease obligation. Borrower has
heretofore delivered to the Administrative Agent a complete and correct copy of
all such material credit agreements, indentures, purchase agreements, contracts,
letters of credit, guarantees, joint venture agreements, or other instruments,
including any modifications or supplements thereto, as in effect on the
Amendment and Restatement Date, which the Administrative Agent has requested.
Each Material Agreement is in full force and effect and is enforceable by
Borrower in accordance with its terms, and none of Borrower nor, to the
knowledge of Borrower, any other party thereto is in breach of or default under
any Material Agreement that would reasonably be likely to have a Material
Adverse Effect or has given notice of termination or cancellation of any
Material Agreement.
SECTION 7.22 GAS IMBALANCES. As of the Amendment and Restatement
Date, except as set forth on SCHEDULE 7.22, on a net basis, there are no gas
imbalances, take or pay or other prepayments with respect to Borrower's Oil and
Gas Properties which would require Borrower to deliver, in the aggregate, five
percent or more of the quarterly production from Hydrocarbons produced from
Borrower's Oil and Gas Properties at some future time without then or thereafter
receiving full payment therefor.
SECTION 7.23 LABOR RELATIONS. None of Borrower or any Subsidiary is
engaged in any unfair labor practice within the meaning of the National Labor
Relations Act of 1947, as amended. There is (a) no unfair labor practice
complaint before the National Labor Relations Board, or grievance or arbitration
proceeding arising out of or under any collective bargaining agreement, pending
or, to the knowledge of Borrower, threatened, against Borrower or any
Subsidiary, (b) no strike, lock-out, slowdown, stoppage, walkout or other labor
dispute pending or, to the knowledge of Borrower, threatened, against Borrower
or any Subsidiary, nor has any such action occurred within the last five years,
and (c) to the knowledge of Borrower, no petition for certification or union
election or union organizing activities taking place with respect to Borrower.
51
SECTION 7.24 INTELLECTUAL PROPERTY. Each of Borrower and its
Subsidiaries owns, or has the legal right to use, all intellectual property
necessary for each of them to conduct its business as currently conducted
("BORROWER INTELLECTUAL Property"). Borrower has not received notice of any
claim challenging or questioning the use of any Borrower Intellectual Property
or the validity or effectiveness of any Borrower Intellectual Property, and to
the knowledge of Borrower, the use of such Borrower Intellectual Property by
Borrower or any Restricted Subsidiary does not infringe on the rights of any
Person, except for such claims and infringements that in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
Loans hereunder, all interest thereon and all other amounts payable by Borrower
hereunder and under the other Loan Documents:
SECTION 8.01 REPORTING REQUIREMENTS. Borrower shall deliver, or
shall cause to be delivered, to the Administrative Agent with sufficient copies
of each for the Lenders:
(a) Annual Financial Statements. As soon as available and in
any event within ninety (90) days after the end of each fiscal year of
Borrower, the audited consolidated (and if Borrower ever has any
Unrestricted Subsidiaries, the unaudited consolidating) statements of
income, stockholders' equity, changes in financial position and cash flow
of Borrower and its Consolidated Subsidiaries for such fiscal year, and
the related consolidated (and if Borrower ever has any Consolidated,
Unrestricted Subsidiaries, the consolidating) balance sheets of Borrower
and its Consolidated Subsidiaries as at the end of such fiscal year, and
setting forth in each case in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by the related opinion of
independent public accountants of recognized national standing acceptable
to the Administrative Agent which opinion shall state that said financial
statements fairly present the consolidated financial condition and results
of operations of Borrower and its Consolidated Subsidiaries as at the end
of, and for, such fiscal year and that such financial statements have been
prepared in accordance with GAAP, except for such changes in such
principles with which the independent public accountants shall have
concurred and such opinion shall not contain a "going concern" or like
qualification or exception, and a certificate of such accountants stating
that, in making the examination necessary for their opinion, they obtained
no knowledge, except as specifically stated, of any Default.
(b) Quarterly Financial Statements. As soon as available and
in any event within forty-five (45) days after the end of each of the
first three fiscal quarterly periods of each fiscal year of Borrower,
consolidated (and if Borrower ever has any Consolidated, Unrestricted
Subsidiaries, the consolidating) statements of income, stockholders'
equity, changes in financial position and cash flow of Borrower and its
Consolidated Subsidiaries for such period and for the period from the
beginning of the
52
respective fiscal year to the end of such period, and the related
consolidated (and if Borrower ever has any Unrestricted Subsidiaries, the
consolidating) balance sheets as at the end of such period, and setting
forth in each case in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year, accompanied by the
certificate of a Responsible Officer, which certificate shall state that
said financial statements fairly present the consolidated financial
condition and results of operations of Borrower and its Consolidated
Subsidiaries in accordance with GAAP, as at the end of, and for, such
period (subject to normal year-end audit adjustments).
(c) Notice of Default, Etc. Promptly after Borrower knows that
any Default or any Material Adverse Effect has occurred, a notice of such
Default or Material Adverse Effect, describing the same in reasonable
detail and the action Borrower proposes to take with respect thereto.
(d) Other Accounting Reports. Promptly upon receipt thereof, a
copy of each other material report or letter submitted to Borrower or any
Subsidiary by independent accountants in connection with any annual,
interim or special audit made by them of the books of Borrower and its
Subsidiaries, and a copy of any response by Borrower or any Subsidiary of
Borrower, or the Board of Directors of Borrower or any Subsidiary of
Borrower, to such letter or report.
(e) SEC Filings, Etc. Promptly upon its becoming available,
each financial statement, report, notice or proxy statement sent by
Borrower to stockholders generally and each regular or periodic report and
any registration statement, prospectus or written communication (other
than transmittal letters) in respect thereof filed by Borrower with or
received by Borrower in connection therewith from any securities exchange
or the SEC.
(f) Notices Under Other Loan Agreements. Promptly after the
furnishing thereof, copies of any statement, report or notice furnished to
any Person pursuant to the terms of any indenture, loan or credit or other
similar agreement, other than this Agreement and not otherwise required to
be furnished to the Lenders pursuant to any other provision of this
SECTION 8.01.
(g) Other Matters. From time to time such other information
regarding the business, affairs or financial condition of Borrower or any
Subsidiary (including, without limitation, any Plan or Multiemployer Plan
and any reports or other information required to be filed under ERISA) as
any Lender or the Administrative Agent may reasonably request.
(h) Hedging Agreements. As soon as available and in any event
within forty-five (45) days after the last day of each calendar quarter, a
report, in form and substance reasonably satisfactory to the
Administrative Agent, setting forth as of the last Business Day of such
calendar quarter a true and complete list of all Hedging Agreements
(including commodity price swap agreements, insurance swap or option
agreements, forward agreements with terms in excess of thirty (30) days or
contracts of sale which provide for prepayment for deferred shipment or
delivery of oil, gas or other
53
commodities) of Borrower and each Restricted Subsidiary, the material
terms thereof (including the type, term, effective date, termination date
and notional amounts or volumes), the net mark to market value therefor,
any new credit support agreements relating thereto not listed on SCHEDULE
7.20, any margin required or supplied under any credit support document,
and the counter party to each such agreement.
(i) Responsible Officer's Certificate. Borrower will furnish
to the Administrative Agent, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate
substantially in the form of Exhibit C executed by a Responsible Officer
(1) certifying as to the matters set forth therein and stating that no
Default has occurred and is continuing (or, if any Default has occurred
and is continuing, describing the same in reasonable detail), and (2)
setting forth in reasonable detail the computations necessary to determine
whether Borrower is in compliance with SECTION 9.01(a) as of the end of
the respective calendar quarter or fiscal year.
SECTION 8.02 LITIGATION. Borrower shall promptly give to the
Administrative Agent notice of: (i) all legal or arbitral proceedings, and of
all proceedings before any Governmental Authority against or adversely affecting
Borrower or any Restricted Subsidiary, except proceedings which, if adversely
determined, could not reasonably be expected to have a Material Adverse Effect,
and (ii) of any litigation or proceeding against or adversely affecting in any
material respect Borrower or any Restricted Subsidiary in which the amount
involved is not covered in full by insurance (subject to normal and customary
deductibles and for which the insurer has not assumed the defense), or in which
injunctive or similar relief is sought. Borrower will, and will cause each of
its Restricted Subsidiaries to, promptly notify the Administrative Agent and
each of the Lenders of any claim, judgment, Lien (other than those permitted
under SECTION 9.02) or other encumbrance affecting any Property of Borrower or
any Restricted Subsidiary if the value of the claim, judgment, Lien, or other
encumbrance affecting such Property shall exceed $500,000.
SECTION 8.03 MAINTENANCE, ETC.
(a) Generally. Borrower shall and shall cause each Restricted
Subsidiary to: preserve and maintain its corporate existence and all of
its material rights, privileges and franchises; keep books of record and
account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and activities;
comply with all Governmental Requirements if failure to comply with such
requirements would be reasonably likely to have a Material Adverse Effect;
pay and discharge all taxes, assessments and governmental charges or
levies imposed on it or on its income or profits or on any of its Property
prior to the date on which penalties attach thereto, except for any such
tax, assessment, charge or levy the payment of which is being contested in
good faith and by proper proceedings and against which adequate reserves
are being maintained; upon reasonable notice, permit representatives of
the Administrative Agent or any Lender, during normal business hours, to
examine, copy and make extracts from its books and records, to inspect its
Properties, and to discuss its business and affairs with its officers, all
to the extent reasonably requested by such Lender or the Administrative
Agent (as the case may be); and keep, or cause to be kept, insured by
financially sound and reputable insurers all Property of a character
usually
54
insured by Persons engaged in the same or similar business similarly
situated against loss or damage of the kinds and in the amounts
customarily insured against by such Persons and carry such other insurance
as is usually carried by such Persons including, without limitation,
environmental risk insurance to the extent reasonably available. Subject
to SECTION 9.14, Borrower will, and will cause each Restricted Subsidiary,
to pay, discharge or otherwise satisfy at or before maturity all
liabilities and obligations as and when due (subject to any applicable
subordination provisions), and any additional costs that are imposed as a
result of any failure to so pay, discharge or otherwise satisfy such
obligations, except to the extent failure to do so would not, individually
or in the aggregate be reasonably likely to have a Material Adverse
Effect.
(b) Oil and Gas Properties. Borrower will and will cause each
Restricted Subsidiary to maintain all of its Oil and Gas Properties as a
reasonably prudent operator. Borrower will and will cause each Restricted
Subsidiary to keep unimpaired, except for Liens described in SECTION 9.02,
its rights with respect to its Oil and Gas Properties and other material
Properties and prevent any forfeiture thereof or a default thereunder.
Borrower will cause and cause each Restricted Subsidiary to perform or
make reasonable and customary efforts to cause to be performed, in
accordance with industry standards, the obligations required by each and
all of the assignments, deeds, leases, sub-leases, contracts and
agreements affecting its interests in its Oil and Gas Properties and other
material Properties.
SECTION 8.04 ENVIRONMENTAL MATTERS.
(a) Compliance with Environmental Laws. Borrower will and will
cause each Subsidiary to maintain and operate all Property of Borrower and
its Subsidiaries in compliance with applicable Environmental Laws in all
material respects.
(b) Notice of Action. Borrower will promptly notify the
Administrative Agent and the Lenders in writing of any threatened action,
investigation or inquiry by any Governmental Authority of which Borrower
has knowledge in connection with any Environmental Laws, excluding routine
testing and corrective action, which if adversely determined could have a
Material Adverse Effect.
(c) Future Acquisitions. Borrower will and will cause each
Subsidiary to provide environmental audits and tests in accordance with
industry standards as reasonably requested by the Majority Lenders (or as
otherwise required to be obtained by the Lenders by any Governmental
Authority) in connection with any future acquisitions of Oil and Gas
Properties.
SECTION 8.05 FURTHER ASSURANCES. Borrower will cure promptly any
defects in the creation and issuance of the Notes and the execution and delivery
of this Agreement. Borrower at its expense will promptly execute and deliver to
the Administrative Agent upon request all such other documents, agreements and
instruments to comply with or accomplish the covenants and agreements of
Borrower this Agreement, or to correct any omissions in, or to state more fully
the obligations set out herein or to make any recordings, to
55
file any notices or obtain any consents, all as may be necessary or appropriate
in connection therewith.
SECTION 8.06 PERFORMANCE OF OBLIGATIONS. Borrower will pay the Notes
according to the reading, tenor and effect thereof; and Borrower will do and
perform every act and discharge all of the obligations to be performed and
discharged by it under this Agreement and the Notes, at the time or times and in
the manner specified.
SECTION 8.07 ERISA INFORMATION AND COMPLIANCE. Borrower will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Administrative Agent with sufficient copies to the
Lenders (i) promptly after the filing thereof with the United States Secretary
of Labor, the Internal Revenue Service or the PBGC, copies of each annual and
other report with respect to each Plan or any trust created thereunder, (ii)
immediately upon becoming aware of the occurrence of any ERISA Event or of any
"prohibited transaction," as described in section 406 of ERISA or in section
4975 of the Code, in connection with any Plan or any trust created thereunder, a
written notice signed by a Responsible Officer specifying the nature thereof,
what action Borrower, the Subsidiary or the ERISA Affiliate is taking or
proposes to take with respect thereto, and, when known, any action taken or
proposed by the Internal Revenue Service, the Department of Labor or the PBGC
with respect thereto, and (iii) immediately upon receipt thereof, copies of any
notice of the PBGC's intention to terminate or to have a trustee appointed to
administer any Plan. With respect to each Plan (other than a Multiemployer
Plan), Borrower will, and will cause each Subsidiary and ERISA Affiliate to, (i)
satisfy in full and in a timely manner, without incurring any late payment or
underpayment charge or penalty and without giving rise to any lien, all of the
contribution and funding requirements of section 412 of the Code (determined
without regard to subsections (d), (e), (f) and (k) thereof) and of section 302
of ERISA (determined without regard to sections 303, 304 and 306 of ERISA), and
(ii) pay, or cause to be paid, to the PBGC in a timely manner, without incurring
any late payment or underpayment charge or penalty, all premiums required
pursuant to sections 4006 and 4007 of ERISA.
SECTION 8.08 RESTRICTED SUBSIDIARIES.
(a) Borrower shall ensure that each Restricted Subsidiary is
at all times a Consolidated Subsidiary.
(b) Borrower shall cause all Restricted Subsidiaries created
or acquired after the date hereof to execute a subsidiary guarantee of the
Notes and to provide legal opinions and such other documents as the
Majority Lenders may reasonably request.
SECTION 8.09 USE OF PROCEEDS OF QUALIFIED OFFERING. If the Borrower
issues Debt in a Qualified Offering, the Borrower shall use the net proceeds of
such offering to repay or redeem Debt, including Debt under the Senior Secured
Credit Facility (which may be reborrowed from time to time as Permitted
Indebtedness). If the aggregate net proceeds from Qualified Offerings equals or
exceeds $150,000,000, Borrower shall repay in full all Debt under the Duke
Credit Facility.
56
SECTION 8.10 RATING. Prior to September 30, 2004, the Borrower will
cause the Notes to be rated by Standard & Poor's, Moody's Investor Services or
Fitch Ratings.
ARTICLE IX
NEGATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
Loans hereunder, all interest thereon and all other amounts payable by Borrower
hereunder and under the other Loan Documents, without the prior written consent
of the Majority Lenders:
SECTION 9.01 DEBT INCURRENCE.
(a) Borrower will not, and will not permit any Restricted
Subsidiary to, incur, create or assume any Debt, other than Permitted
Indebtedness, if (i) the Interest Coverage Ratio after giving effect to
the incurrence, creation or assumption of such Debt is less than 2.5 to
1.0, or (ii) the Debt Coverage Ratio after giving effect to the
incurrence, creation or assumption of such Debt is more than 4.0 to 1.0.
(b) Borrow will not, and will not permit any Restricted
Subsidiary to, incur, create or assume more than $175,000,000 in aggregate
principal amount of Senior Secured Debt unless the Ratio of Borrower's
Adjusted Consolidated Net Tangible Assets to Senior Secured Debt is equal
to, or greater than, 2.5 to 1.0.
SECTION 9.02 LIENS. Unless the Loans are secured equally and
ratably, Borrower will not, and will not permit any Restricted Subsidiary to,
create, incur or assume any Lien securing pari passu or subordinated Debt on any
of its Properties (now owned or hereafter acquired), except:
(a) Liens securing the payment of the Loans;
(b) Permitted Liens;
(c) Liens securing leases allowed under clause (d) in the
definition of Permitted Indebtedness, but only on the Property under
lease;
(d) Liens disclosed on SCHEDULE 9.02;
(e) Liens on cash or securities of Borrower securing Debt
described in clause (e) of the definition of Permitted Indebtedness; and
(f) any Lien on any Property acquired after the date hereof
existing prior to the acquisition thereof by Borrower or any Restricted
Subsidiary or existing on any Property of any Person that becomes a
Restricted Subsidiary after the date hereof prior to the time such Person
becomes a Restricted Subsidiary; provided that (i) such Lien is not
created in contemplation of or in connection with such acquisition or such
Person becoming a Restricted Subsidiary, as the case may be, (ii) such
Lien shall not apply to any other Property of Borrower or any Restricted
Subsidiary and (iii) such Lien shall
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secure only those obligations which it secures on the date of such
acquisition or the date such Person becomes a Restricted Subsidiary, as
the case may be and extensions, renewals and replacements thereof that do
not increase the outstanding principal amount thereof.
SECTION 9.03 RESTRICTED INVESTMENTS; RESTRICTIVE AGREEMENTS.
(a) Borrower will not, and will not permit any of its
Restricted Subsidiaries, directly or indirectly, to:
(1) declare or pay any dividend or make any distribution
on or in respect of its capital stock (including any payment in
connection with any merger or consolidation involving Borrower or
any of its Restricted Subsidiaries) except:
(A) dividends or distributions payable in capital
stock of Borrower (other than Disqualified Stock) or in
options, warrants or other rights to purchase such capital
stock;
(B) dividends or distributions payable to Borrower
or a Restricted Subsidiary of Borrower (and if such Restricted
Subsidiary is not a Wholly-Owned Subsidiary, to its other
holders of common capital stock on a pro rata basis); and
(C) dividends on Borrower's $2.125 Convertible
Exchangeable Preferred Stock, Series A currently outstanding;
(2) purchase, redeem, retire or otherwise acquire for
value any capital stock of Borrower or any direct or indirect parent
of Borrower held by Persons other than Borrower or a Restricted
Subsidiary of Borrower (other than in exchange for capital stock of
Borrower (other than Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment, any Subordinated Debt
(other than the purchase, repurchase or other acquisition of
Subordinated Debt purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each
case due within one year of the date of purchase, repurchase or
acquisition); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Restricted Investment referred to in clauses
(1) through (4) only shall be referred to herein as a "RESTRICTED PAYMENT"), if
at the time Borrower or such Restricted Subsidiary makes such Restricted
Payment:
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(A) a Default shall have occurred and be
continuing (or would result therefrom); or
(B) Borrower is not able to incur an additional
$1.00 of Debt pursuant to SECTION 9.01(a) after giving effect,
on a pro forma basis, to such Restricted Payment; or
(C) the aggregate amount of such Restricted
Payment and all other Restricted Payments declared or made
subsequent to the date hereof would exceed the sum of:
(i) 50% of Consolidated Net Income for the
period (treated as one accounting period) from the
beginning of the first calendar quarter commencing after
the date of this Agreement to the end of the most recent
calendar quarter ending prior to the date of such
Restricted Payment for which financial statements are in
existence (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit); provided, however,
that writedowns of oil and gas properties due to the
application of the full-cost method of accounting will
not be deducted in calculating Consolidated Net Income
for purposes of this paragraph;
(ii) the aggregate Net Cash Proceeds
received by Borrower from the issue or sale of its
capital stock (other than Disqualified Stock) or other
capital contributions subsequent to the date hereof
(other than Net Cash Proceeds received from an issuance
or sale of such capital stock to a Subsidiary of
Borrower or an employee stock ownership plan, option
plan or similar trust to the extent such sale to an
employee stock ownership plan, option plan or similar
trust is financed by loans from or guaranteed by
Borrower or any Restricted Subsidiary unless such loans
have been repaid with cash on or prior to the date of
determination);
(iii) the amount by which Debt of Borrower
is reduced on Borrower's balance sheet upon the
conversion or exchange (other than by a Subsidiary of
Borrower) subsequent to the date hereof of any Debt of
Borrower convertible or exchangeable for capital stock
(other than Disqualified Stock) of Borrower (less the
amount of any cash, or other property, distributed by
Borrower upon such conversion or exchange); and
(iv) the amount equal to the net reduction
in Restricted Investments made by Borrower or any of its
Restricted Subsidiaries in any Person resulting from:
(a) repurchases or redemptions of such
Restricted Investments by such Person, proceeds
realized
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upon the sale of such Restricted Investment to an
unaffiliated purchaser, repayments of loans or
advances or other transfers of assets (including
by way of dividend or distribution) by such Person
to Borrower or any Restricted Subsidiary of
Borrower; or
(b) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of
"INVESTMENT") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments
previously made by Borrower or any Restricted
Subsidiary in such Unrestricted Subsidiary,
which amount in each case under this clause (iv) was
included in the calculation of the amount of Restricted
Payments; provided, however, that no amount will be
included under this clause (iv) to the extent it is
already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase or redemption of capital stock or
Subordinated Debt of Borrower made by exchange for, or out of the
proceeds of the substantially concurrent sale of, capital stock of
Borrower or Subordinated Debt with a maturity after December 31,
2010; provided, however, that (a) such purchase or redemption will
be excluded in subsequent calculations of the amount of Restricted
Payments and (b) the Net Cash Proceeds from such sale will be
excluded from clause (c)(ii) of the preceding paragraph;
(2) any purchase or redemption of Subordinated
Obligations of Borrower made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Subordinated Debt of
Borrower that is refinanced in compliance with this Agreement;
provided, however, that such purchase or redemption will be excluded
in subsequent calculations of the amount of Restricted Payments;
(3) so long as no Default or Event of Default has
occurred and is continuing, any purchase or redemption of
Subordinated Debt from Net Available Cash to the extent permitted
under SECTION 9.11 below; provided, however, that such purchase or
redemption will be excluded in subsequent calculations of the amount
of Restricted Payments;
(4) dividends paid within sixty (60) days after the date
of declaration if at such date of declaration such dividend would
have complied with this provision; provided, however, that such
dividends will be included in subsequent calculations of the amount
of Restricted Payments;
(5) so long as no Default or Event of Default has
occurred and is continuing,
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(A) the purchase, redemption or other acquisition,
cancellation or retirement for value of capital stock, or
options, warrants, equity appreciation rights or other rights
to purchase or acquire capital stock of Borrower or any
Restricted Subsidiary of Borrower or any parent of Borrower
held by any existing or former directors, employees or
management of Borrower or any Subsidiary of Borrower or their
assigns, estates or heirs, in each case in connection with the
repurchase provisions under employee or director stock option
or stock purchase agreements or other agreements to compensate
management employees or directors; provided that such
redemptions or repurchases pursuant to this clause will not
exceed $2,000,000 in the aggregate during any calendar year
and $10,000,000 in the aggregate for all such redemptions and
repurchases; provided, however, that the amount of any such
repurchase or redemption will be included in subsequent
calculations of the amount of Restricted Payments; and
(B) loans or advances to employees or directors of
Borrower or any Subsidiary of Borrower the proceeds of which
are used to purchase capital stock of Borrower, in an
aggregate amount not in excess of $2,000,000 at any one time
outstanding; provided, however, that the amount of such loans
and advances will be included in subsequent calculations of
the amount of Restricted Payments;
(6) repurchases of capital stock deemed to occur upon
the exercise of stock options if such capital stock represents a
portion of the exercise price thereof; provided, however, that such
repurchases will be excluded from subsequent calculations of the
amount of Restricted Payments; and
(7) Restricted Payments in an amount not to exceed
$10,000,000; provided that the amount of such Restricted Payments
will be included in the calculation of the amount of Restricted
Payments pursuant to SECTION 9.03(a)(4)(c).
The amount of all Restricted Payments (other than cash) shall be the fair market
value on the date of such Restricted Payment of the Property or securities
proposed to be paid, transferred or issued by Borrower or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair
market value of any cash Restricted Payment shall be its face amount and any
non-cash Restricted Payment shall be determined conclusively by the board of
directors of Borrower acting in good faith.
(c) Borrower will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or consensual restriction on the
ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its
capital stock or pay any Debt or other obligations owed to Borrower
or any Restricted Subsidiary;
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(2) make any loans or advances to Borrower or any
Restricted Subsidiary; or
(3) transfer any of its Property to Borrower or any
Restricted Subsidiary.
The preceding provisions will not prohibit:
(A) any encumbrance or restriction pursuant to
this Agreement, the Senior Secured Credit Facility, the Duke
Credit Facility or an agreement in effect on the date hereof;
(B) any encumbrance or restriction with respect to
a Restricted Subsidiary pursuant to an agreement relating to
any Debt incurred by a Restricted Subsidiary on or before the
date on which such Restricted Subsidiary was acquired by
Borrower (other than Debt incurred as consideration in, or to
provide all or any portion of the funds utilized to
consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Borrower or in
contemplation of the transaction) and outstanding on such
date;
(C) any encumbrance or restriction with respect to
a Restricted Subsidiary pursuant to an agreement effecting a
refunding, replacement or refinancing of Debt incurred
pursuant to an agreement referred to in clause (a) or (b) of
this paragraph or this clause (c) or contained in any
amendment to an agreement referred to in clause (a) or (b) of
this paragraph or this clause (c); provided, however, that the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such agreement are no less
favorable in any material respect to the holders of the Notes
than the encumbrances and restrictions contained in such
agreements referred to in clauses (a) or (b) of this paragraph
on the date hereof or the date such Restricted Subsidiary
became a Restricted Subsidiary, whichever is applicable:
(D) in the case of clause (3) of this covenant,
any encumbrance or restriction;
(i) that restricts in a customary manner the
subletting, assignment or transfer of any Property that
is subject to a lease, license or similar contract, or
the assignment or transfer of any such lease, license or
other contract;
(ii) contained in mortgages, pledges or
other security agreements permitted under this Agreement
securing Debt of Borrower or a Restricted Subsidiary to
the extent such encumbrances or restrictions restrict
the transfer of the Property subject to such mortgages,
pledges or other security agreements; or
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(iii) pursuant to customary provisions
regarding preferential rights or rights of first refusal
or restricting dispositions of real property interests
set forth in any reciprocal easement agreements of
Borrower or any Restricted Subsidiary;
(E) purchase money obligations for Property
acquired in the ordinary course of business that impose
encumbrances or restrictions of the nature described in clause
(3) of this covenant on the Property so acquired;
(F) any restriction with respect to a Restricted
Subsidiary (or any of its Property) imposed pursuant to an
agreement entered into for the direct or indirect sale or
disposition of all or substantially all the capital stock or
Property of such Restricted Subsidiary (or the Property that
is subject to such restriction) pending the closing of such
sale or disposition;
(G) encumbrances or restrictions arising or
existing by reason of applicable law or any applicable rule,
regulation or order;
(H) any encumbrance or restriction arising out of
any Permitted Lien; and
(I) customary provisions with respect to the
distribution of assets or property in joint venture
agreements.
SECTION 9.04 SALES AND LEASEBACKS. Other than in connection with
Permitted Equipment Financings, neither Borrower nor any Restricted Subsidiary
will enter into any arrangement, directly or indirectly, with any Person whereby
Borrower or any Restricted Subsidiary shall sell or transfer any of its
Property, whether now owned or hereafter acquired, and whereby Borrower or any
Restricted Subsidiary shall then or thereafter rent or lease as lessee such
Property or any part thereof or other Property which Borrower or any Restricted
Subsidiary intends to use for substantially the same purpose or purposes as the
Property sold or transferred.
SECTION 9.05 NATURE OF BUSINESS. Neither Borrower nor any Restricted
Subsidiary will allow any material change to be made in the character of its
business.
SECTION 9.06 LIMITATION ON LEASES. Other than in connection with
Permitted Equipment Financings, neither Borrower nor any Restricted Subsidiary
will create, incur, assume or permit to exist any obligation for the payment of
rent or hire of Property of any kind whatsoever (real or personal including
capital leases, but excluding leases of Hydrocarbon Interests), under leases or
lease agreements for terms in excess of, or that are non-cancelable by Borrower
or such Subsidiary within, twelve months which would cause all payments made by
Borrower and its Restricted Subsidiaries pursuant to all such leases or lease
agreements to exceed (i) $2,000,000 per annum during the calendar years 2004 and
2005 or (ii) $4,000,000 per annum during calendar years 2006 through 2010.
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SECTION 9.07 CONSOLIDATION AND MERGER. Borrower shall not merge into
or consolidate with or sell all or substantially all of its Property to any
Person or group of affiliated Persons unless (a) either (1) Borrower survives,
or (2) survivor is an entity organized under United States law or any state
thereof or the District of Columbia and assumes, in writing, the Loans; (b) no
Default or Event of Default shall have occurred and be continuing; (c) except in
the case of the consolidation or merger of any Restricted Subsidiary with or
into Borrower, the consolidated net worth of Borrower (or the surviving entity)
does not decrease; Borrower could incur $1.00 of additional Debt (excluding
Permitted Indebtedness) under SECTION 9.01(a); and (e) if any of Borrower's
assets become subject to any Lien, the imposition of such Lien shall have been
in compliance with SECTION 9.02. Notwithstanding the preceding clause (D), (i)
any Restricted Subsidiary of Borrower may consolidate with, merge into or
transfer all or part of its properties and assets to Borrower, (ii) Borrower may
merge with an Affiliate incorporated solely for the purpose of reincorporating
Borrower in another jurisdiction to realize tax or other benefits and (iii) any
Wholly-Owned Subsidiary can consolidate with or merge into any other
Wholly-Owned Subsidiary, except Restricted Subsidiaries cannot merge with
Unrestricted Subsidiaries.
SECTION 9.08 PROCEEDS OF NOTES AND LOANS. Borrower will not permit
the proceeds of the Notes and Loans to be used for any purpose other than those
permitted by SECTION 7.07. Neither Borrower nor any Person acting on behalf of
Borrower has taken or will take any action which might cause any of the Loan
Documents to violate Regulation T, U or X or any other regulation of the Board
of Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each
case as now in effect or as the same may hereinafter be in effect.
SECTION 9.09 ERISA COMPLIANCE. Borrower will not at any time:
(a) engage in, or permit any Subsidiary or ERISA Affiliate to
engage in, any transaction in connection with which Borrower, any
Subsidiary or any ERISA Affiliate could be subjected to either a civil
penalty assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax
imposed by Chapter 43 of Subtitle D of the Code;
(b) terminate, or permit any Subsidiary or ERISA Affiliate to
terminate, any Plan in a manner, or take any other action with respect to
any Plan, which could result in any liability to Borrower, any Subsidiary
or any ERISA Affiliate to the PBGC;
(c) fail to make, or permit any Subsidiary or ERISA Affiliate
to fail to make, full payment when due of all amounts which, under the
provisions of any Plan, agreement relating thereto or applicable law,
Borrower, a Subsidiary or any ERISA Affiliate is required to pay as
contributions thereto;
(d) permit to exist, or allow any Subsidiary or ERISA
Affiliate to permit to exist, any accumulated funding deficiency within
the meaning of Section 302 of ERISA or section 412 of the Code, whether or
not waived, with respect to any Plan;
(e) permit, or allow any Subsidiary or ERISA Affiliate to
permit, the actuarial present value of the benefit liabilities under any
Plan maintained by Borrower,
64
any Subsidiary or any ERISA Affiliate which is regulated under Title IV of
ERISA to exceed the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan
allocable to such benefit liabilities. The term "actuarial present value
of the benefit liabilities" shall have the meaning specified in section
4041 of ERISA;
(f) contribute to or assume an obligation to contribute to, or
permit any Subsidiary or ERISA Affiliate to contribute to or assume an
obligation to contribute to, any Multiemployer Plan;
(g) acquire, or permit any Subsidiary or ERISA Affiliate to
acquire, an interest in any Person that causes such Person to become an
ERISA Affiliate with respect to Borrower, any Subsidiary or any ERISA
Affiliate if such Person sponsors, maintains or contributes to, or at any
time in the six-year period preceding such acquisition has sponsored,
maintained, or contributed to, (1) any Multiemployer Plan, or (2) any
other Plan that is subject to Title IV of ERISA under which the actuarial
present value of the benefit liabilities under such Plan exceeds the
current value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Plan allocable to such benefit
liabilities;
(h) incur, or permit any Subsidiary or ERISA Affiliate to
incur, a liability to or on account of a Plan under sections 515, 4062,
4063, 4064, 4201 or 4204 of ERISA;
(i) contribute to or assume an obligation to contribute to, or
permit any Subsidiary or ERISA Affiliate to contribute to or assume an
obligation to contribute to, any employee welfare benefit plan, as defined
in section 3(1) of ERISA, including, without limitation, any such plan
maintained to provide benefits to former employees of such entities, that
may not be terminated by such entities in their sole discretion at any
time without any material liability; or
(j) amend or permit any Subsidiary or ERISA Affiliate to
amend, a Plan resulting in an increase in current liability such that
Borrower, any Subsidiary or any ERISA Affiliate is required to provide
security to such Plan under section 401(a)(29) of the Code.
SECTION 9.10 SALE OR DISCOUNT OF RECEIVABLES. Neither Borrower nor
any Restricted Subsidiary will discount or sell (with or without recourse) any
of its notes receivable or accounts receivable other than settlement of any past
due accounts in the ordinary course of business and in accordance with prudent
commercial practices.
SECTION 9.11 SALE OF PROPERTY.
(a) Borrower shall not, and shall not permit any Restricted
Subsidiary to, sell, assign, convey or otherwise transfer any Property
unless (i) consideration equal to the fair market value of the Property
sold is received, (ii) the sale is an arm's length transaction; (iii) all
of the consideration received consists of cash, Cash Equivalents, liquid
securities or Exchanged Properties ("PERMITTED CONSIDERATION"); provided,
65
however, that Borrower and its Restricted Subsidiaries may receive
Property that does not constitute Permitted Consideration, so long as the
aggregate fair market value of all Property received pursuant to this
proviso shall not exceed 10.0% of Adjusted Consolidated Net Tangible
Assets, as determined by the Borrower's Board of Directors.
(b) Within 365 days following the receipt of Net Available
Cash, an amount equal to 100% of the Net Available Cash from such Asset
Disposition shall be applied by Borrower or such Restricted Subsidiary, as
the case may be:
(1) to apply all or any of the Net Available Cash
therefrom to repay indebtedness under the Senior Secured Credit
Facility, or
(2) invest all or any part of the Net Available Cash in
Property that will be used in the oil and gas business of Borrower
or its Restricted Subsidiaries.
Any Net Available Cash from Asset Dispositions that are not applied
or invested as provided in the preceding paragraph will be deemed to constitute
"EXCESS PROCEEDS." On the 366th day after an Asset Disposition, if the aggregate
amount of Excess Proceeds exceeds $5,000,000.00, Borrower will be required to
make an offer ("ASSET DISPOSITION OFFER") to all holders of Notes and to the
extent required by the terms of other Senior Indebtedness, to all holders of
other Senior Indebtedness outstanding with similar provisions requiring Borrower
to make an offer to purchase such Senior Indebtedness with the proceeds from any
Asset Disposition ("PARI PASSU NOTES"), to purchase the maximum principal amount
of Notes and any such Pari Passu Notes to which the Asset Disposition Offer
applies that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount of the Notes and Pari
Passu Notes plus accrued and unpaid interest to the date of purchase, in
accordance with the procedures set forth herein or in the agreements governing
the Pari Passu Notes, as applicable, and subject to the prepayment provisions of
SECTION 2.04 (the term "voluntary" therein being deleted). To the extent that
the aggregate amount of Notes and Pari Passu Notes so validly tendered and not
properly withdrawn pursuant to an Asset Disposition Offer is less than the
Excess Proceeds, Borrower may use any remaining Excess Proceeds for general
corporate purposes, subject to the other covenants contained herein. If the
aggregate principal amount of Notes surrendered by holders thereof and other
Pari Passu Notes surrendered by holders or lenders, collectively, exceeds the
amount of Excess Proceeds, Borrower shall select the Notes and Pari Passu Notes
to be purchased on a pro rata basis on the basis of the aggregate principal
amount of tendered Notes and Pari Passu Notes. Upon completion of such Asset
Disposition Offer, the amount of Excess Proceeds shall be reset at zero.
The Asset Disposition Offer will remain open for a period of twenty
(20) Business Days following its commencement, except to the extent that a
longer period is required by applicable law (the "ASSET DISPOSITION OFFER
PERIOD"). No later than five (5) Business Days after the termination of the
Asset Disposition Offer Period (the "ASSET DISPOSITION PURCHASE DATE"), Borrower
will purchase the principal amount of Notes and Pari Passu Notes required to be
purchased pursuant to this covenant (the "ASSET DISPOSITION OFFER AMOUNT") or,
if less than
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the Asset Disposition Offer Amount has been so validly tendered, all Notes and
Pari Passu Notes validly tendered in response to the Asset Disposition Offer.
Any accrued and unpaid interest will be paid to the Person in whose
name a Note is registered at the close of business on such date, and no
additional interest will be payable to holders of the Notes who tender Notes
pursuant to the Asset Disposition Offer.
On or before the Asset Disposition Purchase Date, Borrower will, to
the extent lawful, accept for payment, on a pro rata basis to the extent
necessary, the Asset Disposition Offer Amount of Notes and Pari Passu Notes or
portions of Notes and Pari Passu Notes so validly tendered and not properly
withdrawn pursuant to the Asset Disposition Offer, or if less than the Asset
Disposition Offer Amount has been validly tendered and not properly withdrawn,
all Notes and Pari Passu Notes so validly tendered and not properly withdrawn.
Borrower will deliver all certificates and notes required, if any, by this
Agreement or the agreements governing the Pari Passu Notes. Borrower will
promptly (but in any case not later than the Asset Disposition Purchase Date)
mail or deliver to each tendering holder of Notes or holder or lender of Pari
Passu Notes, as the case may be, an amount equal to the purchase price of the
Notes or Pari Passu Notes so validly tendered and not properly withdrawn by such
holder or lender, as the case may be, and accepted by Borrower for purchase, and
Borrower will promptly issue a new Note and will deliver such new Note to such
holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. In addition, Borrower will take any and all other actions required
by the agreements governing the Pari Passu Notes. Any Note not so accepted will
be promptly mailed or delivered by Borrower to the holder thereof. Borrower will
publicly announce the results of the Asset Disposition Offer on the Asset
Disposition Purchase Date.
For the purposes of this covenant, the following will be deemed to
be cash:
(1) the assumption by the transferee of Debt (other than
Subordinated Obligations or Disqualified Stock) of Borrower or Debt
(other than Preferred Stock) of any Restricted Subsidiary of
Borrower and the release of Borrower or such Restricted Subsidiary
from all liability on such Debt in connection with such Asset
Disposition (in which case Borrower will, without further action, be
deemed to have applied such deemed cash to Debt in accordance with
SECTION 9.11(b) above); and
(2) securities, notes or other obligations received by
Borrower or any Restricted Subsidiary of Borrower from the
transferee that are promptly converted by Borrower or such
Restricted Subsidiary into cash or Cash Equivalents.
Borrower will comply, to the extent applicable, with the
requirements of securities laws or regulations in connection with the repurchase
of Notes pursuant to this Agreement. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this covenant,
Borrower will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this Agreement by
virtue of complying with such securities laws and regulations.
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SECTION 9.12 ENVIRONMENTAL MATTERS. Neither Borrower nor any
Restricted Subsidiary will cause or, to the extent within its control, permit
any of its Property to be in violation of, or do anything or, to the extent
within its control, permit anything to be done which will subject any such
Property to any remedial obligations under any Environmental Laws, assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such Property where such
violations or remedial obligations would have a Material Adverse Effect.
SECTION 9.13 TRANSACTIONS WITH AFFILIATES. Neither Borrower nor any
Restricted Subsidiary will enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of Property or the rendering
of any service, with any Affiliate unless such transactions are otherwise
permitted under this Agreement, are in the ordinary course of its business and
are upon fair and reasonable terms no less favorable to it than it would obtain
in a comparable arm's length transaction with a Person not an Affiliate;
provided, however, that notwithstanding the provisions of SECTION 9.12, Borrower
may engage in the Permitted Medusa Transaction.
SECTION 9.14 SUBORDINATED DEBT. If a Default exists or would result
therefrom, Borrower shall not make any payment in respect of any Subordinated
Debt or the Existing Subordinated Debt. Borrower will not amend, supplement or
otherwise modify any instruments evidencing, or agreements relating to or
executed in connection with, any Existing Subordinated Debt, in any manner which
would have the effect of (i) accelerating the timing or amount of any scheduled
payments of principal or interest thereon, (ii) increasing the rate of interest
payable thereon or (iii) resulting in a Material Adverse Effect.
SECTION 9.15 ISSUANCE AND SALE OF CAPITAL STOCK. Borrower (a) shall
not permit any Restricted Subsidiary to issue any capital stock (other than to
Borrower or a Wholly-Owned Subsidiary of Borrower) and (b) shall not permit any
Person (other than Borrower or a wholly-owned Restricted Subsidiary of Borrower)
to own any capital stock of any Restricted Subsidiary, except, in each case, for
(1) directors' qualifying shares, (2) capital stock of a Restricted Subsidiary
organized in a foreign jurisdiction required to be issued to, or owned by, the
government of such foreign jurisdiction or individual or corporate citizens of
such foreign jurisdiction in order for such Restricted Subsidiary to transact
business in such foreign jurisdiction, (3) a sale of all or substantially all
the capital stock of a Restricted Subsidiary effected in connection with a
Property sale in accordance with SECTION 9.11, and (4) the capital stock of a
Restricted Subsidiary owned by a Person at the time such Restricted Subsidiary
became a Restricted Subsidiary or acquired by such Person in connection with the
formation of the Restricted Subsidiary; provided, however, that any capital
stock retained by Borrower or a Restricted Subsidiary shall be treated as an
Investment for purposes of SECTION 9.03, if the amount of such capital stock
represents less than a majority of the voting stock of such Restricted
Subsidiary.
SECTION 9.16 MODIFICATION OF AGREEMENTS. Borrower shall not, and
shall not permit any Subsidiary to, amend, modify or change any provision of its
articles, certificate of incorporation, bylaws, partnership agreement,
certificate of formation or operating agreement, as applicable, or the terms of
any class or series of its capital stock, other than in a manner that would not
be reasonably likely to have a Material Adverse Effect or to adversely affect
the right
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or ability of Borrower to receive dividend payments or other distributions from
its Subsidiaries, or amend, modify, cancel or terminate or fail to renew or
extend or permit the amendment, modification, cancellation or termination of any
Material Agreement, except to the extent that such amendments, modifications,
cancellations or terminations would not be reasonably likely to have a Material
Adverse Effect.
SECTION 9.17 GUARANTEES. Borrower shall not, and shall not permit
any Restricted Subsidiary to, guarantee, directly or indirectly, any Debt of any
Unrestricted Subsidiary.
SECTION 9.18 LIMITATION ON ADDITIONAL DEBT. Borrower shall not incur
any Debt other than (i) Permitted Debt or (ii) Debt incurred under the Senior
Secured Credit Facility. For purposes of this SECTION 9.18, Debt shall only
include the obligations listed in clauses (i) through (v), (vii), and (ix)
through (xi) of the definition of Debt in SECTION 1.02.
SECTION 9.19 PERMITTED MEDUSA TRANSACTIONS. Notwithstanding anything
in this Agreement or any other Loan Document to the contrary, so long as no
Default or Event of Default has occurred and is continuing at the time Borrower
or any of its Subsidiaries enters into any Permitted Medusa Transaction, the
entering into and carrying out of such Permitted Medusa Transaction shall be
allowed hereunder and shall not in itself constitute a breach of, non-compliance
with, or Default or Event of Default under this Agreement or any other Loan
Document.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
SECTION 10.01 EVENTS OF DEFAULT. One or more of the following events
shall constitute an "EVENT OF DEFAULT":
(a) Borrower shall default in the payment or prepayment when
due of any principal of or interest on any Loan or any fees payable by it
hereunder or under any Loan Document and such default, other than a
default of a payment or prepayment of principal (which shall have no cure
period), shall continue unremedied for a period of thirty (30) days; or
(b) Borrower or any Restricted Subsidiary shall default in the
payment when due of any principal of or interest on any of its other Debt
(other than Debt owed to Borrower or any Restricted Subsidiary)
aggregating $10,000,000 or more ($15,000,000 in the case of non-recourse
Debt), or any event specified in any note, agreement, indenture or other
document evidencing or relating to any such Debt shall occur if the effect
of such event is to cause, or (with the giving of any notice or the lapse
of time or both) to permit the holder or holders of such Debt (or a
trustee or administrative agent on behalf of such holder or holders) to
cause, such Debt to become due prior to its stated maturity; or
(c) any representation, warranty or certification made or
deemed made herein, in any Loan Document by Borrower, or any certificate
furnished to any Lender or the Administrative Agent pursuant to the
provisions hereof, or any Loan Document, shall
69
prove to have been false or misleading as of the time made or furnished in
any material respect; or
(d) Borrower shall default in the performance of any of its
obligations under SECTION 9.07 of this Agreement; (ii) Borrower shall
default in the performance of any of its obligations under SECTION
2.04(b), ARTICLE VIII or ARTICLE IX (other than the payment of amounts due
which shall be governed by SECTION 10.01(a) or SECTION 9.07 which shall be
governed by SECTION 10.01(D)(I)) and such default shall continue
unremedied for a period of thirty (30) days after the earlier to occur of
(a) notice thereof to Borrower by the Administrative Agent or any Lender
(through the Administrative Agent), or (b) Borrower otherwise becoming
aware of such default; or (iii) Borrower shall default in the performance
of any of its other obligations under this Agreement and such default
shall continue unremedied for a period of sixty (60) days after the
earlier to occur of (a) notice thereof to Borrower by the Administrative
Agent or any Lender (through the Administrative Agent), or (b) Borrower
otherwise becoming aware of such default; or
(e) Borrower or any Restricted Subsidiary shall admit in
writing its inability to, or be generally unable to, pay its debts as such
debts become due; or
(f) Borrower or any Restricted Subsidiary shall (i) apply for
or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) make a general assignment for the
benefit of its creditors, (iii) commence a voluntary case under the
Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, liquidation or
composition or readjustment of debts, (v) fail to controvert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Federal Bankruptcy Code, or
(vi) take any corporate action for the purpose of effecting any of the
foregoing; or
(g) a proceeding or case shall be commenced, without the
application or consent of Borrower or any Restricted Subsidiary, in any
court of competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of such Person of all or any substantial
part of its assets, or (iii) similar relief in respect of such Person
under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order, judgment or decree approving
or ordering any of the foregoing shall be entered and continue unstayed
and in effect, for a period of sixty (60) days; or (iv) an order for
relief against such Person shall be entered in an involuntary case under
the Federal Bankruptcy Code;
(h) a judgment or judgments for the payment of money in excess
of $10,000,000 in the aggregate (net of any amounts that a reputable and
creditworthy insurance company has acknowledged liability for in writing)
shall be rendered by a court against Borrower or any Restricted Subsidiary
and the same shall not be discharged (or
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provision shall not be made for such discharge), or a stay of execution
thereof shall not be procured, within sixty (60) days from the date of
entry thereof and Borrower or such Subsidiary shall not, within said
period of sixty (60) days, or such longer period during which execution of
the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal; or
(i) any Subsidiary takes, suffers or permits to exist any of
the events or conditions referred to in clauses (e), (f), (g) or (h), and
such event or condition has a Material Adverse Effect.
SECTION 10.02 REMEDIES.
(a) In the case of an Event of Default other than one referred
to in clauses (e), (f) or (g)of SECTION 10.01, or in clause (i) to the
extent it relates to clauses (e), (f) or (g), the Administrative Agent,
upon request of the Majority Lenders, shall, by notice to Borrower declare
the principal amount then outstanding of, and the accrued interest on, the
Loans and all other amounts payable by Borrower hereunder and under the
other Loan Documents and the Notes to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without
presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby
expressly waived by Borrower.
(b) In the case of the occurrence of an Event of Default
referred to in clauses (e), (f) or (g) of SECTION 10.01, or in clause (i)
to the extent it relates to clauses (e), (f) or (g), the principal amount
then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by Borrower hereunder and under the other Loan Documents
and the Notes shall become automatically immediately due and payable
without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other formalities of any kind, all of which are
hereby expressly waived by Borrower.
(c) All proceeds received after maturity of the Notes, whether
by acceleration or otherwise shall be applied first to reimbursement of
expenses and indemnities provided for in this Agreement and the other Loan
Documents; second to accrued interest on the Notes; third to fees; fourth
pro rata to principal outstanding on the Notes; and any excess shall be
paid to Borrower or as otherwise required by any Governmental Requirement.
ARTICLE XI
THE ADMINISTRATIVE AGENT
SECTION 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby
irrevocably appoints and authorizes the Administrative Agent to act as its
Administrative Agent hereunder with such powers as are specifically delegated to
the Administrative Agent by the terms of this Agreement, together with such
other powers as are reasonably incidental thereto. The Administrative Agent
(which term as used in this sentence and in SECTION 11.04 and the first
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sentence of SECTION 11.05 shall include reference to its Affiliates and its and
its Affiliates' officers, directors, employees, attorneys, accountants, experts
and administrative agents): (i) shall have no duties or responsibilities except
those expressly set forth in the Loan Documents, and shall not by reason of the
Loan Documents be a trustee or fiduciary for any Lender; (ii) makes no
representation or warranty to any Lender and shall not be responsible to the
Lenders for any recitals, statements, representations or warranties contained in
the Loan Documents, this Agreement, or in any certificate or other document
referred to or provided for in, or received by any of them under, this
Agreement, or for the value, validity, effectiveness, genuineness, execution,
effectiveness, legality, enforceability or sufficiency of this Agreement, the
Loan Documents, any Note or any other document referred to or provided for
herein or for any failure by Borrower or any other Person (other than the
Administrative Agent) to perform any of its obligations hereunder or thereunder
or for the existence, value, perfection or priority of any collateral security
or the financial or other condition of Borrower, its Subsidiaries or any other
obligor or guarantor; (iii) except pursuant to SECTION 11.06 shall not be
required to initiate or conduct any litigation or collection proceedings
hereunder; and (iv) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other document or instrument referred to
or provided for herein or in connection herewith including its own ordinary
negligence, except for its own gross negligence or willful misconduct. The
Administrative Agent may employ administrative agents, accountants, attorneys
and experts and shall not be responsible for the negligence or misconduct of any
such administrative agents, accountants, attorneys or experts selected by it in
good faith or any action taken or omitted to be taken in good faith by it in
accordance with the advice of such administrative agents, accountants, attorneys
or experts. The Administrative Agent shall not be required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties hereunder. The Administrative Agent may deem and treat the payee of
any Note as the holder thereof for all purposes hereof unless and until a
written notice of the assignment or transfer thereof permitted hereunder shall
have been filed with the Administrative Agent. The Administrative Agent is
authorized to release any collateral that is permitted to be sold or released
pursuant to the terms of the Loan Documents.
SECTION 11.02 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative
Agent shall be entitled to rely upon any certification, notice or other
communication (including any thereof by telephone, telex, telecopier, telegram
or cable) believed by it to be genuine and correct and to have been signed or
sent by or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel, independent accountants and other experts selected
by the Administrative Agent.
SECTION 11.03 DEFAULTS. The Administrative Agent shall not be deemed
to have knowledge of the occurrence of a Default (other than the non-payment of
principal of or interest on Loans or of fees) unless the Administrative Agent
has received written notice from a Lender or Borrower specifying such Default
and stating that such notice is a "Notice of Default." In the event that the
Administrative Agent receives such a notice of the occurrence of a Default, the
Administrative Agent shall give prompt written notice thereof to the Lenders. In
the event of a payment Default, the Administrative Agent shall give each Lender
prompt written notice of each such payment Default.
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SECTION 11.04 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY AND
HOLD HARMLESS THE ADMINISTRATIVE AGENT AND ITS AFFILIATES AND EACH OF THEIR
RESPECTIVE DIRECTORS, OFFICERS, PRINCIPALS, MEMBERS, MANAGERS, SHAREHOLDERS,
EMPLOYEES, FAMILY MEMBERS AND AGENTS RATABLY IN ACCORDANCE WITH EACH LENDER'S
PERCENTAGE SHARES FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE
EXTENT NOT INDEMNIFIED OR REIMBURSED BY BORROWER UNDER SECTION 12.03, BUT
WITHOUT LIMITING THE OBLIGATIONS OF BORROWER UNDER SAID SECTION 12.03 AND FOR
ANY AND ALL OTHER INDEMNITY MATTERS WHICH MAY BE IMPOSED ON, INCURRED BY OR
ASSERTED AGAINST THE ADMINISTRATIVE AGENT IN ANY WAY RELATING TO OR ARISING OUT
OF: (i) THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER DOCUMENTS CONTEMPLATED
BY OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY, BUT EXCLUDING,
UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND
EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR (ii) THE
ENFORCEMENT OF ANY OF THE TERMS OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS;
WHETHER OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS SECTION 11.04 ARISES FROM
THE SOLE OR CONCURRENT NEGLIGENCE OF THE ADMINISTRATIVE AGENT, PROVIDED THAT NO
LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE ADMINISTRATIVE AGENT.
SECTION 11.05 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER
LENDERS. Each Lender acknowledges and agrees that it has, independently and
without reliance on the Administrative Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis of Borrower and its decision to enter into this Agreement, and that it
will, independently and without reliance upon the Administrative Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Administrative Agent shall
not be required to keep itself informed as to the performance or observance by
Borrower of this Agreement, the Notes or any Loan Document or other document
referred to or provided for herein or to inspect the properties or books of
Borrower. Except for notices, reports and other documents and information
expressly required to be furnished to the Lenders by the Administrative Agent
hereunder, the Administrative Agent shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the affairs,
financial condition or business of Borrower (or any of its Affiliates) which may
come into the possession of the Administrative Agent or any of its Affiliates.
SECTION 11.06 ACTION BY ADMINISTRATIVE AGENT. Except for action or
other matters expressly required of the Administrative Agent hereunder, the
Administrative Agent shall in all cases be fully justified in failing or
refusing to act hereunder unless it shall (i) receive written instructions from
the Majority Lenders (or all of the Lenders as expressly required by SECTION
12.04) specifying the action to be taken, and (ii) be indemnified to its
satisfaction by the Lenders against any and all liability and expenses which may
be incurred by it by reason of
73
taking or continuing to take any such action. The instructions of the Majority
Lenders (or all of the Lenders as expressly required by SECTION 12.04) and any
action taken or failure to act pursuant thereto by the Administrative Agent
shall be binding on all of the Lenders. If a Default has occurred and is
continuing, the Administrative Agent shall take such action with respect to such
Default as shall be directed by the Majority Lenders (or all of the Lenders as
required by SECTION 12.04) in the written instructions (with indemnities
satisfactory to the Administrative Agent) described in this SECTION 11.07,
provided that, unless and until the Administrative Agent shall have received
such directions, the Administrative Agent shall not be obligated to take any
such action with respect to such Default. In no event, however, shall the
Administrative Agent be required to take any action which exposes the
Administrative Agent to personal liability or which is contrary to this
Agreement or applicable law.
SECTION 11.07 RESIGNATION OR REMOVAL OF ADMINISTRATIVE AGENT.
Subject to the appointment and acceptance of a successor Administrative Agent as
provided below, the Administrative Agent may resign at any time by giving at
least thirty (30) days' written notice thereof to the Lenders and Borrower, and
the Administrative Agent may be removed at any time with or without cause by the
Majority Lenders. Upon any such resignation or removal, the Majority Lenders
shall have the right to appoint a successor Administrative Agent with consent of
Borrower (such consent not to be unreasonably withheld), except no such consent
shall be necessary if an Event of Default has occurred and is continuing. If no
successor Administrative Agent shall have been so appointed by the Majority
Lenders and shall have accepted such appointment within thirty (30) days after
the retiring Administrative Agent's giving of notice of resignation or the
Majority Lenders' removal of the retiring Administrative Agent, then the
retiring Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent with consent of Borrower (such consent not to be
unreasonably withheld), except no such consent shall be necessary if an Event of
Default has occurred and is continuing. Upon the acceptance of such appointment
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. After any retiring Administrative Agent's resignation or removal
hereunder as Administrative Agent, the provisions of this ARTICLE XI and SECTION
12.03 shall continue in effect for its benefit in respect of any actions taken
or omitted to be taken by it while it was acting as the Administrative Agent.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01 WAIVER. No failure on the part of the Administrative
Agent or any Lender to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege under any of the Loan
Documents shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege under any of the Loan Documents
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
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SECTION 12.02 NOTICES. All notices and other communications provided
for herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier (including
overnight delivery service with delivery confirmation) or U.S. Mail or in
writing and telexed, telecopied, mailed or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof or, as to any party, at such other address as shall be designated by such
party in a notice to each other party pursuant to the terms hereof. Except as
otherwise provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding Business Day) by telex or telecopier and evidence or confirmation of
receipt is obtained, or personally delivered (including overnight delivery
service with delivery confirmation) or, in the case of a mailed notice, three
(3) Business Days after the date deposited in the mails, postage prepaid, in
each case given or addressed as aforesaid.
SECTION 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC.
(a) Borrower agrees:
(1) to pay the reasonable fees and disbursements of
counsel to the Majority Lenders in connection with this Agreement
and related matters (not to exceed $100,000), together with all of
the Administrative Agent's and Majority Lenders' reasonable legal
fees and expenses in connection with any amendment, waiver or
consent relating to this Agreement and related matters, and, in the
case of enforcement pursuant to or in connection with this
Agreement, the reasonable fees and disbursements of counsel for the
Administrative Agent and any of the Lenders; and promptly reimburse
the Administrative Agent for all amounts expended, advanced or
incurred by the Administrative Agent or the Lenders to satisfy any
obligation of Borrower under this Agreement or any other Loan
Document, including without limitation, all costs and expenses of
foreclosure;
(2) TO INDEMNIFY THE ADMINISTRATIVE AGENT AND EACH
LENDER AND EACH OF THEIR AFFILIATES AND EACH OF THEIR RESPECTIVE
OFFICERS, MEMBERS, MANAGERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES,
AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES")
FROM, HOLD EACH OF THEM HARMLESS AGAINST AND PROMPTLY UPON DEMAND
PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY MATTERS WHICH MAY
BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER
OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF,
ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR PROPOSED
USE BY BORROWER OF THE PROCEEDS OF ANY OF THE LOANS, (II) THE
EXECUTION, DELIVERY AND PERFORMANCE OF THE LOAN DOCUMENTS, (III) THE
OPERATIONS OF THE BUSINESS OF BORROWER AND ITS SUBSIDIARIES, (IV)
THE FAILURE OF BORROWER OR ANY SUBSIDIARY TO COMPLY WITH THE TERMS
OF
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THIS AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY
INACCURACY OF ANY REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF
BORROWER SET FORTH IN ANY OF THE LOAN DOCUMENTS, OR (VI) ANY OTHER
ASPECT OF THE LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, THE
REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES
INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO
DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL
INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF
ANY INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING
SOLELY BY REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE
ADMINISTRATIVE AGENT OR A LENDER'S SHAREHOLDERS OR OWNERS AGAINST
THE ADMINISTRATIVE AGENT OR LENDER OR BY REASON OF THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED
PARTY; AND
(3) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE
INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS,
COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES
AND LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I)
UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO BORROWER OR ANY SUBSIDIARY
OR ANY OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE
TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR
PROPERTIES, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY
BORROWER OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO
BORROWER OR ANY SUBSIDIARY, (III) DUE TO PAST OWNERSHIP BY BORROWER
OR ANY SUBSIDIARY OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY
OF THEIR PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT
THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE,
RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON
OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY BORROWER OR ANY
SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY
CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS; PROVIDED, HOWEVER,
NO INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 12.03(a)(3) IN
RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING FROM THE ACTS OR
OMISSIONS OF THE ADMINISTRATIVE AGENT OR ANY LENDER DURING THE
PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE
OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE OR DEED
IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR OTHERWISE).
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(b) No Indemnified Party may settle any claim to be
indemnified without the consent of the indemnitor, such consent not to be
unreasonably withheld; provided, that the indemnitor may not reasonably
withhold consent to any settlement that an Indemnified Party proposes, if
the indemnitor does not have the financial ability to pay all its
obligations outstanding and asserted against the indemnitor at that time,
including the maximum potential claims against the Indemnified Party to be
indemnified pursuant to this Section 12.03. No indemnitor shall, without
the prior written consent of the Indemnified Party, effect any settlement
of any pending or threatened proceeding in respect of which any
Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party, unless such settlement
(1) includes an unconditional release of such Indemnified Party in form
and substance satisfactory to such Indemnified Party from all liability on
claims that are the subject matter of such proceeding and (2) does not
include any statement as to an admission of fault, culpability or failure
to act by or on behalf of any Indemnified Party.
(c) In the case of any indemnification hereunder, the
Administrative Agent or Lender, as appropriate shall give notice to
Borrower of any such claim or demand being made against the Indemnified
Party and Borrower shall have the non-exclusive right to join in the
defense against any such claim or demand provided that if Borrower
provides a defense (such defense counsel to be reasonably acceptable to
the Administrative Agent and the Indemnified Party), the Indemnified Party
shall bear its own cost of defense unless there is a conflict between
Borrower and such Indemnified Party.
(d) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED
PARTIES NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR
CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE
ACT OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT
CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF
THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN
INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL
CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED
TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(e) Borrower's obligations under this SECTION 12.03 shall
survive any termination of this Agreement and the Loan Documents and the
payment of the Notes and shall continue for a period of three years and
one day thereafter in full force and effect.
(f) Borrower shall pay any amounts due under this SECTION
12.03 within thirty (30) days of the receipt by Borrower of notice of the
amount due.
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SECTION 12.04 AMENDMENTS, ETC. Any provision of this Agreement or
any Loan Document may be amended, modified or waived with Borrower's and the
Majority Lenders' prior written consent; provided that (i) no amendment,
modification or waiver which extends the final maturity of the Loans, forgives
the principal amount of any Loans outstanding under this Agreement or reduces
the interest rate applicable to the Loans or the fees payable to the Lenders
generally, affects this SECTION 12.04 or SECTIONS 12.03 or 12.06(a) or modifies
the definition of "Majority Lenders" shall be effective without the consent of
all Lenders; (ii) no amendment, modification or waiver which modifies the
rights, duties or obligations of the Administrative Agent shall be effective
without the consent of the Administrative Agent.
SECTION 12.05 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. SECTION 12.06 ASSIGNMENTS AND PARTICIPATIONS.
(a) Borrower may not assign its rights or obligations
hereunder or under the Notes without the prior written consent of all of
the Lenders and the Administrative Agent.
(b) Any Lender may, upon the written consent of the
Administrative Agent and, if no Event of Default has occurred and is
continuing, Borrower (which consent will not be unreasonably withheld),
assign to one or more assignees all or a portion of its rights and
obligations under this Agreement pursuant to an Assignment Agreement
substantially in the form of Exhibit D (an "ASSIGNMENT"); provided,
however, that any such assignment shall be in the amount of at least
$5,000,000 or such lesser amount to which Borrower has consented. Any such
assignment will become effective upon the execution and delivery to the
Administrative Agent of the Assignment and the consent of the
Administrative Agent. Promptly after receipt of an executed Assignment,
the Administrative Agent shall send to Borrower a copy of such executed
Assignment. Upon receipt of such executed Assignment, Borrower, will, at
its own expense, execute and deliver new Notes to the assignor and/or
assignee, as appropriate, in accordance with their respective interests as
they appear. Upon the effectiveness of any assignment pursuant to this
SECTION 12.06(b), the assignee will become a "Lender," if not already a
"Lender," for all purposes of this Agreement. The assignor shall be
relieved of its obligations hereunder to the extent of such assignment
(and if the assigning Lender no longer holds any rights or obligations
under this Agreement, such assigning Lender shall cease to be a "Lender"
hereunder except that its rights under SECTIONS 4.05 and 12.03 shall not
be affected). The Administrative Agent will prepare on the last Business
Day of each month during which an assignment has become effective pursuant
to this SECTION 12.06(b), a new ANNEX I giving effect to all such
assignments effected during such month, and will promptly provide the same
to Borrower and each of the Lenders.
(c) The Lenders may furnish any information concerning
Borrower in the possession of the Lenders from time to time to assignees
and participants (including prospective assignees and participants);
provided that, such Persons agree to be bound by the provisions of SECTION
12.15.
78
(d) Notwithstanding anything in this SECTION 12.06 to the
contrary, any Lender may assign and pledge its Note to any Federal Reserve
Bank as collateral security pursuant to Regulation A of the Board of
Governors of the Federal Reserve System and any operating circular issued
by such Federal Reserve System and/or such Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging
Lender from its obligations hereunder.
(e) Notwithstanding any other provisions of this SECTION
12.06, no transfer or assignment of the interests or obligations of any
Lender or any grant of participations therein shall be permitted if such
transfer, assignment or grant would require Borrower to file a
registration statement with the SEC or to qualify the Loans under the
"Blue Sky" laws of any state.
SECTION 12.07 INVALIDITY. In the event that any one or more of the
provisions contained in any of the Loan Documents shall, for any reason, be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of the Notes, this
Agreement or any other Loan Document.
SECTION 12.08 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
SECTION 12.09 REFERENCES. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a section shall be deemed to refer to the applicable
section of this Agreement unless otherwise stated herein. Any reference herein
to an annex, exhibit or schedule shall be deemed to refer to the applicable
annex, exhibit or schedule attached hereto unless otherwise stated herein.
SECTION 12.10 SURVIVAL. The obligations of the parties under SECTION
4.05 and SECTIONS 11.04 and 12.03 shall survive the termination of this
Agreement and the repayment of the Loans. To the extent that any payments on the
Loans are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, debtor in possession, receiver
or other Person under any bankruptcy law, common law or equitable cause, then to
such extent, the portion of the Loans so satisfied shall be revived and continue
as if such payment or proceeds had not been received and the Administrative
Agent's and the Lenders' Liens, security interests, rights, powers and remedies
under this Agreement and each Loan Document shall continue in full force and
effect. In such event, each Loan Document shall be automatically reinstated and
Borrower shall take such action as may be reasonably requested by the
Administrative Agent and the Lenders to effect such reinstatement.
SECTION 12.11 CAPTIONS. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
SECTION 12.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE
79
PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH
PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
SECTION 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE NOTES
(INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF AND
THEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK INCLUDING SECTION 5-1401 OF THE GENERAL
OBLIGATIONS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT GIVING EFFECT
TO PRINCIPLES OF CONFLICTS OF LAWS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN
DOCUMENTS SHALL BE BROUGHT IN ANY FEDERAL OR STATE COURT OF COMPETENT
JURISDICTION LOCATED IN THE BOROUGH OF MANHATTAN, CITY OF NEW YORK, AND
ANY APPELLATE COURT AUTHORIZED TO HEAR APPEALS THEREFROM, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF BORROWER, THE
ADMINISTRATIVE AGENT AND EACH LENDER HEREBY ACCEPTS FOR ITSELF AND (TO THE
EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH
OF BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER HEREBY IRREVOCABLY
WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS
EXCLUSIVE AND IS INTENDED TO AND DOES PRECLUDE THE PARTIES FROM OBTAINING
JURISDICTION OVER OTHER PARTIES IN ANY OTHER COURT.
(c) BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
LOCATED AT 1633 BROADWAY, NEW YORK, NEW YORK 10019, AS THE DESIGNEE,
APPOINTEE AND AGENT OF BORROWER TO RECEIVE, FOR AND ON BEHALF OF BORROWER,
SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS. IT IS UNDERSTOOD THAT A
COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY
OVERNIGHT COURIER TO BORROWER AT ITS ADDRESS SET FORTH UNDER ITS SIGNATURE
BELOW, BUT THE FAILURE OF
80
BORROWER TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF
SUCH PROCESS. BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF
PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO BORROWER AT ITS SAID ADDRESS, SUCH SERVICE TO
BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE
ADMINISTRATIVE AGENT OR ANY LENDER OR ANY HOLDER OF A NOTE TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
(e) BORROWER AND EACH LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY
JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY
LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO
THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM
OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; (III) CERTIFY THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR
ADMINISTRATIVE AGENT OF COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV) ACKNOWLEDGE
THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
SECTION 12.13.
SECTION 12.14 INTEREST. It is the intention of the parties hereto
that each Lender shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated hereby would be usurious as to any
Lender under laws applicable to it (including the laws of the United States of
America and the State of New York or any other jurisdiction whose laws may be
mandatorily applicable to such Lender notwithstanding the other provisions of
this Agreement), then, in that event, notwithstanding anything to the contrary
in any of the Loan Documents or any agreement entered into in connection with or
as security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Loans (or, to the extent that the principal amount of the Loans shall have been
or would thereby be paid in full, refunded by such Lender to Borrower); and (ii)
in the event that the maturity of the Notes is accelerated by reason of an
81
election of the holder thereof resulting from any Event of Default under this
Agreement or otherwise, or in the event of any required or permitted prepayment,
then such consideration that constitutes interest under law applicable to any
Lender may never include more than the maximum amount allowed by such applicable
law, and excess interest, if any, provided for in this Agreement or otherwise
shall be canceled automatically by such Lender as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by such
Lender on the principal amount of the Loans (or, to the extent that the
principal amount of the Loans shall have been or would thereby be paid in full,
refunded by such Lender to Borrower). All sums paid or agreed to be paid to any
Lender for the use, forbearance or detention of sums due hereunder shall, to the
extent permitted by law applicable to such Lender, be amortized, prorated,
allocated and spread throughout the full term of the Loans evidenced by the
Notes until payment in full so that the rate or amount of interest on account of
any Loans hereunder does not exceed the maximum amount allowed by such
applicable law. If at any time and from time to time (i) the amount of interest
payable to any Lender on any date shall be computed at the Highest Lawful Rate
applicable to such Lender pursuant to this SECTION 12.14 and (ii) in respect of
any subsequent interest computation period the amount of interest otherwise
payable to such Lender would be less than the amount of interest payable to such
Lender computed at the Highest Lawful Rate applicable to such Lender, then the
amount of interest payable to such Lender in respect of such subsequent interest
computation period shall continue to be computed at the Highest Lawful Rate
applicable to such Lender until the total amount of interest payable to such
Lender shall equal the total amount of interest which would have been payable to
such Lender if the total amount of interest had been computed without giving
effect to this SECTION 12.14.
SECTION 12.15 CONFIDENTIALITY. In the event that Borrower provides
to the Administrative Agent or the Lenders written confidential information
belonging to Borrower, the Administrative Agent and the Lenders shall thereafter
maintain such information in confidence in accordance with the standards of care
and diligence that each utilizes in maintaining its own confidential
information. This obligation of confidence shall not apply to such portions of
the information which (i) are in the public domain, (ii) hereafter become part
of the public domain without the Administrative Agent or the Lenders breaching
their obligation of confidence to Borrower, (iii) are previously known by the
Administrative Agent or the Lenders from some source other than Borrower, (iv)
are hereafter developed by the Administrative Agent or the Lenders without using
Borrower's information, (v) are hereafter obtained by or available to the
Administrative Agent or the Lenders from a third party who owes no obligation of
confidence to Borrower with respect to such information or through any other
means other than through disclosure by Borrower, (vi) are disclosed with
Borrower's consent, (vii) must be disclosed either pursuant to any Governmental
Requirement or to Persons regulating the activities of the Administrative Agent
or the Lenders, or (viii) as may be required by law or regulation or order of
any Governmental Authority in any judicial, arbitration or governmental
proceeding. Further, the Administrative Agent or a Lender may disclose any such
information to any other Lender, any independent certified public accountants,
any legal counsel employed by such Person in connection with this Agreement or
any Loan Document, including without limitation, the enforcement or exercise of
all rights and remedies thereunder, or any assignee or participant (including
prospective assignees and participants) in the Loans; provided, however, that
the Administrative Agent or the Lenders shall ensure that the Person to whom
such information is disclosed shall have the same obligation to maintain the
confidentiality of such information as is imposed upon the Administrative Agent
or the Lenders hereunder. Notwithstanding anything to
82
the contrary provided herein, this obligation of confidence shall cease three
years from the date all Loans are paid in full, unless Borrower requests in
writing at least thirty (30) days prior to the expiration of such three (3) year
period, to maintain the confidentiality of such information for an additional
three year period. Borrower waives any and all other rights it may have to
confidentiality as against the Administrative Agent and the Lenders arising by
contract, agreement, statute or law except as expressly stated in this SECTION
12.15.
SECTION 12.16 EFFECTIVENESS. This Agreement shall be effective on
the Amendment and Restatement Date.
SECTION 12.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND EACH LOAN
DOCUMENT AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF
THIS AGREEMENT AND EACH LOAN DOCUMENT; THAT IT HAS IN FACT READ THIS AGREEMENT
AND EACH LOAN DOCUMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE
OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT AND EACH LOAN DOCUMENT;
THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE
THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND EACH
LOAN DOCUMENT; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS
AGREEMENT AND EACH LOAN DOCUMENT; AND THAT IT RECOGNIZES THAT CERTAIN OF THE
TERMS OF THIS AGREEMENT AND EACH LOAN DOCUMENT RESULT IN ONE PARTY ASSUMING THE
LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER
PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND
COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS AGREEMENT AND EACH LOAN DOCUMENT ON THE BASIS THAT
THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS
NOT "CONSPICUOUS."
83
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
BORROWER: CALLON PETROLEUM COMPANY
By: _______________________________________
Name: John S. Weatherly
Title: Senior Vice President and
Chief Financial Officer
Address for Notices:
200 North Canal Street
Natchez, Mississippi 39120
Telecopier No.: (601) 446-1374
Telephone No.: (601) 442-1601
Attention: John S. Weatherly
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
ADMINISTRATIVE AGENT: WELLS FARGO BANK, NATIONAL
ASSOCIATION
By: _______________________________________
Name: Melissa Scott
Title: Vice President
Address for Notices:
505 Main Street, Suite 301
Fort Worth, TX 76102
Telecopier No.: (817) 885-8650
Telephone No.: (817) 334-7065
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: FTVIPT-INCOME SECURITIES FUND
By: _______________________________________
Name: David P. Goss
Title: Vice President
Address for Notices:
1 Franklin Parkway
San Mateo, CA 94403
With copy to:
Paul, Hastings, Janofsky & Walker
55 Second St., 24th Floor
San Francisco, CA 94105
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: FTIF INCOME FUND
By: _______________________________________
Name: Greg McGowan
Title: Director
Address for Notices:
1 Franklin Parkway
San Mateo, CA 94403
With copy to:
Paul, Hastings, Janofsky & Walker
55 Second St., 24th Floor
San Francisco, CA 94105
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: FRANKLIN CUSTODIAN FUNDS - INCOME
SERIES
By: _______________________________________
Name: David P. Gross
Title: Vice President
Address for Notices:
1 Franklin Parkway
San Mateo, CA 94403
With copy to:
Paul, Hastings, Janofsky & Walker
55 Second St., 24th Floor
San Francisco, CA 94105
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: MERRILL LYNCH PCG, INC.
By: _______________________________________
Name: Martin McInerney
Title: _______________________________________
Address for Notices:
4 World Financial Center
9th Floor
New York, NY 10080
ATTN: Larry First
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: DB DISTRESSED OPPORTUNITIES FUND,
L.P., AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By: __________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: HFR ASSET MANAGEMENT, L.L.C.,
AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:_______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: THE OPPORTUNITY FUND, LLC, AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:_______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: POST BALANCED FUND, L.P., AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:_______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: POST OPPORTUNITY FUND, L.P., AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: MW POST OPPORTUNITY OFFSHORE
FUND, LTD., AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:_______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: POST TOTAL RETURN FUND, L.P.,
AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: SOUTH DAKOTA INVESTMENT COUNCIL,
AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: SPHINX DISTRESSED FUND SPC, AS ASSIGNEE
BY: POST ADVISORY GROUP, LLC, AS
INVESTMENT MANAGER
By:_______________________________________
Name: Carl Goldsmith
Title: Executive Vice President
Address for Notices:
Post Advisory Group, LLC
11755 Wilshire Blvd., Suite 1400
Los Angeles, CA 90025
ATTN: Mark Porrazzo
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: DEUTSCH BANK AG, LONDON BRANCH
By: _______________________________________
Name: Tracy Fu
Title: _______________________________________
Address for Notices:
31 West 52nd Street
New York, NY 10019
ATTN: Tracy Fu
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: CREDIT SUISSE FIRST BOSTON
INTERNATIONAL
By: _______________________________________
Name: _______________________________________
Title: _______________________________________
By: _______________________________________
Name: _______________________________________
Title: _______________________________________
Address for Notices:
11 Madison Avenue
4th Floor
New York, NY 10010
ATTN: Jeff Tuck
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: DOUBLE BLACK DIAMOND OFFSHORE LDC
By: Carlson Capital, L.P., Investment Advisor
By: Asgard Investment Corp., its
General Partner
By: ______________________________
Name: Clint D. Carlson
Title: President
Address for Notices:
210 McKinney Avenue
Suite 1600
Dallas, TX 75201
ATTN: Don Kendall
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: BLACK DIAMOND OFFSHORE LTD.
By: Carlson Capital, L.P., Investment Advisor
By: Asgard Investment Corp., its
General Partner
By: ______________________________
Name: Clint D. Carlson
Title: President
Address for Notices:
210 McKinney Avenue
Suite 1600
Dallas, TX 75201
ATTN: Don Kendall
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
LENDERS: JEFFERIES & COMPANY, INC.
By: _______________________________________
Name: Robert J. Welch
Title: Senior Vice President
Address for Notices:
The Metro Center
One Station Place, Three North
Stamford, CT 06902
ATTN: Robert J. Welch
-SIGNATURE PAGE-
AMENDED AND RESTATED SENIOR UNSECURED CREDIT AGREEMENT,
DATED AS OF DECEMBER 23, 2003, AMONG
CALLON PETROLEUM COMPANY, AS BORROWER,
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
AND THE LENDERS SIGNATORY HERETO
ANNEX I
LIST OF COMMITMENTS
LENDER COMMITMENTS
-----------------
Franklin Custodian Funds-Income Series, A Maryland corporation ........ U.S. $ 92,500,000
FTVIPT-Income Securities Fund, A Massachusetts Business Trust.......... U.S. $ 6,000,000
FTIF Income Fund, A Luxembourg corporation............................. U.S. $ 1,500,000
-----------------
U.S. $100,000,000
NEW LENDER
Merrill Lynch PCG, Inc................................................. U.S. $ 20,000,000
DB Distressed Opportunities Fund, L.P.................................. U.S. $ 300,000
HFR Asset Management, L.L.C............................................ U.S. $ 700,000
The Opportunity Fund, LLC.............................................. U.S. $ 2,000,000
Post Balanced Fund, L.P................................................ U.S. $ 1,500,000
Post Opportunity Fund, L.P............................................. U.S. $ 3,800,000
MW Post Opportunity Offshore Fund, Ltd................................. U.S. $ 3,500,000
Post Total Return Fund, L.P............................................ U.S. $ 1,250,000
South Dakota Investment Council........................................ U.S. $ 1,650,000
Sphinx Distressed Fund SPC............................................. U.S. $ 300,000
Deutsch Bank AG, London Branch......................................... U.S. $ 5,000,000
Credit Suisse First Boston International............................... U.S. $ 5,000,000
Double Black Diamond Offshore LDC...................................... U.S. $ 14,280,000
Black Diamond Offshore Ltd............................................. U.S. $ 2,720,000
Black Diamond Energy Offshore LDC...................................... U.S. $ 3,000,000
Jefferies & Company, Inc............................................... U.S. $ 10,000,000
Franklin Custodian Funds - Income Series, a Maryland corporation....... U.S. $ 10,000,000
-----------------
U.S. $ 85,000,000
TOTAL U.S. $185,000,000
=================
Annex I
EXHIBIT A
[FORM OF]
NOTE
THE ISSUANCE AND SALE OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER HEREOF, BY ITS
ACCEPTANCE OF THIS NOTE, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS NOTE
MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE
EXPIRATION OF THE HOLDING PERIOD APPLICABLE THERETO UNDER RULE 144(k) UNDER THE
SECURITIES ACT WHICH IS APPLICABLE TO THIS NOTE (THE "RESALE RESTRICTION
TERMINATION DATE") OTHER THAN (1) TO THE COMPANY OR THEIR RESPECTIVE
SUBSIDIARIES, (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, IN EACH CASE TO WHOM NOTICE IS GIVEN THAT THE RESALE,
PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT), (4) TO A NON-"U.S. PERSON"
IN AN "OFFSHORE TRANSACTION" (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER
THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT,
(5) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT, IF AVAILABLE, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO
ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF
SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL,
AND SUBJECT TO THE RIGHT OF THE ADMINISTRATIVE AGENT OR THE COMPANY PRIOR TO ANY
SUCH SALE, PLEDGE OR OTHER TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM.
THIS LEGEND WILL BE REMOVED UPON REQUEST OF THE HOLDER ON OR AFTER THE RESALE
RESTRICTION TERMINATION DATE.
A-1
$____________________ December 23, 2003
CALLON PETROLEUM COMPANY, a Delaware corporation (the "BORROWER"),
for value received, promises and agrees to pay to __________________________
(the "LENDER"), or order, at the account of Wells Fargo Bank, National
Association, a national banking association, as Administrative Agent, maintained
at _______________, or such other account as the Administrative Agent may from
time to time specify by written notice to Borrower, the principal sum of
[__________________________] ($_________________), or such lesser amount as
shall equal the aggregate unpaid principal amount of the Loans owed to the
Lender under the Credit Agreement, as hereafter defined, in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided for in the Credit Agreement, and to pay interest
on the unpaid principal amount as provided for in the Credit Agreement, at such
account, in like money and funds, for the period commencing on the date of each
such Loan until such Loan shall be paid in full, at the rate per annum equal to
9.75% or as otherwise specified in the Credit Agreement, but in no event to
exceed the Highest Lawful Rate, and on the dates provided in the Amended and
Restated Credit Agreement..
This note evidences the Loan owed to the Lender under that certain
Amended and Restated Credit Agreement dated as of December 8, 2003 and amended
and restated as of December 23, 2003, by and among Borrower, Wells Fargo Bank,
National Association, a national banking association, as Administrative Agent,
and the other lenders signatory thereto (including the Lender) (such Credit
Agreement, together with all modifications, amendments, supplements or
successors thereto, being the "CREDIT AGREEMENT"), and shall be governed by the
Credit Agreement. Capitalized terms used in this note and not defined in this
note, but which are defined in the Credit Agreement, have the respective
meanings herein as are assigned to them in the Credit Agreement.
Each payment made on account of the principal and interest hereof
shall be recorded by the Lender on its books, provided that any failure by the
Lender to make any such record shall not affect the obligations of Borrower
under the Credit Agreement or under this note in respect of such Loans.
Except only for any notices which are specifically required by the
Credit Agreement or the other Loan Documents, Borrower and any and all
co-makers, endorsers, guarantors and sureties severally waive notice (including
but not limited to notice of intent to accelerate and notice of acceleration,
notice of protest and notice of dishonor), demand, presentment for payment,
protest, diligence in collecting and the filing of suit for the purpose of
fixing liability, and consent that the time of payment hereof may be extended
and re-extended from time to time without notice to any of them. Each such
person agrees that his, her or its liability on or with respect to this note
shall not be affected by any release of or change in any guaranty or security at
any time existing or by any failure to perfect or maintain perfection of any
lien against or security interest in any such security or the partial or
complete unenforceability of any guaranty or other surety obligation, in each
case in whole or in part, with or without notice and before or after maturity.
A-2
The Credit Agreement provides for the acceleration of the maturity
of this note upon the occurrence of certain events and for prepayment of Loans
upon the terms and conditions specified therein. Reference is made to the Credit
Agreement for all other pertinent purposes. This note may not be assigned,
transferred, sold or indorsed except in accordance with the Credit Agreement.
This note is issued pursuant to and is entitled to the benefits of
the Credit Agreement.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY
THE LAW OF THE STATE OF NEW YORK INCLUDING SECTION 5-1401 OF THE GENERAL
OBLIGATIONS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAWS AND THE UNITED STATES OF AMERICA FROM TIME TO
TIME IN EFFECT.
CALLON PETROLEUM COMPANY
By: ____________________________________
Name: ____________________________________
Title:____________________________________
A-3
EXHIBIT B
FORM OF
COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the
_______________________ of CALLON PETROLEUM COMPANY, a Delaware corporation (the
"BORROWER"), and that as such he is authorized to execute and deliver this
certificate on behalf of Borrower. This certificate is being delivered pursuant
to that certain Amended and Restated Credit Agreement dated as of December 8,
2003 and amended and restated as of December 23, 2003 (as restated, amended,
modified, supplemented and in effect from time to time, the "AGREEMENT"), among
Borrower, the Lenders signatory thereto, and Wells Fargo Bank, National
Association, a national banking association, as Administrative Agent for the
Lenders.
The undersigned represents and warrants as follows (each capitalized
term used herein having the same meaning given to it in the Agreement unless
otherwise specified);
(a)______[There currently does not exist any Default under the
Agreement.] [Attached hereto is a schedule specifying the reasonable details of
[a] certain Default[s] which exist under the Agreement and the action taken or
proposed to be taken with respect thereto.]
(b)______All of the representations and warranties of Borrower set
forth in the Agreement are true and correct as of the date hereof, unless such
representations and warranties speak as to a certain date.
EXECUTED AND DELIVERED this ____ day of _____________, 20__.
CALLON PETROLEUM COMPANY
By: _______________________________
Name: _______________________________
Title: _______________________________
B-1
EXHIBIT C
FORM OF
RESPONSIBLE OFFICER'S CERTIFICATE
Pursuant to SECTION 8.01(I) of that certain Amended and Restated Credit
Agreement dated as of December 8, 2003 and amended and restated as of December
23, 2003 (the "CREDIT AGREEMENT") among Callon Petroleum Company, a Delaware
corporation (the "Borrower"), the Lenders signatory thereto, and Wells Fargo
Bank, National Association, a national banking association, as Administrative
Agent for the Lenders, the undersigned hereby certifies, as of the date hereof,
that:
1. He is the duly appointed ____________________ of Borrower and is
duly authorized to make, execute and deliver this certificate.
2. The matters set forth in the financial statements attached hereto
are accurate and correctly reflect the financial condition of the
Corporation for the respective calendar quarter or fiscal year of
the statements.
3. No Default has occurred and is continuing (or, if any Default has
occurred and is continuing, such Default is described in reasonable
detail in a document attached hereto).
4. Attached hereto, in reasonable detail, are the computations
necessary to determine whether Borrower is in compliance with
SECTION 9.01(a) of the Credit Agreement as of the end of the
respective calendar quarter or fiscal year of the financial
statements attached hereto.
IN WITNESS HEREOF, the undersigned has executed this certificate as of the ___
day of ____________, 20__.
By: _______________________________
Name:
Title:
C-1
EXHIBIT D
FORM OF
ASSIGNMENT AGREEMENT
This Assignment Agreement ("Assignment") between Assignor and
Assignee is executed and delivered pursuant to that certain Amended and Restated
Credit Agreement dated as of December 8, 2003 and amended and restated as of
December 23, 2003 (as amended, modified, supplemented and in effect on the date
hereof, (the "CREDIT AGREEMENT"), among Callon Petroleum Company, a Delaware
corporation, the Lenders signatory thereto and Wells Fargo Bank, National
Association, a national banking association, as Administrative Agent for the
Lenders. Capitalized terms used but not defined herein are as defined in the
Credit Agreement.
The Assignor named herein hereby sells and assigns, without
recourse, to the Assignee named herein, and the Assignee hereby purchases and
assumes, without recourse, from the Assignor, effective as of the Assignment
Date (defined below) the interests set forth herein (the "Assigned Interest") in
the Assignor's rights and obligations under the Credit Agreement, including,
without limitation, the Loans which are outstanding on the Assignment Date, but
excluding accrued interest and fees to and excluding the Assignment Date. The
Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and
after the Assignment Date (i) the Assignee shall be a party to and be bound by
the provisions of the Credit Agreement and, to the extent of the Assigned
Interest, have the rights and obligations of a Lender thereunder and (ii) the
Assignor shall, to the extent of the Assigned Interest, relinquish its rights
and be released from its obligations under the Credit Agreement.
This Assignment is being delivered to the Administrative Agent
together with (i) if the Assignee is a foreign lender, any documentation
required to be delivered by the Assignee pursuant to SECTION 4.05(D) of the
Credit Agreement, duly completed and executed by the Assignee, and (ii) if the
Assignee is not already a Lender under the Credit Agreement, any other
documentation required by the Credit Agreement or any Loan Document, duly
completed by the Assignee, to Borrower, the Administrative Agent and each
Lender, as applicable. The Assignee shall pay the fee payable to the
Administrative Agent pursuant to SECTION 12.06(b) of the Credit Agreement.
This Assignment shall be governed by and construed in accordance
with the laws of the State of New York including section 5-1401 of the General
Obligations Law of the State of New York, but otherwise without giving effect to
principles of conflicts of laws.
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of Assignment ("Assignment Date"):
D-1
Percentage Assigned of
Facility/Commitment (set forth, to
at least 8 decimals, as a percentage
of the Facility and the aggregate
Commitments of all Lenders
Facility Principal Amount Assigned thereunder)
_____________________________ ______________________________ _________________________________
Commitment Assigned:
_____________________________ $_____________________________ _________________________________
Loans:
_____________________________ ______________________________ _________________________________
The terms set forth above are hereby agreed to:
[NAME OF ASSIGNEE], AS ASSIGNEE
By: ______________________________
Name: ______________________________
Title:______________________________
[NAME OF ASSIGNOR], AS ASSIGNOR
By: ______________________________
Name: ______________________________
Title:______________________________
The undersigned hereby consent to this Assignment:
CALLON PETROLEUM COMPANY
By: ____________________________________________
Name: ____________________________________________
Title: ____________________________________________
WELLS FARGO BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT
By: ____________________________________________
Name: ____________________________________________
Title: ____________________________________________
D-2
EXHIBIT E-1
FORM OF LOAN INCREASE CERTIFICATE
[_________], 200[__]
To: Wells Fargo Bank, National Association,
as Administrative Agent
The Borrower, the Administrative Agent and the other Agents and certain
Lenders have heretofore entered into that certain Amended and Restated Credit
Agreement, dated as of December 8, 2003 and amended and restated as of December
23, 2003, as amended from time to time (the "CREDIT AGREEMENT"). Capitalized
terms not otherwise defined herein shall have the meaning given to such terms in
the Credit Agreement.
This Commitment Increase Certificate is being delivered pursuant to
SECTION 2.02 of the Credit Agreement.
Please be advised that the undersigned has agreed to increase its
Commitment under the Credit Agreement effective [ ], 200[ ] from $[ ] to $[ ]
and (b) that it shall continue to be a party in all respect to the Credit
Agreement and the other Loan Documents.
[The [Borrower/Lender] shall pay the fee payable to the Administrative
Agent pursuant to SECTION ____ of the Credit Agreement.]
Very truly yours,
[ ]
By: _______________________________
Name: _______________________________
Title: _______________________________
E-1-1
Accepted and Agreed:
Wells Fargo Bank, National Association,
as Administrative Agent
By: ________________________________
Name: ________________________________
Title: ________________________________
Accepted and Agreed:
Callon Petroleum Company
By: ________________________________
Name: ________________________________
Title: ________________________________
E-1-2
EXHIBIT E-2
FORM OF ADDITIONAL LENDER CERTIFICATE
[_________], 200[___]
To: Wells Fargo Bank, National Association,
as Administrative Agent
The Borrower, the Administrative Agent and the other Lenders have
heretofore entered into that certain Amended and Restated Credit Agreement,
dated as of December 8, 2003 and amended and restated as of December 23, 2003,
as amended from time to time (the "Credit Agreement"). Capitalized terms not
otherwise defined herein shall have the meaning given to such terms in the
Credit Agreement.
This Additional Lender Certificate is being delivered pursuant to SECTION
___ of the Credit Agreement.
Please be advised that the undersigned has agreed (a) to become a Lender
under the Credit Agreement effective [ ], 200[ ] with a Commitment of $[ ] and
(b) that it shall be a party in all respect to the Credit Agreement and the
other Loan Documents.
This Additional Lender Certificate is being delivered to the
Administrative Agent together with (i) if the Additional Lender is a Foreign
Lender, any documentation required to be delivered by such Additional Lender
pursuant to SECTION 4.05(D) of the Credit Agreement, duly completed and executed
by the Additional Lender[, and (ii) an Administrative Questionnaire in the form
supplied by the Administrative Agent, duly completed by the Additional Lender].
[The [Borrower/Additional Lender] shall pay the fee payable to the
Administrative Agent pursuant to SECTION ___ of the Credit Agreement.]
Very truly yours,
[ ]
By: _______________________________
Name: _______________________________
Title:_______________________________
F-1
Accepted and Agreed:
Wells Fargo Bank, National Association,
as Administrative Agent
By: ________________________________
Name: ________________________________
Title: ________________________________
Accepted and Agreed:
Callon Petroleum Company
By: ________________________________
Name: ________________________________
Title: ________________________________
F-2
EXHIBIT 10.19
===============================================================================
MEDUSA SPAR AGREEMENT
AMONG
MURPHY EXPLORATION & PRODUCTION COMPANY-USA,
CALLON PETROLEUM OPERATING COMPANY
AND
OCEANEERING INTERNATIONAL, INC.
===============================================================================
TABLE OF CONTENTS
Page
ARTICLE I ORGANIZATION OF MEDUSA SPAR LLC...........................................2
1.1 Medusa Spar LLC............................................................2
1.2 Initial Capital Contributions..............................................2
ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF MURPHY AND CALLON...........4
2.1 Representations and Warranties.............................................4
2.2 Covenants..................................................................7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF OII...................................8
3.1 Organization of OII........................................................8
3.2 Authority..................................................................8
3.3 Availability of Funds......................................................9
3.4 Brokers or Finders..........................................................9
ARTICLE IV FINANCING AND OTHER MATTERS..............................................9
4.1 Deemed Value................................................................9
4.2 Commitment for Non-Recourse Financing.......................................9
4.3 Costs Prior to the Closing.................................................10
4.4 BBD Approval...............................................................
4.5 Release of the Bay Lien....................................................
ARTICLE V MEDUSA SPAR OPERATING AND PRODUCTION HANDLING AGREEMENT..................10
5.1 Medusa Spar Operating and Production Handling Agreement...................10
ARTICLE VI CLOSING.................................................................10
6.1 Closing Conditions........................................................10
6.2 Closing...................................................................13
6.3 Medusa Spar Contractors and Suppliers.....................................15
ARTICLE VII SURVIVIAL OR REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION...........15
7.1 Survival of Representations and Warranties................................15
7.2 Indemnification by Transaction Parties....................................15
7.3 Matters Involving Third Parties...........................................16
7.4 Limitation on Damages.....................................................17
7.5 Exclusive Remedies........................................................18
ARTICLE VIII GENERAL PROVISIONS....................................................18
8.1 Notices...................................................................18
8.2 Expenses..................................................................19
8.3 Interpretation............................................................19
8.4 Counterparts..............................................................19
8.5 Entire Agreement; Assignment..............................................19
8.6 Severability..............................................................19
8.7 Governing Law; Jurisdiction; Venue........................................20
8.8 Rules of Construction.....................................................20
8.9 Survival..................................................................20
8.10 Medusa JOA................................................................20
8.11 News Releases.............................................................21
i
INDEX OF EXHIBITS
EXHIBIT "A" Dedicated Blocks
EXHIBIT "B" Certificate of Formation of Medusa Spar LLC
EXHIBIT "C" LLC Agreement
EXHIBIT "D" Murphy Assignment
EXHIBIT "E" Callon Assignment
EXHIBIT "F" Callon Third Party Encumbrances
EXHIBIT "G" Medusa Spar Operating and Production Handling Agreement
EXHIBIT "H" Form of Certificate from Murphy and Callon as Required by
Section 6.1(a) (viii)
ii
MEDUSA SPAR AGREEMENT
THIS MEDUSA SPAR AGREEMENT (this "Agreement") is made and entered into
among MURPHY EXPLORATION & PRODUCTION COMPANY-USA, a Delaware corporation
("Murphy"), CALLON PETROLEUM OPERATING COMPANY, a Delaware corporation
("Callon"), and OCEANEERING INTERNATIONAL, INC., a Delaware corporation ("OII"),
and shall be effective as of the date (the "Effective Date") on which this
Agreement has been fully executed by Murphy, Callon and OII (each a "Party", and
hereinafter referred to collectively as the "Parties" or the "Members").
RECITALS
A. Murphy is the successor owner of certain assets that Murphy acquired
from Murphy Exploration & Production Company, a Delaware corporation ("MEPCO"),
and as such successor, Murphy is the owner of an undivided 60% interest in that
certain truss spar, hull, buoyancy cans, deck, facilities, equipment and
moorings located on Mississippi Canyon Block 582, Outer Continental Shelf, Gulf
of Mexico, USA (the "Medusa Spar"), being constructed under that certain EPCI
contract between J. Ray McDermott, Inc. and MEPCO, dated February 23, 2001, as
amended (the "EPCI Contract"), and Callon is the owner of an undivided 15%
interest in the Medusa Spar.
B. British-Borneo Deepwater, LLC ("BBD") is the successor owner of
certain assets that BBD acquired from British-Borneo Petroleum, Inc. ("BBP"),
and as such successor, BBD owns an undivided 25% interest in the Medusa Spar,
and the Medusa Spar is subject to, and is to be operated under, that certain
Joint Operating Agreement, dated February 1, 1999, among MEPCO, Callon and BBP
(hereinafter referred to as the "Medusa JOA").
C. Murphy and Callon desire to contribute their collective undivided
75% interest in the Medusa Spar to a new Delaware limited liability company
("Medusa Spar LLC"), and in return for such contribution, acquire a 50%
membership interest in Medusa Spar LLC in the proportions of 40% to Murphy and
10% to Callon.
D. OII desires to make a cash contribution to Medusa Spar LLC as set
forth hereinafter, and in return for such contribution, acquire a 50% membership
interest in Medusa Spar LLC.
E. The Parties intend to arrange for non-recourse financing for Medusa
Spar LLC (the "Non-Recourse Financing"), in an amount equal to 50% of the Deemed
Value (as defined hereinafter).
F. Murphy, Callon and OII further desire to enter into an agreement
with Medusa Spar LLC for, among other things, the operation of the Medusa Spar,
and the production and the handling of the production of Murphy and Callon, from
those certain Mississippi Canyon Blocks (the "Dedicated Blocks") as listed on
Exhibit "A" attached hereto and made a part hereof.
NOW THEREFORE, in consideration of the covenants, provisions and
representations set forth herein, and for other good and valuable consideration,
the Parties hereto, intending to be legally bound, hereby agree as follows:
1
ARTICLE I
ORGANIZATION OF MEDUSA SPAR LLC
1.1 Medusa Spar LLC.
(a) Not less than five (5) business days prior to the Closing (as
defined in Section 6.2 hereinafter), the Parties shall cause the
formation of Medusa Spar LLC by filing a certificate of formation
(hereinafter referred to as the "LLC Formation Document") with the
Secretary of State of the State of Delaware pursuant to the
Delaware Limited Liability Company Act. The LLC Formation Document
shall be in the form of, and shall contain the terms, conditions
and provisions as are more particularly set forth in, Exhibit B
attached hereto and is made a part hereof. As used in this
Agreement, the term "business day" shall mean any day other than a
Saturday, Sunday or legal holiday on which banks in New Orleans,
Louisiana are open for the conduct of a substantial part of their
commercial banking business.
(b) Murphy, Callon and OII shall each be a "Member" of Medusa Spar
LLC. OII shall have a membership interest in Medusa Spar LLC of
50%, Murphy shall have a membership interest in Medusa Spar LLC of
40%, and Callon shall have a membership interest in Medusa Spar
LLC of 10%.
(c) At the Closing, the Members shall execute an agreement
memorializing the affairs of Medusa Spar LLC and the conduct of
its business (the "LLC Agreement"). The LLC Agreement shall be in
the form of, and contain the terms, conditions and provisions as
are more particularly set forth in, Exhibit C attached hereto and
made a part hereof.
1.2 Initial Capital Contributions.
(a) At the Closing, each of the Members shall make an initial capital
contribution (the "Initial Capital Contribution") to Medusa Spar
LLC as follows:
(i) Murphy shall assign and transfer to Medusa Spar LLC: an
undivided sixty percent (60%) ownership in the Medusa Spar,
free and clear of any liens, charges or other encumbrances,
except for the lien and security interest granted pursuant to
Section 6.3 of the Medusa JOA, which assignment (the "Murphy
Assignment") shall be in the form of, and contain such terms,
2
conditions and provisions as are more particularly set forth
in, Exhibit D attached hereto and made a part hereof;
(ii) Callon shall assign and transfer to Medusa Spar LLC: an
undivided fifteen percent (15%) ownership in the Medusa Spar,
free and clear of any liens, charges or other encumbrances,
except for (A) the lien and security interest granted pursuant
to Section 6.3 of the Medusa JOA, and (B) the Callon Third
Party Encumbrances (as defined hereinafter), which assignment
(the "Callon Assignment") shall be in the form of, and contain
such terms, conditions and provisions as are more particularly
set forth in, Exhibit E attached hereto and made a part
hereof; and
(iii) OII shall assign and transfer to Medusa Spar LLC a cash
amount (the "OII Initial Capital Cash Contribution") equal to
$83,625,000.00, less the sum of (A) 50% of the amount of the
Non-Recourse Financing, (B) $120,000.00 incurred by OII for
out-of-pocket expenses for due diligence, and (C) $30,000.00
incurred by OII for the fees and costs for independent
engineers retained by OII to provide the certification set
forth in Section 6.1(a)(vii), as evidenced by applicable
documentation that is acceptable to Murphy and Callon in all
reasonable respects.
(iv) Each Member shall contribute its percentage share of the
required initial working capital as determined by unanimous
vote of the Members.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF MURPHY AND CALLON
2.1 Representations and Warranties.
Except as otherwise stated in this Article II, Murphy and Callon hereby
respectively represent and warrant, each as to itself, to OII, as
of the Effective Date and as of the Closing, that:
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(a) Murphy is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Murphy has
the power to execute, deliver and perform this Agreement and to
own its undivided interest in the Medusa Spar.
(b) Callon is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Callon has
the power to execute, deliver and perform this Agreement and to
own its undivided interest in the Medusa Spar.
(c) Each of Murphy and Callon has all requisite authority to execute
and deliver this Agreement, to perform its obligations hereunder
and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been
duly authorized by all necessary formal action on the part of
Murphy and Callon. No vote of, or consent by, the holders of any
class or series of stock or other equity issued by Murphy or
Callon is necessary to authorize the execution and delivery by
Murphy or Callon of this Agreement or the consummation by it of
the transactions contemplated herein. This Agreement has been duly
executed and delivered by Murphy and Callon and constitutes the
legal, valid and biding obligation of Murphy and Callon,
enforceable against each such Party in accordance with its terms,
except as the enforcement hereof may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium and other similar laws now
or hereafter in effect relating to creditors' rights generally and
(b) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
(d) Neither Murphy nor Callon nor any of its subsidiaries has entered
into any agreement or arrangement entitling any agent, broker,
investment banker, financial advisor or other firm or entity to
any broker's or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated in
this Agreement, except for any fees associated with the
Non-Recourse Financing.
(e) Murphy and Callon, each as to its own interest, have valid and
merchantable title in and to an undivided seventy-five percent
(75%) ownership interest in and to the Medusa Spar (the
"Murphy/Callon Spar Interest").
(f) The Murphy/Callon Spar Interest is free and clear of any liens,
charges or other encumbrances of any kind whatsoever, other than
(i) the liens and security interests granted by Murphy and Callon
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pursuant to Section 6.3 of the Medusa JOA, (ii) the lien and
privilege being claimed by Berry Contracting, LP d/b/a Bay Ltd.
which is more particularly described in (A) that certain Statement
of Privilege recorded in the records of Plaquemines Parish,
Louisiana, in MOB 370, page 228, under Entry No. 03004606, as
amended by that certain Amendment to Statement of Privilege
recorded in the records of Plaquemines Parish, Louisiana, in MOB
372, page 531, under Entry No. 03005125, (B) that certain UCC-1
financing statement filed in the UCC records of Plaquemines
Parish, Louisiana, under Original File No. 38-03-532, as amended,
(C) that certain UCC-1 financing statement filed with the Delaware
Department of State, UCC Filing Section, under Initial Filing
Number 3164184 7, as amended, and (D) that certain Statement of
Privilege and UCC-1 financing statement filed with the Minerals
Management Service on June 27, 2003, as amended (the "Bay Lien"),
which Bay Lien will be released on or before August 29, 2003, and
(iii) the liens and security interests granted by Callon (the
"Callon Third Party Encumbrances") disclosed on Exhibit "F"
attached hereto and made a part hereof, which Callon Third Party
Encumbrances burdening Callon's undivided fifteen percent (15%)
ownership interest in and to the Medusa Spar and the right to
dedicate Callon's working interest production from the Dedicated
Blocks for handling on the Medusa Spar will be released or
subordinated at or prior to the Closing.
(g) The Medusa Spar and production risers have been operated and
maintained by Murphy on behalf of the working interest owners
under the Medusa JOA in a safe and workmanlike manner in
accordance with all applicable laws and regulations and the
generally accepted standards of petroleum industry practices for a
prudent operator.
(h) The installation of the export pipelines attached to the Medusa
Spar has been completed and, to the best of Murphy's and Callon's
knowledge, have been operated and maintained by Shell Pipeline
Company LP and VK Deepwater Gathering Company LLC in a safe and
workmanlike manner in accordance with all applicable laws and
regulations and the generally accepted standards of petroleum
industry practices for a prudent operator. As used in this
Agreement, "knowledge" means the actual (and not constructive or
imputed) knowledge of an officer of Murphy or Callon, as the case
may be.
(i) Murphy has obtained and maintained in force and effect all
licenses, permits, franchises, consents, privileges and other
authorizations issued by any government or authority having
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jurisdiction related to the ownership and operation of the Medusa
Spar.
(j) Murphy, as operator under the Medusa JOA, represents that, except
for the amount being claimed with respect to the Bay Lien, all
amounts due and payable to manufacturers, suppliers or contractors
that constructed, equipped or installed the Medusa Spar or that
otherwise provided goods, supplies or services in relation to the
Medusa Spar have been paid.
(k) Murphy and Callon have provided to OII all material documents,
contracts and agreements relating to the transfer of the
Murphy/Callon Spar Interest.
(l) All obligations or requirements under the Medusa JOA or any other
applicable agreement or document have been satisfied in order to
mortgage, pledge or otherwise encumber the Murphy/Callon Spar
Interest.
(m) Murphy and Callon has each paid as due all charges authorized
under the Medusa JOA, and Murphy and Callon, each as to itself,
has not received a notice that it is in default for non-payment of
any such charges pursuant to Section 6.4 of the Medusa JOA.
(n) Murphy, as operator under the Medusa JOA, has paid as due (a)
rentals, royalties and other fees as required under Section 19.2
of the Medusa JOA, and (b) taxes and assessments as required under
Article 20 of the Medusa JOA and Callon, as non-operator has paid
any such charge that has been billed pursuant to the Medusa JOA.
(o) Except for (i) the liens and security interests granted by Murphy
and Callon pursuant to Section 6.3 of the Medusa JOA, (ii) the
Callon Third Party Encumbrances, (iii) the Bay Lien, which will be
released on or before August 29, 2003, and (iv) the Non-Recourse
Financing contemplated in this Agreement, neither Murphy nor
Callon shall have allowed any lien, charge or other encumbrance to
attach to or burden its interest under the Medusa JOA, its working
interests in the Dedicated Blocks, or its share of hydrocarbon
production from the Dedicated Blocks.
(p) Neither Murphy nor Callon shall have (i) assigned, or otherwise
transferred, all or any portion of its rights or obligations under
the Medusa JOA, (ii) made a non-consent election under the Medusa
JOA that would reduce its interest or rights in or to the Medusa
Spar, (iii) proposed or elected to withdraw from the Medusa JOA,
or (iv) made any dedication of the reserves in and under the
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Dedicated Blocks to any processing agreement other than those
agreements contemplated herein.
(q) Except for the Bay Lien, which will be released on or before
August 29, 2003, there are no claims, demands, litigation,
arbitrations, or other proceedings on-going, pending or threatened
in writing in relation to the Dedicated Blocks.
(r) The Medusa JOA is in full force and effect. Except for the Bay
Lien, which will be released on or before August 29, 2003, there
are no claims, demands, litigation, arbitrations, or other
proceedings on-going, pending or threatened in writing in relation
to the Medusa JOA or the Medusa Spar.
(s) The Medusa Spar does not constitute "qualified property" within
the meaning of Section 168(k)(2) of the United States Internal
Revenue Code.
(t) Except for the representations and warranties expressly contained
in this Article II, neither Murphy nor Callon nor any other person
or entity acting on behalf of Murphy or Callon makes any
representation or warranty, express or implied.
2.2 Covenants.
Prior to the Closing:
(a) Murphy and Callon shall use their good faith efforts to obtain the
right to provide OII promptly after provision or receipt, but
without duplication, with a copy of any proposal or notice of any
type, including, without limitation, AFEs, Plans and Budgets,
given or received pursuant to the Medusa JOA that relates to or
may affect, directly or indirectly, the ownership, operation, use
or condition of the Medusa Spar or that relates to or may affect,
directly or indirectly, Murphy's or Callon's rights in or to the
Medusa Spar.
(b) Prior to casting a vote, making an election, granting or
withholding approval, or otherwise taking any action pursuant to
the Medusa JOA which relates to or may affect, directly or
indirectly, the ownership, operation, use or condition of the
Medusa Spar or that relate to or may affect, directly or
indirectly, Murphy's or Callon's rights in or to the Medusa Spar,
Murphy and Callon shall each consult with OII.
(c) Murphy and Callon shall each use its commercially reasonable
efforts not to take any action that would have a direct adverse
effect on the ownership, operation, use or condition of the Medusa
7
Spar, other than such actions relating to human health, safety,
the environment or otherwise that would be taken by a prudent
operator under generally accepted standards of petroleum industry
practices.
(d) Murphy and Callon shall, but without duplication, promptly notify
OII of all material developments related to the Medusa Spar. As
used in this Section 2.2 (d), "material" means one or more events,
occurrences, changes or effects which, individually or in the
aggregate, has had or could be reasonably expected to have an
adverse effect or impact on any Party's ability to consummate the
transactions contemplated by this Agreement, in accordance with
the terms of this Agreement.
(e) Murphy and Callon shall, but without duplication, promptly notify
OII of any on-going, pending or threatened claim, demand,
litigation, arbitration or other proceeding related to the federal
oil and gas leases covered by the Medusa JOA, the Medusa JOA, or
the Medusa Spar.
(f) Murphy, Callon and OII shall each execute and deliver at the
Closing such documents as may be required by lenders in order to
obtain the Non-Recourse Financing.
(g) Murphy and Callon shall obtain the release of the Bay Lien on or
before August 29, 2003.
(h) Murphy and Callon shall each use its reasonable efforts to obtain
on or before August 29, 2003, a written amendment to the Medusa
JOA, signed by Murphy, Callon and BBD, and approved by OII,
evidencing to the reasonable satisfaction of all Parties hereto,
BBD's approval of the transactions contemplated by this Agreement
(the "BBD Approval").
(i) Neither Murphy or Callon shall claim (directly or indirectly) any
additional allowance for depreciation under Section 168(k) of the
United States Internal Revenue Code with respect to the Medusa
Spar.
(j) Murphy and Callon shall each cause its representations and
warranties to be true, correct and accurate in all respects as of
the Closing, and neither shall take any action that would cause a
representation and warranty to be untrue, incorrect or inaccurate.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF OII
OII represents and warrants to Murphy and Callon, as of the
Effective Date and as of the Closing, that:
3.1 Organization of OII.
OII is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. OII has the corporate power to
own, lease and operate its properties and to carry on its business as now being
conducted.
3.2 Authority.
OII has all requisite authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary formal action on the part of OII. No vote of, or
consent by, the holders of any class or series of stock or other equity issued
by OII is necessary to authorize the execution and delivery by OII of this
Agreement or the consummation by it of the transactions contemplated herein.
This Agreement has been duly executed and delivered by OII and constitutes the
legal, valid and binding obligation of OII, enforceable against OII in
accordance with its terms, except as the enforcement hereof may be limited by
(a) bankruptcy, insolvency, reorganization, moratorium or other similar laws now
or hereafter in effect relating to creditors' rights generally and (b) general
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
3.3 Availability of Funds.
OII currently has access to sufficient immediately available funds in
cash or cash equivalents and will at the Closing have sufficient immediately
available funds, in cash, to pay the OII Initial Capital Cash Contribution and
to pay any other amounts payable pursuant to this Agreement and to effect the
transactions contemplated in this Agreement.
3.4 Brokers or Finders.
Neither OII nor any of its subsidiaries has entered into any agreement
or arrangement entitling any agent, broker, investment banker, financial advisor
or other firm or entity to any broker's or finder's fee or any other commission
or similar fee (collectively, "Commissions") in connection with any of the
transactions contemplated in this Agreement other than Convergent Energy Group
LLC (hereinafter referred to as "OII's Broker") which has heretofore acted, and
shall hereafter continue to act, for and on behalf of OII. OII represents and
warrants to Murphy and Callon that there will be no Commissions payable by
Murphy and/or Callon in connection with this Agreement or any of the
transactions contemplated by this Agreement by reason of any dealings,
negotiations or communications with OII's Broker.
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ARTICLE IV
FINANCING AND OTHER MATTERS
4.1 Deemed Value.
As used in this Agreement, the term "Deemed Value" shall mean
$167,250,000.00.
4.2 Commitment for Non-Recourse Financing.
The Parties intend to obtain the Non-Recourse Financing for Medusa Spar
LLC in an amount equal to 50% of Deemed Value. Collateral for the Non-Recourse
Financing may include a security interest in the Parties' interests in Medusa
Spar LLC, as well as accounts receivable, contracts, cash accounts, guarantees,
insurances, pledges and cash flows of Medusa Spar LLC. The terms and conditions
of the Non-Recourse Financing shall require the unanimous approval by all of the
Parties. Should the Parties, despite the good-faith efforts of the Parties, be
unable to obtain a written commitment letter (or similar document) for the
Non-Recourse Financing by not later than September 30, 2003, then any Party may
terminate this Agreement by providing written notice thereof to the other
Parties, but only if the Party wishing to terminate this Agreement is not in
material breach of this Agreement, and upon such termination, the Parties hereto
shall have no further obligation or liability to each other hereunder. If the
commitment letter (or similar document) for the Non-Recourse Financing is not
obtained because of a Party's material breach of this Agreement, the other
Parties shall be entitled to all remedies which they may have at law or in
equity.
4.3 Costs Prior to the Closing.
Murphy and Callon will be responsible for the payment of all costs
incurred in connection with their combined undivided 75% interest in the Medusa
Spar prior to the Closing.
4.4 BBD Approval.
If the BBD Approval is not obtained on or before August 29, 2003, then
any Party may terminate this Agreement by providing written notice thereof to
the other Parties, but only if the Party wishing to terminate this Agreement is
not in material breach of this Agreement.
4.5 Release of the Bay Lien.
If the Bay Lien is not released on or before August 29, 2003, then any
Party may terminate this Agreement by providing written notice thereof to the
other Parties, but only if the Party wishing to terminate this Agreement is not
in material breach of this Agreement.
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ARTICLE V
MEDUSA SPAR OPERATING AND PRODUCTION HANDLING AGREEMENT
5.1 Medusa Spar Operating and Production Handling Agreement.
At the Closing, Murphy, Callon, OII and Medusa Spar LLC will enter into
an agreement pursuant to which, among other things: (i) the Parties will agree
on the manner in which the rights and obligations under the Medusa JOA related
to the Medusa Spar will be exercised and fulfilled, (ii) Murphy will operate the
Medusa Spar, (iii) Murphy and Callon will dedicate for handling on the Medusa
Spar, and Medusa Spar LLC will handle, the production of Murphy and Callon from
the Dedicated Blocks as listed on Exhibit "A" attached hereto, and (iv) Medusa
Spar LLC may handle on the Medusa Spar third party production (the "Medusa Spar
Operating and Production Handling Agreement"). The Medusa Spar Operating and
Production Handling Agreement shall be in the form of Exhibit G attached hereto
and made a part hereof.
ARTICLE VI
CLOSING
6.1 Closing Conditions.
(a) As used in this Agreement, the term "Closing Conditions
Satisfaction Date" shall mean the first date on which all of the
following conditions have been satisfied:
(i) the EPCI Contract shall have been completed, or substantially
completed, as the case may be, and Murphy and Callon shall
have either finally accepted the Medusa Spar and production
risers from the applicable contractors, or, in the case of
such substantial completion, such final acceptance shall be
conditioned on the completion of minor or inconsequential
matters that remain to be finished, and/or the correction of
minor defects or errors in the work on the Medusa Spar that
need to be remedied;
(ii) the export pipelines from the Medusa Spar shall have been
accepted and placed in operation by Shell Oil Pipeline LC and
VK Deepwater Gathering Company LLC ;
(iii) all permits and authorizations required for the operation of
the Medusa Spar, production risers and pipelines shall have
been obtained;
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(iv) Murphy and Callon shall have conducted production operations
through the Medusa Spar for a period of not less than ten (10)
days after the first date of such production operations
without significant interruption or underperformance due to
equipment problems;
(v) no material default by Murphy, Callon or OII shall have
occurred and be continuing under (a) this Agreement, (b) any
lease or operating agreement for any of the Dedicated Blocks
listed on Exhibit "A" or (c) any construction or installation
contract for the construction or installation of the Medusa
Spar, production risers, or related export pipelines;
(vi) there are no claims, demands, litigation, arbitrations, or
other proceedings on-going, pending or threatened in writing
in relation to the transactions contemplated by this
Agreement;
(vii) Medusa Spar LLC shall have received a certification from
independent engineers retained by OII that the matters
described in items (i) through (iv) and (v) (c) above have
occurred, unless waived by OII;
(viii) Medusa Spar LLC shall have received a certification from
Murphy and Callon that the conditions described in items (i)
through (vi) have occurred, which certification shall be in
the form of, and shall contain such terms, conditions and
provisions as are more particularly set forth in, Exhibit H
attached hereto and made a part hereof;
(ix) Murphy, Callon and OII and/or Medusa Spar LLC shall have
entered into a credit agreement (or similar financing
document) for the Non-Recourse Financing;
(x) the leases for the Dedicated Blocks shall be in full force and
effect;
12
(xi) the Callon Third Party Encumbrances shall have been released
or subordinated as represented in Section 2.1(f).
Each Party shall use commercially reasonable efforts to cause the
conditions set out above to be satisfied in an expeditious manner, and
no Party shall take any action that would cause the conditions not to
be satisfied.
(b) In addition to the satisfaction of the conditions set out in
Section 6.1(a), the obligation of OII to proceed with Closing is
subject to the satisfaction at or prior to the Closing of all of
the following conditions, any one or more of which may be waived,
in whole or in part, by OII:
(i) Murphy and Callon shall each have complied in all respects
with each of its covenants contained in this Agreement, and
each representation and warranty contained in Section 2.1
shall be true, correct and accurate;
(ii) OII shall have received a certificate, dated as of Closing,
of an officer of each of Murphy and Callon certifying as to
the matters specified in Section 6.1(b)(i);
(iii) the matters set out in Section 6.2(b) shall have occurred;
(iv) the Bay Lien shall have been released; and
(v) the BBD Approval shall have been obtained.
(c) In addition to the satisfaction of the conditions set out in
Section 6.1(a), the obligation of each of Murphy and Callon to
proceed with Closing is subject to the satisfaction at or prior to
the Closing of all of the following conditions, any one or more of
which may be waived, in whole or in part, by Murphy or Callon:
(i) OII shall have complied in all respects with each of its
covenants contained in this Agreement, and each representation
and warranty of OII contained in Section 3.1 shall be true,
correct and accurate;
(ii) Murphy and Callon shall each have received a certificate,
dated as of Closing, of an officer of
13
OII certifying as to the matters specified in Section
6.1(c)(i);
(iii) the matters set out in Section 6.2(b) shall have occurred;
(iv) the Bay Lien shall have been released; and
(v) the BBD Approval shall have been obtained.
(d) To the extent that a matter set out in Section 6.2(b) is within
the control of OII, and neither Murphy or Callon is in breach of
this Agreement and both are ready, willing and able to perform,
OII shall use its best efforts to cause the matter to occur. To
the extent that a matter set out in Section 6.2(b) is within the
control of Murphy or Callon, and OII is not in breach of this
Agreement and is ready, willing and able to perform, Murphy and
Callon shall each use its best efforts to make the matter occur.
6.2 Closing.
(a) The closing of the transactions contemplated by this Agreement
(the "Closing") shall occur on a date that is not later than the
fifth (5th) business day after the Closing Conditions Satisfaction
Date. The Closing shall be held at such location, and on such date
(the "Closing Date"), as may be specified by written notice from
Murphy to Callon and OII not less than three (3) days prior to the
Closing Date. If Closing has not occurred on or before December
15, 2003 despite the good-faith efforts of the Parties, any Party
may terminate this Agreement by providing written notice thereof
to the other Parties, but only if the Party wishing to terminate
this Agreement is not in material breach of this Agreement. If the
Closing does not occur because of a Party's material breach of
this Agreement or because of a Party's failure or refusal to close
that is not permitted by the terms of this Agreement, the other
Parties shall be entitled to all remedies which they may have at
law or in equity.
(b) On the Closing Date, the Closing shall take place as follows:
(i) Murphy, Callon and OII shall execute the LLC Agreement and, by
virtue of the execution of the Murphy Assignment by Murphy and
the Callon Assignment by Callon, Murphy and Callon shall make
their respective Initial Capital Contributions to Medusa Spar
LLC as set forth in Section 1.2(a) (i) and (ii) above;
14
(ii) OII shall pay to Medusa Spar LLC the OII Initial Capital Cash
Contribution as specified in Section 1.2 (a)(iii) above;
(iii) Murphy, Callon and OII shall execute and/or deliver such
documents as may be required to obtain the Non-Recourse
Financing;
(iv) the Non-Recourse Financing shall fund;
(v) Murphy, Callon, OII and Medusa Spar LLC shall execute the
Medusa Spar Operating and Production Handling Agreement; and
(vi) Medusa Spar LLC will distribute the sum of the OII Initial
Capital Cash Contribution and the funds received from the
Non-Recourse Financing to Murphy and Callon in the respective
proportions of 80% and 20%.
(c) At the Closing, Murphy and Callon shall each deliver to OII:
(i) a Secretary's Certificate or Assistant Secretary's Certificate
certifying as to the due authorization of the signatory to the
documents signed at the Closing; and
(ii) the certificate contemplated by Section 6.1(b)(ii).
(d) At the Closing, OII shall deliver to each of Murphy and Callon:
(i) a Secretary's Certificate or Assistant Secretary's Certificate
certifying as to the due authorization of the signatory to the
documents signed at the Closing; and
(ii) the certificate contemplated by Section 6.1(c)(ii).
6.3 Medusa Spar Contractors and Suppliers.
Any amounts payable to manufacturers, suppliers or contractors that
constructed, equipped or installed the Medusa Spar or that otherwise provided
goods, supplies or services in relation to the Medusa Spar shall remain the
responsibility of Murphy and Callon and shall be paid by Murphy and Callon when
due, provided that, subject to Sections 2.2(g), 4.5, 6.1(b)(iv) and 6.1(c)(iv),
the amount being claimed with respect to the Bay Lien shall not be paid until
the amount in dispute has been resolved to the satisfaction of all parties
having an interest in such
15
dispute, including, without limitation, Murphy and Callon. Murphy and Callon
will provide evidence satisfactory to OII of full payment of all such amounts.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
7.1 Survival of Representations and Warranties.
All of the Parties' representations, warranties, covenants, and
agreements in this Agreement or in any certificate or instrument delivered
pursuant to this Agreement shall survive the Closing of the transactions
contemplated in this Agreement.
7.2 Indemnification by Transaction Parties.
Each of the Parties (a "Transaction Indemnifying Party") shall
reimburse, indemnify, defend and hold harmless the other Parties from and
against any and all claims, demands, lawsuits, liabilities, judgments, damages,
awards, fines, costs, expenses, fees, penalties, deficiencies, losses, amounts
paid or incurred in defense and/or settlement and related expenses, including
without limitation interest, court and other legal proceeding costs, reasonable
fees of attorneys, accountants, and other experts or other expenses of
litigation or other proceedings or of any claim, default or assessment
(collectively, "Losses") incurred by each of the other Parties, and its and
their officers, directors, employees, and agents (a "Transaction Indemnified
Party"), in each case net of insurance proceeds if and when received by such
Transaction Indemnified Party in connection with such Losses, directly or
indirectly as a result of any of the following events (an "Indemnification
Event"):
(a) any inaccuracy in, or breach of, a representation or warranty of
the Transaction Indemnifying Party contained herein (or in any
certificate or instrument delivered by the Transaction
Indemnifying Party pursuant to this Agreement);
(b) any failure by the Transaction Indemnifying Party to perform or
comply with any of its covenants or agreements contained herein;
and/or
(c) third party claims related to ownership, operation, use, or
condition of the Medusa Spar prior to Closing, regardless of when
any such claim arises, in which case Murphy and Callon shall each
be a Transaction Indemnifying Party, and Medusa Spar LLC and OII,
and its and their officers, directors, employees and agents, shall
be the Transaction Indemnified Party;
provided, however, that no indemnification shall be owed by a Transaction
Indemnifying Party to a Transaction Indemnified Party under this Section 7.2,
and no amount of indemnity shall be payable by a Transaction Indemnifying Party
in the case of a claim by any Transaction Indemnified Party under this Section
7.2, unless and until an Indemnified Event has occurred and
16
is continuing for a period of thirty (30) business days after written notice
thereof given by the Transaction Indemnified Party to the Transaction
Indemnifying Party in accordance with Section 8.1 of this Agreement.
7.3 Matters Involving Third Parties.
(a) If any third party shall notify any Party entitled to
indemnification under Section 7.2 (the "Indemnified Party") with
respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against any other Party hereto (the
"Indemnifying Party") under this Article VII, then the Indemnified
Party shall promptly notify (and in any event by the sooner to
occur of (i) 10 days after receipt of notice by it, and (ii) five
days prior to the date a responsive pleading is due (which
notification shall be made by either facsimile or overnight
delivery pursuant to Section 8.1 hereof) each Indemnifying Party
thereof in writing; provided, however, that no delay on the part
of the Indemnified Party in notifying any Indemnifying Party shall
relieve the Indemnifying Party from any obligation hereunder
unless (and then solely to the extent) the Indemnifying Party
thereby is prejudiced.
(b) Any Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim with counsel of
its choice reasonably satisfactory to the Indemnified Party so
long as (i) the Indemnifying Party promptly notifies the
Indemnified Party in writing that the Indemnifying Party will
indemnify the Indemnified Party, to the extent indemnification is
provided for under Section 7.2, (ii) the Indemnifying Party
provides the Indemnified Party with evidence reasonably acceptable
to the Indemnified Party that the Indemnifying Party will have the
financial resources to defend against the Third Party Claim and
fulfill its indemnification obligations hereunder, and (iii) the
Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 7.3(b) above, (i) the
Indemnified Party may retain separate co-counsel at its sole cost
and expense and participate in the defense of the Third Party
Claim, (ii) the Indemnified Party will not consent to the entry of
any judgment or enter into any settlement with respect to the
Third Party Claim without the prior written consent of the
Indemnifying Party (which consent shall not unreasonably be
withheld), (iii) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to
the Third Party Claim unless a written agreement is obtained
releasing the Indemnified Party from all liability thereunder,
(iv) the Indemnifying Party will
17
not consent to the entry of any judgment or enter into any
settlement with respect to a Third Party Claim, which involves an
injunction or other equitable relief, without the consent of the
Indemnified Party, which consent will not be unreasonably
withheld, and (v) the Indemnifying Party will not consent to the
entry of any judgment or enter into any settlement with respect to
a Third Party Claim which will, in the good faith judgment of the
Indemnified Party, likely establish a precedential custom or
practice adverse to the continuing business interests of the
Indemnified Party.
(d) In the event any of the conditions in Section 7.3(b) above is or
becomes unsatisfied, however, (i) the Indemnified Party may defend
against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any
manner it may deem appropriate (and the Indemnified Party need not
consult with, or obtain any consent from, any Indemnifying Party
in connection therewith), (ii) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the
costs of defending against the Third Party Claim (including
attorneys' fees and expenses), provided that the Third Party Claim
is subject to indemnification under Section 7.2 and (iii) the
Indemnifying Parties will remain responsible for any Losses the
Indemnified Party may incur to the extent provided in Section 7.2.
7.4 Limitation on Damages.
Except for such damages that must be paid by an Indemnified Party to a
third party, no Party shall be entitled to indemnification under this Article
VII for incidental, indirect, consequential, exemplary or punitive damages;
provided, however that it is understood and agreed that diminution in value of
the Medusa Spar shall constitute actual damages.
7.5 Exclusive Remedies.
The remedies provided in this Article VII constitute the sole and
exclusive remedies available to each of the Parties for recoveries against the
other Parties for breaches or failures to comply with or non-fulfillments of the
representations, warranties, covenants and agreements of this Agreement or in
any certificate or document furnished to any of the Parties by any other Party
pursuant to this Agreement except that nothing in this Agreement shall limit the
right of a Party to pursue any appropriate remedy at equity, including specific
performance for breach of any of the covenants of any other Party contained
herein or rescission based upon allegations of fraud or willful misconduct in
connection with this Agreement.
18
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed given when delivered by hand, or when sent by electronic
facsimile transmission (with acknowledgement of complete transmission), or on
the first business day after delivery to any overnight commercial delivery
service, freight prepaid, or fourteen (14) days after being mailed by registered
or certified mail (return receipt requested), postage prepaid, and addressed to
the Parties at the following addresses (or at such other address for a Party as
shall be specified by like notice):
(a) if to Murphy, to:
Murphy Exploration & Production Company-USA
131 South Robertson, New Orleans, LA 70112
Attention: Steve Jones, General Manager-Land
Facsimile: 504-561-2551
(b) if to Callon, to:
Callon Petroleum Operating Company
200 North Canal Street, Natchez, MS 39120
Attention: Dee A. Newman, Land Manager
Facsimile: 601-446-1362
(c) if to OII, to
Oceaneering International, Inc.
11911 FM 529, Houston, TX 77041-3011
Attention: Fred E. Shumaker, Vice President and General Manager-MOPS
Facsimile: 713-329-4825
8.2 Expenses.
In the event the transactions contemplated in this Agreement are not
consummated, all fees and expenses incurred in connection with the transactions
contemplated in this Agreement including, without limitation, all legal,
accounting, financial advisory, consulting and all other fees and expenses of
third parties ("Third Party Expenses") incurred by a Party in connection with
the negotiation and implementation of the terms and conditions of this Agreement
and the transactions contemplated hereby, shall be the obligation of the
respective Party incurring such fees and expenses, provided, however, that in
the event the transactions contemplated by this Agreement are not consummated as
a result of the willful misconduct of any of the Parties (which willful
misconduct shall not include failure of a condition to be satisfied where such
Party has used reasonable commercial efforts to satisfy such condition), and in
addition to all other remedies at law and in equity, then the Party who has
committed such
19
willful misconduct will reimburse to the other Parties all such hird Party
Expenses incurred in connection with such transactions immediately upon demand
therefor.
8.3 Interpretation.
The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. The term "Person" means any individual, corporation, partnership,
association, trust, limited liability company or partnership, unincorporated
organization, joint venture, other legal entity or group.
8.4 Counterparts.
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that all Parties need not
sign the same counterpart.
8.5 Entire Agreement; Assignment.
This Agreement, the schedules and Exhibits hereto, and the documents
and instruments and other agreements among the Parties hereto referenced herein:
(a) constitute the entire agreement among the Parties with respect to the
subject matter hereof and supersede all prior agreements (including that certain
Medusa Spar Ownership and Operation Letter of Intent, dated April 29, 2003, as
amended, among Murphy, Callon and OII) and understandings, both written and
oral, among the Parties with respect to the subject matter hereof; (b) are not
intended to confer upon any other person any rights or remedies hereunder; and
(c) shall not be assigned by operation of law or otherwise except as otherwise
specifically provided, or with the written consent of each of the other Parties
hereto.
8.6 Severability.
In the event that any provision of this Agreement, or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
Parties hereto. The Parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
8.7 Governing Law; Jurisdiction; Venue.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Louisiana excluding any provisions of Louisiana
conflicts of law which would require application of the substantive laws of
another jurisdiction. Such law shall govern the validity, interpretation,
performance and breach of this Agreement. The Parties agree that any action,
proceeding or suit seeking to enforce any provision of, or based on any rights
of the Parties arising out of, this Agreement shall be brought in the Courts of
the State of Louisiana,
20
and further agree the United States District Court for the Eastern District of
Louisiana shall have exclusive jurisdiction to hear and determine any suit to
enforce the rights of the Parties under this Agreement. Each of the Parties
consents to the jurisdiction of such court (and of the appropriate Appellate
Courts), in an any such action, claim or proceeding and waives any objection to
venue. Each of the Parties further agrees that process may be served upon them
in any manner authorized by the laws of the State of Louisiana for such persons,
and waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and venue and such process. Further, in the
event jurisdiction is denied in the United States District Court for the Eastern
District of Louisiana, the Parties agree that any action, proceeding or suit may
be brought against any of the Parties in the 24th Judicial District Court for
the Parish of Jefferson, State of Louisiana, and each of the Parties consents to
the jurisdiction of such Court (and of the appropriate Appellate Courts) in any
such action or proceeding and waives and covenants not to assert or plead any
objection which they might otherwise have to such jurisdiction and venue.
8.8 Rules of Construction.
The Parties hereto agree that they have been represented by counsel
during the negotiation and execution of this Agreement and, therefore, waive the
application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against the
Party drafting such agreement or document.
8.9 Survival.
Articles VII and VIII shall survive termination of this Agreement.
8.10 Medusa JOA.
Each of the Parties hereto recognize that the Medusa Spar is subject
to, and is operated under the Medusa JOA. If any of the terms, conditions or
provisions in this Agreement, or in any document or agreement executed pursuant
to this Agreement, conflicts with any of the terms, conditions or provisions of
the Medusa JOA as they affect a working interest owner under the Medusa JOA that
is not a Party to this Agreement, the terms, conditions and provisions of the
Medusa JOA shall be controlling in application to such working interest owner.
8.11 News Releases.
The Parties hereto shall use reasonable efforts to unanimously agree
upon the timing and content of releases to the news media covering the signing
of this Agreement and/or the occurrence of the Closing. However, in the event
the Parties cannot unanimously agree upon either the timing and/or the content
of the news release within two (2) business days of such proposed news release,
then the Party proposing such news release shall be entitled to issue the news
release as so proposed.
[SIGNATURE PAGES FOLLOW]
21
IN WITNESS WHEREOF, Murphy has caused this Agreement to be signed by its duly
authorized officer, on the date set forth below, to be effective as of the
Effective Date.
MURPHY EXPLORATION & PRODUCTION COMPANY-USA
BY:
--------------------------------------------
NAME:
TITLE:
DATE:
--------------------------------------
22
IN WITNESS WHEREOF, Callon has caused this Agreement to be signed by its duly
authorized officer, on the date set forth below, to be effective as of the
Effective Date.
CALLON PETROLEUM OPERATING COMPANY
BY:
--------------------------------------------
NAME: DENNIS W. CHRISTIAN
TITLE: CHIEF OPERATING OFFICER
DATE: AUGUST 7, 2003
23
IN WITNESS WHEREOF, OII has caused this Agreement to be signed by its duly
authorized officer, on the date set forth below, to be effective as of the
Effective Date.
OCEANEERING INTERNATIONAL, INC.
BY:
----------------------------------------------
NAME: T. JAY COLLINS
TITLE: PRESIDENT AND CHIEF OPERATING OFFICER
Date:
----------------------------------------
24
EXHIBIT 10.20
CREDIT AGREEMENT
DATED AS OF
DECEMBER 18, 2003
AMONG
MEDUSA SPAR LLC,
AS BORROWER,
THE BANK OF NOVA SCOTIA,
AS ADMINISTRATIVE AGENT,
BANK ONE, N.A.
AND
SUNTRUST BANK,
AS SYNDICATION AGENTS,
AND
THE LENDERS PARTY HERETO
SOLE LEAD ARRANGER AND SOLE BOOKRUNNER
THE BANK OF NOVA SCOTIA
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above.......................................................................1
Section 1.02 Certain Defined Terms.....................................................................1
Section 1.03 Types of Loans...........................................................................19
Section 1.04 Terms Generally; Rules of Construction...................................................19
Section 1.05 Accounting Terms and Determinations; GAAP................................................19
ARTICLE II
THE TERM LOAN
Section 2.01 Term Loan................................................................................20
Section 2.02 Loans....................................................................................20
Section 2.03 Request for Term Loan....................................................................21
Section 2.04 Funding of Term Loan.....................................................................21
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES
Section 3.01 Repayment of Loans.......................................................................22
Section 3.02 Interest.................................................................................22
Section 3.03 Alternate Rate of Interest...............................................................23
Section 3.04 Prepayments..............................................................................23
Section 3.05 Fees.....................................................................................23
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; SHARING OF SET-OFFS
Section 4.01 Payments Generally; Pro Rata Treatment; Sharing of Set-offs..............................24
Section 4.02 Presumption of Payment by the Borrower...................................................25
Section 4.03 Certain Deductions by the Administrative Agent...........................................25
ARTICLE V
INCREASED COSTS; BREAK FUNDING PAYMENTS; TAXES; ILLEGALITY
Section 5.01 Increased Costs..........................................................................25
Section 5.02 Break Funding Payments...................................................................26
Section 5.03 Taxes....................................................................................26
Section 5.04 Mitigation Obligations...................................................................27
Section 5.05 Illegality...............................................................................28
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Effective Date...........................................................................28
i
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Organization; Powers.....................................................................32
Section 7.02 Authority; Enforceability................................................................32
Section 7.03 Approvals; No Conflicts..................................................................32
Section 7.04 Financial Condition; No Material Adverse Change..........................................33
Section 7.05 Litigation...............................................................................33
Section 7.06 Environmental Matters....................................................................34
Section 7.07 Compliance with the Laws and Agreements; No Defaults.....................................35
Section 7.08 Investment Company Act...................................................................35
Section 7.09 Public Utility Holding Company Act.......................................................35
Section 7.10 Taxes....................................................................................35
Section 7.11 ERISA....................................................................................36
Section 7.12 Disclosure; No Material Misstatements....................................................36
Section 7.13 Insurance................................................................................36
Section 7.14 Restriction on Liens.....................................................................37
Section 7.15 Subsidiaries.............................................................................37
Section 7.16 Location of Business and Offices.........................................................37
Section 7.17 Properties; Titles, Etc..................................................................37
Section 7.18 Maintenance of Properties................................................................38
Section 7.19 Swap Agreements..........................................................................38
Section 7.20 Use of Loans.............................................................................38
Section 7.21 Solvency.................................................................................39
Section 7.22 Medusa Spar Documents....................................................................39
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 Financial Statements; Ratings Change; Other Information..................................39
Section 8.02 Notices of Material Events...............................................................42
Section 8.03 Existence; Conduct of Business...........................................................42
Section 8.04 Payment of Obligations...................................................................42
Section 8.05 Performance of Obligations under Loan Documents and Medusa Spar Documents................42
Section 8.06 Operation and Maintenance of Properties..................................................43
Section 8.07 Insurance................................................................................43
Section 8.08 Books and Records; Inspection Rights.....................................................44
Section 8.09 Compliance with Laws.....................................................................44
Section 8.10 Environmental Matters....................................................................44
Section 8.11 Further Assurances.......................................................................45
Section 8.12 Collateral...............................................................................45
Section 8.13 Swap Agreements..........................................................................45
Section 8.14 MEPC Restricted Account..................................................................45
ii
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 Debt.....................................................................................46
Section 9.02 Liens....................................................................................46
Section 9.03 Restricted Payments......................................................................47
Section 9.04 Investments..............................................................................47
Section 9.05 Nature of Business; International Operations.............................................47
Section 9.06 Limitation on Leases.....................................................................48
Section 9.07 Proceeds of Notes........................................................................48
Section 9.08 ERISA Compliance.........................................................................48
Section 9.09 Sale or Discount of Receivables..........................................................48
Section 9.10 Mergers, Etc.............................................................................48
Section 9.11 Dispositions.............................................................................48
Section 9.12 Environmental Matters....................................................................48
Section 9.13 Transactions with Affiliates.............................................................48
Section 9.14 Subsidiaries.............................................................................49
Section 9.15 Negative Pledge Agreements...............................................................49
Section 9.16 Swap Agreements..........................................................................49
Section 9.17 Amendments of Agreements.................................................................49
Section 9.18 Limitation on Capital Expenditures.......................................................49
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default........................................................................49
Section 10.02 Remedies.................................................................................52
ARTICLE XI
THE AGENTS
Section 11.01 Appointment; Powers......................................................................53
Section 11.02 Duties and Obligations of Administrative Agent...........................................53
Section 11.03 Action by Administrative Agent...........................................................54
Section 11.04 Reliance by Administrative Agent.........................................................55
Section 11.05 Subagents................................................................................55
Section 11.06 Resignation or Removal of Agents.........................................................55
Section 11.07 Agents as Lenders........................................................................56
Section 11.08 No Reliance..............................................................................56
Section 11.09 Administrative Agent May File Proofs of Claim............................................56
Section 11.10 Authority of Administrative Agent to Release Collateral and Liens........................57
Section 11.11 The Arranger and the Syndication Agents..................................................57
ARTICLE XII
MISCELLANEOUS
Section 12.01 Notices..................................................................................57
Section 12.02 Waivers; Amendments......................................................................58
Section 12.03 Expenses, Indemnity; Damage Waiver.......................................................59
Section 12.04 Successors and Assigns...................................................................61
Section 12.05 Survival; Revival; Reinstatement.........................................................64
Section 12.06 Counterparts; Integration; Effectiveness.................................................64
iii
Section 12.07 Severability.............................................................................65
Section 12.08 Right of Setoff..........................................................................65
Section 12.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS...............................65
Section 12.10 Headings.................................................................................67
Section 12.11 Confidentiality..........................................................................67
Section 12.12 Interest Rate Limitation.................................................................68
Section 12.13 EXCULPATION PROVISIONS...................................................................69
Section 12.14 Collateral Matters; Swap Agreements......................................................69
Section 12.15 No Third Party Beneficiaries.............................................................69
iv
ANNEXES, EXHIBITS AND SCHEDULES
Annex I ......... List of Commitments
Annex II ......... Amortization Schedule
Exhibit A......... Form of Note
Exhibit B......... Form of Borrowing Request
Exhibit C......... Form of Compliance Certificate
Exhibit D-1 Form of Legal Opinion of Baker Botts L.L.P., special counsel to the Borrower and OII
Exhibit D-2 Form of Legal Opinion of Lemle & Kelleher, L.L.P., special counsel to MEPC and MOC
Exhibit D-3 Form of Legal Opinion of Haynes and Boone, LLP, special counsel to CPC and CPOC
Exhibit D-4 Form of Legal Opinion of John Moore, in-house counsel to MEPC and MOC
Exhibit E-1....... Security Instruments
Exhibit E-2....... Form of Security Agreement
Exhibit E-3....... Form of MOC Parent Guarantee
Exhibit E-4....... Form of CPC Parent Guarantee
Exhibit E-5....... Form of Minimum Throughput Guarantee
Exhibit E-6....... Form of Pledge Agreement
Exhibit F......... Form of Assignment and Assumption
Schedule 1.02..... Description of Dedicated Blocks
Schedule 7.05..... Litigation
Schedule 7.19..... Swap Agreements
Schedule 9.03..... Restricted Payments
Schedule 9.04..... Investments
THIS CREDIT AGREEMENT dated as of December 18, 2003, is among: Medusa
Spar LLC, a limited liability company duly formed and existing under the laws of
the State of Delaware (the "Borrower"); each of the Lenders from time to time
party hereto; and The Bank of Nova Scotia, as administrative agent for the
Lenders (in such capacity, together with its successors in such capacity, the
"Administrative Agent"); and Bank One, N.A. and SunTrust Bank, as syndication
agents for the Lenders (each in such capacity, together with its successors in
such capacity, a "Syndication Agent").
R E C I T A L S
A. The Borrower has requested that the Lenders provide a single advance
term loan to the Borrower.
B. The Lenders have agreed to make such term loan subject to the terms
and conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the term loan and commitments hereinafter referred to, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above. As used in this Agreement, each term
defined above has the meaning indicated above.
Section 1.02 Certain Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:
"ABR", when used in reference to any Loan or the Term Loan, refers to
whether such Loan, or the Loans comprising the Term Loan, are bearing interest
at a rate determined by reference to the Alternate Base Rate.
"Account Bank" has the meaning assigned such term in the Security
Agreement.
"Actual CPOC Throughput Amount" means, with respect to any given
calendar quarter, that portion of the Tariff received by the Borrower which is
attributable to CPOC's actual throughput of production through the Medusa Spar.
"Adjusted LIBO Rate" means, with respect to the Term Loan for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period
multiplied by (b) the Statutory Reserve Rate.
"Administrative Questionnaire" means an Administrative Questionnaire in
a form supplied by the Administrative Agent.
"Affected Loan" has the meaning assigned such term in Section 5.05.
"Affiliate" means, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
"Agents" means, collectively, the Administrative Agent and the
Syndication Agents, and "Agent" shall mean either the Administrative Agent or a
Syndication Agent, as the context requires.
"Agreement" means this Credit Agreement, as the same may from time to
time be amended, modified, supplemented or restated.
"Alternate Base Rate" means, for any day, a rate per annum equal to the
greatest of (a) the Prime Rate in effect on such day and (b) the Federal Funds
Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate
Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate
shall be effective from and including the effective date of such change in the
Prime Rate or the Federal Funds Effective Rate, respectively.
"Amortization Schedule" means the amortization schedule set forth in
Annex II.
"Applicable Margin" means, from time to time, the following
percentages, based upon the Debt Rating as set out below:
DEBT RATINGS
PRICING LEVEL S&P/MOODY'S APPLICABLE MARGIN +
- ------------------------ ------------------------- ------------------------
1 A-/A3 or better 0.75%
2 BBB+/Baa1 1.00%
3 BBB/Baa2 1.30%
4 BBB-/Baa3 1.50%
5 BB+/Ba1 or worse 2.50%
Initially, the Applicable Margin shall be determined based upon the
Debt Rating specified in the certificate delivered pursuant to Section 6.01(q).
Thereafter, each change in the Applicable Margin resulting from a publicly
announced change in the Debt Rating shall be effective, in the case of an
upgrade, during the period commencing on the date of delivery by the Borrower to
the Administrative Agent of notice thereof pursuant to Section 8.01(l) and
ending on the date immediately preceding the effective date of the next such
change and, in the case of a downgrade, during the period commencing on the date
of the public announcement thereof and ending on the date immediately preceding
the effective date of the next such change. In the event of a split rating
between S&P and Moody's, (a) the higher rating will apply (with the Debt Rating
for Price Level 1 being the highest and the Debt Rating of Price Level 5 being
the lowest), (b) if the split rating is of a differential greater than one
level, the rating level immediately above the lower of the two ratings will
apply, and (c) notwithstanding clause (a) or clause (b), if the MOC Debt Rating
of either S&P or Moody's is less than BB+ or Ba1 or is unrated, the Applicable
Margin shall be 2.50%.
2
"Applicable Percentage" means, with respect to any Lender, the
percentage of the total Commitments represented by such Lender's Commitment as
such percentage is set forth on Annex I.
"Approved Counterparty" means any Lender or any Affiliate of a Lender.
"Approved Fund" means any Person (other than a natural person) that is
engaged in making, purchasing, holding or investing in bank loans and similar
extensions of credit in the ordinary course of its business and that is
administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an
entity or an Affiliate of an entity that administers or manages a Lender.
"Approved Petroleum Engineers" means Knowledge Reservoir Inc. and any
other independent petroleum engineers reasonably acceptable to the
Administrative Agent and the Majority Lenders.
"Arranger" means The Bank of Nova Scotia, in its capacity as the sole
lead arranger and sole bookrunner hereunder.
"Assignment and Assumption" means an assignment and assumption entered
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 12.04(b)), and accepted by the Administrative Agent, in the
form of Exhibit F or any other form approved by the Administrative Agent.
"Available Cash" means the amount of "excess" cash as defined in
Section 11.7 of the Borrower's LLC Agreement as such agreement is in effect on
the date hereof.
"Board" means the Board of Governors of the Federal Reserve System of
the United States of America or any successor Governmental Authority.
"Borrower's LLC Agreement" means the Limited Liability Company
Agreement of Medusa Spar LLC dated as of December 18, 2003, as the same may from
time to time be amended, modified, supplemented or restated.
"Borrowing Request" means a written request by the Borrower for the
Term Loan in accordance with Section 2.03, in substantially the form of Exhibit
B.
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banks in New York City or Atlanta, Georgia are
authorized or required by law to remain closed; and if such day relates to a
borrowing or continuation of, a payment or prepayment of principal of or
interest on, or the Interest Period for, a Eurodollar Loan or a notice by the
Borrower with respect to any such borrowing or continuation, payment,
prepayment, or Interest Period, any day which is also a day on which dealings in
dollar deposits are carried out in the London interbank market.
"Capital Expenditures" means, in respect of any Person, for any period,
the aggregate (determined without duplication) of all expenditures and costs
that are capitalized or should have been capitalized on the balance sheet of
such Person in accordance with GAAP.
3
"Casualty Event" means any loss, casualty or other insured damage to,
or any nationalization, taking under power of eminent domain or by condemnation
or similar proceeding of, any Property of the Borrower having a fair market
value in excess of $2,500,000.
"Change in Control" occurs (a) upon the acquisition of ownership,
directly or indirectly, beneficially or of record, by any Person or group
(within the meaning of the Securities Exchange Act of 1934 and the rules of the
SEC thereunder as in effect on the date hereof) of Equity Interests representing
more than 35% of the aggregate ordinary voting power represented by the issued
and outstanding Equity Interests of MOC, other than by members of the Murphy
Family; (b) upon the occupation of a majority of the seats (other than vacant
seats) on the board of directors of MOC by Persons who were neither (i)
nominated by the board of directors of MOC nor (ii) appointed by directors so
nominated; (c) if MOC should at any time fail to own, directly or indirectly,
beneficially or of record, 100% of all of the issued and outstanding Equity
Interests of MEPC; (d) if MEPC should at any time fail to own, directly or
indirectly, beneficially or of record, 40% of all of the issued and outstanding
Equity Interests of the Borrower or (e) if OII should at any time fail to own,
directly or indirectly, beneficially or of record, 50% of all of the issued and
outstanding Equity Interests of the Borrower.
"Change in Law" means (a) the adoption of any law, rule or regulation
after the date of this Agreement, (b) any change in any law, rule or regulation
or in the interpretation or application thereof by any Governmental Authority
after the date of this Agreement or (c) compliance by any Lender (or, for
purposes of Section 5.01(b)), by any lending office of such Lender or by such
Lender's holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute.
"Commitment" means, with respect to each Lender, the commitment of such
Lender to make its Loan pursuant to Section 2.01, expressed as an amount
representing the maximum aggregate amount of such Lender's Credit Exposure
hereunder, as such commitment may be modified from time to time pursuant to
assignments by or to such Lender pursuant to Section 12.04(b). The amount
representing each Lender's Commitment shall at any time be such Lender's
Applicable Percentage of the total Commitments.
"Collateral" means (a) 100% of the Equity Interests of the Borrower;
(b) all of the Borrower's Property (excluding the Medusa Spar and the Borrower's
related tangible assets), including, without limitation, all cash and cash
equivalents (including Dedicated Cash Receipts), accounts receivable, contracts,
guarantees, insurance, deposit accounts and securities accounts (and all cash
and financial assets credited thereto), and all of the Borrower's interest in
the Medusa Spar Documents and all other contracts relating to the ownership and
use of the Medusa Spar (including, without limitation, all production and
handling agreements) and (c) any other Property which at any time is subject to
a Lien under the Security Instruments.
"Consolidated Subsidiaries" means, as to any Person, each Subsidiary of
such Person (whether now existing or hereafter created or acquired) the
financial statements of which shall be
4
(or should have been) consolidated with the financial statements of such Person
in accordance with GAAP.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise. For the
purposes of this definition, and without limiting the generality of the
foregoing, any Person that owns directly or indirectly 15% or more of the Equity
Interests having ordinary voting power for the election of the directors or
other governing body of a Person (other than as a limited partner of such other
Person) will be deemed to "control" such other Person. "Controlling" and
"Controlled" have meanings correlative thereto.
"CPC" means Callon Petroleum Company, a Delaware corporation.
"CPC Parent Guarantee" means that certain Guaranty and Consent
Agreement of even date herewith among the Borrower, the Administrative Agent and
CPC, in substantially the form of Exhibit E-4, as the same may from time to time
be amended, modified, supplemented or restated.
"CPOC" means Callon Petroleum Operating Company, a Delaware
corporation.
"Credit Exposure" means, with respect to any Lender at any time, the
outstanding principal amount of such Lender's Loan at such time.
"Debt" means, for any Person, the sum of the following (without
duplication): (a) all obligations of such Person for borrowed money or evidenced
by bonds, bankers' acceptances, debentures, notes or other similar instruments;
(b) all obligations of such Person (whether contingent or otherwise) in respect
of letters of credit, surety or other bonds and similar instruments; (c) all
accounts payable and all accrued expenses, liabilities or other obligations of
such Person to pay the deferred purchase price of Property or services; (d) all
obligations under capital leases; (e) all obligations under synthetic leases;
(f) all Debt (as defined in the other clauses of this definition) of others
secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) a Lien on any Property of such
Person, whether or not such Debt is assumed by such Person; (g) all Debt (as
defined in the other clauses of this definition) of others guaranteed by such
Person or in which such Person otherwise assures a creditor against loss of the
Debt (howsoever such assurance shall be made) to the extent of the lesser of the
amount of such Debt and the maximum stated amount of such guarantee or assurance
against loss; (h) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of others or to
purchase the Debt or Property of others; (i) obligations to deliver commodities,
goods or services, including, without limitation, hydrocarbons, in consideration
of one or more advance payments, other than gas balancing arrangements in the
ordinary course of business; (j) obligations to pay for goods or services even
if such goods or services are not actually received or utilized by such Person;
(k) any Debt of a partnership for which such Person is liable either by
agreement, by operation of law or by a Governmental Requirement but only to the
extent of such liability; (l) Disqualified Capital Stock; and (m) the
undischarged balance of any production payment created by such Person or for the
creation of which such Person directly or indirectly received payment. The Debt
of any Person shall include all obligations of such Person of the character
described above to the extent
5
such Person remains legally liable in respect thereof notwithstanding that any
such obligation is not included as a liability of such Person under GAAP.
"Debt Rating" means, as of any date of determination, the rating as
determined by either S&P or Moody's of MOC's non-credit-enhanced, senior
unsecured long-term debt.
"Dedicated Blocks" means the Blocks of Mississippi Canyon, Outer
Continental Shelf, Gulf of Mexico described on Schedule 1.02.
"Dedicated Cash Receipts" means all cash or cash equivalents received
by or on behalf of the Borrower with respect to the following: (a) any amounts
payable to the Borrower by any Loan Party under the Minimum Throughput
Guarantee, the Guarantees, the Operating and Production Handling Agreement or
any other Loan Document or Medusa Spar Document; (b) cash representing operating
revenue earned or to be earned by the Borrower; (c) any proceeds from Swap
Agreements and (d) any other cash or cash equivalents received by the Borrower
from whatever source; provided that none of the following shall constitute
"Dedicated Cash Receipts: (i) proceeds from the Term Loan; (ii) capital
contributions received from the members of the Borrower; (iii) proceeds payable
to third parties under any policy in respect of third party liability insurance
or (iv) proceeds required to be deposited in the Casualty Account pursuant to
Section 3.04(a) of the Security Agreement.
"Default" means any event or condition which constitutes an Event of
Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Disposition" or "Dispose" means the sale, transfer, license, lease,
assignment, farm-out, conveyance, abandonment or other transfer or disposition
(including any sale and leaseback transaction) of any Property by any Person,
including any sale, assignment, transfer or other disposal, with or without
recourse, of any notes or accounts receivable or any rights and claims
associated therewith.
"Disqualified Capital Stock" means any Equity Interest that, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable) or upon the happening of any event, matures or is
mandatorily redeemable for any consideration other than other Equity Interests
(which would not constitute Disqualified Capital Stock), pursuant to a sinking
fund obligation or otherwise, or is convertible or exchangeable for Debt or
redeemable for any consideration other than other Equity Interests (which would
not constitute Disqualified Capital Stock) at the option of the holder thereof,
in whole or in part, on or prior to the date that is one year after the earlier
of (a) the Maturity Date and (b) the date on which there are no Loans or other
obligations hereunder outstanding and all of the Commitments are terminated.
"dollars" or "$" refers to lawful money of the United States of
America.
"Effective Date" means the date on which the conditions specified in
Section 6.01 are satisfied (or waived in accordance with Section 12.02).
"Environmental Laws" means any and all Governmental Requirements
pertaining in any way to health, safety, the environment or the preservation or
reclamation of natural resources, in effect in any and all jurisdictions in
which the Borrower is conducting or at any time has
6
conducted business, or where any Property of the Borrower or the Dedicated
Blocks are located, including without limitation, the Oil Pollution Act of 1990
("OPA"), as amended, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Superfund Amendments
and Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and other environmental conservation or
protection Governmental Requirements. The term "oil" shall have the meaning
specified in OPA, the terms "hazardous substance" and "release" (or "threatened
release") have the meanings specified in CERCLA, the terms "solid waste" and
"disposal" (or "disposed") have the meanings specified in RCRA and the term "oil
and gas waste" shall have the meaning specified in Section 91.1011 of the Texas
Natural Resources Code ("Section 91.1011"); provided, however, that (a) in the
event either OPA, CERCLA, RCRA or Section 91.1011 is amended so as to broaden
the meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment and (b) to the extent the
laws of the state or other jurisdiction in which any Property of the Borrower or
the Dedicated Blocks are located establish a meaning for "oil," "hazardous
substance," "release," "solid waste," "disposal" or "oil and gas waste" which is
broader than that specified in either OPA, CERCLA, RCRA or Section 91.1011, such
broader meaning shall apply.
"Equity Interests" means shares of capital stock, partnership
interests, membership interests in a limited liability company, beneficial
interests in a trust or other equity ownership interests in a Person, and any
warrants, options or other rights entitling the holder thereof to purchase or
acquire any such Equity Interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any corporation, trade, business or entity
under common control with the Borrower within the meaning of Section 414(b),
(c), (m) or (o) of the Code or Section 4001 of ERISA.
"Eurodollar", when used in reference to any Loan or the Term Loan,
refers to whether such Loan, or the Loans comprising the Term Loan, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.
"Event of Default" has the meaning assigned such term in Section 10.01.
"Excepted Liens" means: (a) Liens for Taxes, assessments or other
governmental charges or levies which are not delinquent or which are being
contested in good faith by appropriate action and for which adequate reserves
have been maintained in accordance with GAAP; (b) Liens in connection with
workers' compensation, unemployment insurance or other social security, old age
pension or public liability obligations (other than Liens imposed under ERISA)
which are not delinquent or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; (c) statutory landlord's liens, operators', vendors',
carriers', warehousemen's, repairmen's, mechanics', suppliers', workers',
materialmen's, construction, maritime or other like Liens
7
arising by operation of law in the ordinary course of business or incident to
the exploration, development, operation and maintenance of oil and gas
properties each of which is in respect of obligations that are not delinquent or
which are being contested in good faith by appropriate action and for which
adequate reserves have been maintained in accordance with GAAP; (d) Liens
arising solely by virtue of any statutory or common law provision relating to
banker's liens, rights of set-off or similar rights and remedies and burdening
only deposit accounts or other funds maintained with a creditor depository
institution, provided that no such deposit account is a cash collateral account
or is subject to restrictions against access by the depositor in excess of those
set forth by regulations promulgated by the Board and no such deposit account is
intended by Borrower to provide collateral to the depository institution; (e)
easements, restrictions, servitudes, permits, conditions, covenants, exceptions
or reservations in any Property of the Borrower or any similar Liens created or
resulting from zoning, planning and environmental laws and ordinances and other
governmental regulations for the purpose of pipelines, transmission lines,
transportation lines, distribution lines for the removal of gas, oil, coal or
other minerals, and other like purposes, or for the joint or common use of real
estate, rights of way, facilities and equipment, that do not secure any monetary
obligations and which in the aggregate do not materially impair the use of such
Property for the purposes of which such Property is held by the Borrower or
materially impair the value of such Property subject thereto; (f) rights
reserved to or vested in any municipality or governmental, statutory or public
authority by the terms of any right, power, franchise, grant, license or permit,
or by any provision of law, to terminate such right, power, franchise, grant,
license or permit or to purchase, condemn, expropriate or recapture or to
designate a purchaser of any of the Property of a Person and rights reserved to
or vested in any municipality or governmental, statutory or public authority to
control, regulate or use any Property of a Person, in each case, that do not
secure any monetary obligations; (g) rights of a common owner of any interest in
Property held by a Person and such common owner as tenants in common or through
other common ownership and (h) judgment and attachment Liens not giving rise to
an Event of Default (and Liens in connection with bonding such judgments),
provided that any appropriate legal proceedings which may have been duly
initiated for the review of such judgment shall not have been finally terminated
or the period within which such proceeding may be initiated shall not have
expired and no action to enforce such Lien has been commenced; provided, further
that Liens described in clauses (a) through (d) and (f) shall remain "Excepted
Liens" only for so long as no action to enforce such Lien has been commenced and
no intention to subordinate the first priority Lien granted in favor of the
Administrative Agent and the Lenders is to be hereby implied or expressed by the
permitted existence of such Excepted Liens.
"Excluded Taxes" means, with respect to the Administrative Agent, any
Lender or any other recipient of any payment to be made by or on account of any
obligation of the Borrower or any Guarantor hereunder or under any other Loan
Document, (a) income or franchise taxes imposed on (or measured by) its net
income by the United States of America or such other jurisdiction under the laws
of which such recipient is organized or in which its principal office is located
or, in the case of any Lender, in which its applicable lending office is
located, (b) any branch profits taxes imposed by the United States of America or
any similar tax imposed by any other jurisdiction in which the Borrower is
located and (c) in the case of a Foreign Lender, any withholding tax that is
imposed on amounts payable to such Foreign Lender at the time such Foreign
Lender becomes a party to this Agreement (or designates a new lending office) or
is attributable to such Foreign Lender's failure to comply with Section 5.03(e),
except to the extent
8
that such Foreign Lender (or its assignor, if any) was entitled, at the time of
designation of a new lending office (or assignment), to receive additional
amounts with respect to such withholding tax pursuant to Section 5.03(a) or
Section 5.03(c).
"Federal Funds Effective Rate" means, for any day, the weighted average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by it.
"Financial Officer" means (a) as to the Borrower, any Person authorized
by the Managers of the Borrower pursuant to a unanimous written resolution to
execute and deliver certificates and other documents required to be delivered
hereunder on behalf of the Borrower and (b) as to any other Person, the chief
financial officer, principal accounting officer, treasurer or controller of such
Person. Unless otherwise specified, all references herein to a Financial Officer
means a Financial Officer of the Borrower.
"Financial Statements" means the financial statement or statements of
the Borrower referred to in Section 7.04(a).
"Foreign Lender" means any Lender that is organized under the laws of a
jurisdiction other than that in which the Borrower is located. For purposes of
this definition, the United States of America, each State thereof and the
District of Columbia shall be deemed to constitute a single jurisdiction.
"Funding Date" means the date specified in the Borrowing Request as the
date of the borrowing of the Term Loan by the Borrower.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time subject to the terms and
conditions set forth in Section 1.05.
"Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government over the Borrower or any of its Properties, any Agent or any Lender.
"Governmental Requirement" means any law, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement,
whether now or hereinafter in effect, including, without limitation,
Environmental Laws, energy regulations and occupational, safety and health
standards or controls, of any Governmental Authority.
"Guarantees" means, collectively, the Parent Guarantees and the Minimum
Throughput Guarantee.
9
"Guarantors" means (a) the Parent Guarantors and (b) the Subsidiary
Guarantors.
"Highest Lawful Rate" means, with respect to each Lender, the maximum
nonusurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Notes or on other
Indebtedness under laws applicable to such Lender which are presently in effect
or, to the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws allow as of the date hereof.
"Indebtedness" means any and all amounts owing or to be owing by the
Borrower or any other Loan Party (whether direct or indirect (including those
acquired by assumption), absolute or contingent, due or to become due, now
existing or hereafter arising): (a) to the Administrative Agent or any Lender or
Affiliate of a Lender under any Loan Document and (b) all renewals, extensions
and/or rearrangements of any of the above.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Information Memorandum" means the Transaction Overview dated November
2003 relating to the Borrower, the Medusa Spar Transactions and the
Transactions.
"Initial Reserve Report" means a report, in form and substance
reasonably satisfactory to the Administrative Agent, regarding the oil and gas
reserves attributable to the Dedicated Blocks.
"Interest Payment Date" means with respect to the Term Loan, for the
period commencing on the Funding Date through and including December 30, 2003,
December 31, 2003 and thereafter, the last day of each Interest Period
applicable to the Term Loan.
"Interest Period" means with respect to the Term Loan, initially, the
period commencing on the Funding Date and ending on December 30, 2003, and
thereafter, the period commencing on the date of the borrowing of such Term Loan
and ending on the numerically corresponding day in the calendar month that is
three months; provided, that (a) if any Interest Period would end on a day other
than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless such next succeeding Business Day would fall in
the next calendar month, in which case such Interest Period shall end on the
next preceding Business Day and (b) any Interest Period pertaining to the Term
Loan that commences on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the last calendar month
of such Interest Period) shall end on the last Business Day of the last calendar
month of such Interest Period. For purposes hereof, the date of a "borrowing"
initially shall be December 31, 2003 and thereafter shall be the effective date
of the most recent continuation of the Loans comprising the Term Loan as
Eurodollar Loans, or conversion of the Loans comprising the Term Loan, into
Eurodollar Loans.
"Investment" means, for any Person: (a) the acquisition (whether for
cash, Property, services or securities or otherwise) of Equity Interests of any
other Person or any agreement to make any such acquisition (including, without
limitation, any "short sale" or any sale of any securities at a time when such
securities are not owned by the Person entering into such short sale); (b) the
making of any deposit with, or advance, loan, capital contribution to,
assumption of Debt of, purchase or other acquisition of any other Debt or equity
participation or interest in, or
10
other extension of credit to, any other Person (including the purchase of
Property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such Property to such Person, but excluding
any such advance, loan or extension of credit having a term not exceeding ninety
(90) days representing the purchase price of inventory or supplies sold by such
Person in the ordinary course of business); (c) the purchase or acquisition (in
one or a series of transactions) of Property of another Person that constitutes
a business unit or (d) the entering into of any guarantee of, or other
contingent obligation (including the deposit of any Equity Interests to be sold)
with respect to, Debt or other liability of any other Person and (without
duplication) any amount committed to be advanced, lent or extended to such
Person.
"JOA Liens" means the Liens granted by the operator and the
non-operators under Section 6.3 of the Joint Operating Agreement.
"Joint Operating Agreement" means that certain Prospect Medusa Joint
Operating Agreement dated effective as of February 1, 1999, by and between MEPC,
CPOC and British-Borneo Petroleum, Inc., as amended by that certain First
Amendment and Supplement to Joint Operating Agreement dated effective as of
August 29, 2003 by and among MEPC, CPOC and ENI Deepwater LLC (as
successor-in-interest to British-Borneo Petroleum, Inc.) and as amended by that
certain Second Amendment and Supplement to Joint Operating Agreement effective
as of December 18, 2003 by and among MEPC, CPOC and ENI Deepwater LLC, as the
same may from time to time be amended, modified, supplemented or restated.
"Lenders" means the Persons listed on Annex I and any Person that shall
have become a party hereto pursuant to an Assignment and Assumption, other than
any such Person that ceases to be a party hereto pursuant to an Assignment and
Assumption.
"LIBO Rate" means, with respect to the Term Loan for any Interest
Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on
any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time, (a) with respect to the initial two-week
Interest Period described in Section 2.02(b), on the Funding Date, and (b) with
respect to all other Interest Periods, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to the
Term Loan for such Interest Period shall be the rate at which dollar deposits of
$5,000,000 and for a maturity comparable to such Interest Period are offered by
the principal London office of the Administrative Agent in immediately available
funds in the London interbank market at approximately 11:00 a.m., London time,
two Business Days prior to the commencement of such Interest Period.
"Lien" means any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to (a)
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for
11
security purposes or (b) production payments and the like payable out of oil and
gas properties. The term "Lien" shall include easements, restrictions,
servitudes, permits, conditions, covenants, exceptions or reservations. For the
purposes of this Agreement, the Borrower shall be deemed to be the owner of any
Property which it has acquired or holds subject to a conditional sale agreement,
or leases under a financing lease or other arrangement pursuant to which title
to the Property has been retained by or vested in some other Person in a
transaction intended to create a financing.
"Loan Documents" means this Agreement, the Notes, the Secured Swap
Agreements and the Security Instruments.
"Loan Parties" means, collectively, the Borrower, each Pledgor and each
Guarantor.
"Loans" means the loans made by the Lenders to the Borrower pursuant to
this Agreement.
"Majority Lenders" means, at any time while no Loans are outstanding,
Lenders having at least sixty-six and two-thirds percent (66-2/3%) of the total
Commitments; and at any time while any Loans are outstanding, Lenders holding at
least sixty-six and two-thirds percent (66-2/3%) of the outstanding aggregate
principal amount of the Loans (without regard to any sale by a Lender of a
participation in any Loan under Section 12.04(c)).
"Material Adverse Effect" means a material adverse change in, or
material adverse effect on (a) the business, operations, Property, liabilities
(actual or contingent), condition (financial or otherwise) or prospects of the
Borrower taken as a whole or of MOC taken as a whole, the Medusa Spar, or the
facts and information regarding such entities as represented to the
Administrative Agent or the Lenders, (b) the ability of the Borrower or MOC to
perform any of its obligations under any Loan Document to which it is a party,
(c) the validity or enforceability of any Loan Document or (d) the rights and
remedies of or benefits available to the Administrative Agent, any other Agent
or any Lender or Affiliate of a Lender under any Loan Document.
"Material Indebtedness" means, with respect to MOC, MEPC or the
Borrower, Debt (other than the Loans), or obligations in respect of one or more
Swap Agreements, of such Person (and in the case of MOC and MEPC, and their
Subsidiaries) in an aggregate principal amount exceeding (a) in the case of MOC,
$35,000,000; (b) in the case of MEPC, $35,000,000 or (c) in the case of the
Borrower, $1,000,000. For purposes of determining Material Indebtedness, the
"principal amount" of the obligations of any such Person in respect of any Swap
Agreement at any time shall be the Swap Termination Value.
"Maturity Date" means December 31, 2009.
"Medusa Spar" means that certain truss spar, hull, buoyancy cans, deck,
facilities, equipment and moorings located on the Mississippi Canyon Block 582,
Outer Continental Shelf, Gulf of Mexico, U.S.A. as constructed under that
certain EPCI Contract between J. Ray McDermott, Inc. and MEPC dated February 23,
2001, as amended, including upgrades and expansions thereof, together with all
components of the Medusa Spar falling within the definition of the term
"Facilities" as set forth in Article 2.21 of the Joint Operating Agreement.
12
"Medusa Spar Agreement" means that certain Medusa Spar Agreement dated
effective August 8, 2003 by and among MEPC, CPOC and OII, as the same may from
time to time be amended, modified, supplemented or restated.
"Medusa Spar Documents" means the following documents and agreements:
(a) the Joint Operating Agreement;
(b) the Operating and Production Handling Agreement;
(c) the Borrower's LLC Agreement;
(d) the Medusa Spar Agreement;
(e) the Minimum Throughput Guarantee;
(f) the Parent Guarantees; and
(g) all other agreements, instruments, certificates, assignments, bills
of sale, security instruments, conveyance instruments, consents and documents
executed in connection with any of the foregoing or the Medusa Spar
Transactions.
"Medusa Spar Transactions" means the following transactions:
(a) the due formation and capitalization of the Borrower, including
without limitation (i) the contribution by MEPC of its 60% undivided interest in
the Medusa Spar to the Borrower, free and clear of all Liens, other than
Excepted Liens and JOA Liens in connection with amounts not past due; (ii) the
contribution by CPOC of its 15% undivided interest in the Medusa Spar to the
Borrower, free and clear of all Liens, other than Excepted Liens and JOA Liens
in connection with amounts not past due; (iii) the contribution by OII of cash
to the Borrower in the amount required under the Medusa Spar Agreement and the
Borrower's LLC Agreement and (iv) the Borrower obtaining good and defensible
title to a 75% undivided interest in the Medusa Spar, free and clear of all
Liens, other than Excepted Liens and JOA Liens in connection with amounts not
past due, and with all necessary regulatory approvals and consents having been
obtained and being in full force and effect;
(b) the closing of the transactions contemplated by the Medusa Spar
Agreement;
(c) the execution and delivery of the Medusa Spar Agreement and the
additional agreements contemplated thereby, including without limitation, the
Borrower's LLC Agreement, the conveyances, assignments and bills of sale from
MEPC and CPOC to the Borrower of the collective 75% interest in the Medusa Spar,
the Operating and Production Handling Agreement and the other Medusa Spar
Documents, all in form and substance satisfactory to the Administrative Agent,
and the satisfaction of all closing conditions and conditions precedent
specified in such agreements (including, without limitation, the satisfaction of
the closing conditions specified in Section 6.1 of the Medusa Spar Agreement);
13
(d) the acceptance and the taking of possession of the Medusa Spar by
MEPC, as operator for the Borrower and the other non-operators under the Joint
Operating Agreement, and the satisfactory performance of the completion and
performance tests related thereto; and
(e) the dedication of production by MEPC and CPOC from the Dedicated
Blocks for handling at the Medusa Spar for the life of the applicable leases and
any extensions and renewals thereof;
in each case, as described in the Information Memorandum and pursuant
to and in accordance with the Medusa Spar Documents.
"MEPC" means Murphy Exploration & Production Company - USA, a Delaware
corporation.
"Minimum Throughput Guarantee" means that certain Minimum Throughput
Guarantee and Consent Agreement of even date herewith among the Borrower, MEPC,
CPOC and the Administrative Agent, in substantially the form of Exhibit E-5, as
the same may from time to time be amended, modified, supplemented or restated.
"MOC" means Murphy Oil Corporation, a Delaware corporation.
"MOC Credit Agreement" means that certain 3-Year Revolving Credit
Agreement dated as of December 4, 2003 among MOC, JPMorgan Chase Bank, as
Administrative Agent, and the lenders from time to time party thereto, as the
same exists on the date of execution of this Agreement and without regard to (a)
any termination or cancellation thereof, whether by reason of payment of all
indebtedness incurred thereunder or otherwise or (b) unless consented to in
writing by the Majority Lenders, any amendment, modification, addition, waiver
or consent thereto or thereof.
"MOC Parent Guarantee" means that certain Guaranty and Consent
Agreement of even date herewith among the Borrower, the Administrative Agent and
MOC, in substantially the form of Exhibit E-3, as the same may from time to time
be amended, modified, supplemented or restated.
"Moody's" means Moody's Investors Service, Inc. and any successor
thereto that is a nationally recognized rating agency.
"Murphy Family" means (a) the C.H. Murphy Family Investments Limited
Partnership; (b) the Estate of C.H. Murphy, Jr. and (c) siblings of the late
C.H. Murphy, Jr. and his and their respective Immediate Family. For purposes of
this definition, "Immediate Family" of a Person means such Person's spouse,
children, siblings, mother-in-law and father -in-law, sons-in-law,
daughters-in-law, brothers-in-law and sisters-in-law.
"Notes" means the promissory notes of the Borrower described in Section
2.02(c) and being substantially in the form of Exhibit A, together with all
amendments, modifications, replacements, extensions and rearrangements thereof.
"OII" means Oceaneering International, Inc., a Delaware corporation.
14
"Operator" means MEPC or any successor operator of the Medusa Spar
under the Joint Operating Agreement.
"Operating and Production Handling Agreement" means that certain
Operating and Production Handling Agreement dated effective December 18, 2003,
by and among MEPC, CPOC, OII and the Borrower, as the same may from time to time
be amended, modified, supplemented or restated.
"Organization Documents" means, (a) with respect to any corporation,
the certificate or articles of incorporation and the bylaws (or equivalent or
comparable constitutive documents with respect to any non-U.S. jurisdiction);
(b) with respect to any limited liability company, the certificate or articles
of formation or organization and operating or limited liability company
agreement and (c) with respect to any partnership, joint venture, trust or other
form of business entity, the partnership, joint venture or other applicable
agreement of formation or organization and any agreement, instrument, filing or
notice with respect thereto filed in connection with its formation or
organization with the applicable Governmental Authority in the jurisdiction of
its formation or organization and, if applicable, any certificate or articles of
formation or organization of such entity.
"Other Taxes" means any and all present or future stamp or documentary
taxes or any other excise or Property taxes, charges or similar levies arising
from any payment made hereunder or from the execution, delivery or enforcement
of, or otherwise with respect to, this Agreement and any other Loan Document.
"Parent Guarantors" means, collectively, MOC and CPC.
"Parent Guarantees" means, collectively, the MOC Parent Guarantee and
the CPC Parent Guarantee.
"Participant" has the meaning set forth in Section 12.04(c)(i).
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
"Pledge Agreement" means, that certain Pledge Agreement of even date
herewith among MEPC, CPOC, OII and the Administrative Agent, in substantially
the form of Exhibit E-6, as the same may from time to time be amended, modified,
supplemented or restated.
"Pledgors" mean, collectively, MEPC, CPOC and OII.
"Prime Rate" means the rate of interest per annum publicly announced
from time to time by The Bank of Nova Scotia as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective from and including the date such change is publicly announced as being
effective. Such rate is set by The Bank of Nova Scotia as a general reference
rate of interest, taking into account such factors as The Bank of Nova Scotia
may deem appropriate; it being understood that many of The Bank of Nova Scotia's
commercial or other
15
loans are priced in relation to such rate, that it is not necessarily the lowest
or best rate actually charged to any customer and that The Bank of Nova Scotia
may make various commercial or other loans at rates of interest having no
relationship to such rate.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible, including, without
limitation, cash, securities, accounts and contract rights.
"Redemption" means with respect to any Debt, the repurchase,
redemption, prepayment, repayment, defeasance or any other acquisition or
retirement for value (or the segregation of funds with respect to any of the
foregoing) of such Debt. "Redeem" has the correlative meaning thereto.
"Register" has the meaning assigned such term in Section 12.04(b)(iv).
"Regulation D" means Regulation D of the Board, as the same may be
amended, supplemented or replaced from time to time.
"Related Parties" means, with respect to any specified Person, such
Person's Affiliates and the respective directors, officers, employees, agents
and advisors (including attorneys, accountants and experts) of such Person and
such Person's Affiliates.
"Remedial Work" has the meaning assigned such term in Section 8.10(a).
"Responsible Officer" means (a) as to the Borrower, any Person
authorized by the Managers of the Borrower pursuant to an unanimous written
resolution to execute and deliver certificates and other documents required to
be delivered hereunder on behalf of the Borrower and (b) as to any other Person,
the Chief Executive Officer, the President, any Financial Officer or any Vice
President of such Person. Unless otherwise specified, all references to a
Responsible Officer herein shall mean a Responsible Officer of the Borrower.
"Restricted Payment" means any dividend or other distribution (whether
in cash, securities or other Property) with respect to any Equity Interests in
the Borrower, or any payment (whether in cash, securities or other Property),
including any sinking fund or similar deposit, on account of the purchase,
redemption, retirement, acquisition, cancellation or termination of any such
Equity Interests in the Borrower or any option, warrant or other right to
acquire any such Equity Interests in the Borrower.
"SEC" means the Securities and Exchange Commission or any successor
Governmental Authority.
"Secured Swap Agreement" means any Swap Agreement between the Borrower
and any Lender or any Affiliate of any Lender while such Person (or, in the case
of an Affiliate of a Lender, the Person affiliated therewith) is a Lender,
including any Swap Agreement between such Persons in existence prior to the date
hereof, as the same may from time to time be amended, modified, supplemented or
restated and (b) entered into in order to maintain the hedge position required
by Section 6.01(m). For the avoidance of doubt, a Swap Agreement ceases to be a
Secured Swap Agreement if the Person that is the counterparty to the Borrower
under a
16
Swap Agreement ceases to be a Lender under the Credit Agreement (or, in the case
of an Affiliate of a Lender, the Person affiliated therewith ceases to be a
Lender under the Credit Agreement).
"Securities Intermediary" has the meaning assigned such term in the
Security Agreement.
"Security Agreement" means that certain Security Agreement of even date
herewith between the Borrower and the Administrative Agent, in substantially the
form of Exhibit E-2, as the same may from time to time be amended, modified,
supplemented or restated.
"Security Instruments" means the Pledge Agreement, the Parent
Guarantees, the Minimum Throughput Guarantee, the Security Agreement, mortgages,
deeds of trust and other agreements, instruments, consents or certificates
described or referred to in Exhibit E-1, and any and all other agreements,
instruments, payment direction letters, consents or certificates now or
hereafter executed and delivered by the Borrower or any other Person in
connection with, or as security for the payment or performance of the
Indebtedness, the Notes or this Agreement or any other Loan Document, as such
agreements may be amended, modified, supplemented or restated from time to time.
"S&P" means Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and any successor thereto that is a nationally
recognized rating agency.
"Statutory Reserve Rate" means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject with
respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred
to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D.
Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be
subject to such reserve requirements without benefit of or credit for proration,
exemptions or offsets that may be available from time to time to any Lender
under such Regulation D or any comparable regulation. The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change in
any reserve percentage.
"Subsidiary" means as to any Person (the "first Person"): (a) any other
Person of which at least a majority of the outstanding Equity Interests having
by the terms thereof ordinary voting power to elect a majority of the board of
directors, manager or other governing body of such Person (irrespective of
whether or not at the time Equity Interests of any other class or classes of
such Person shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
the first Person or by the first Person and one or more of its Subsidiaries and
(b) any partnership of which the first Person or any of its Subsidiaries is a
general partner.
"Subsidiary Guarantors" means, collectively, MEPC and CPOC.
"Swap Agreement" means any agreement with respect to any swap, forward,
future or derivative transaction or option or similar agreement, whether
exchange traded, "over-the-
17
counter" or otherwise, involving, or settled by reference to, one or more rates,
currencies, commodities, equity or debt instruments or securities, or economic,
financial or pricing indices or measures of economic, financial or pricing risk
or value or any similar transaction or any combination of these transactions;
provided that no phantom stock or similar plan providing for payments only on
account of services provided by current or former directors, officers, employees
or consultants of the Borrower or the Subsidiaries shall be a Swap Agreement.
"Swap Termination Value" means, in respect of any one or more Swap
Agreements, after taking into account the effect of any legally enforceable
netting agreement relating to such Swap Agreements, (a) for any date on or after
the date such Swap Agreements have been closed out and termination value(s)
determined in accordance therewith, such termination value(s) and (b) for any
date prior to the date referenced in clause (a), the amount(s) determined as the
mark-to-market value(s) for such Swap Agreements, as determined based upon one
or more mid-market or other readily available quotations provided by any
recognized dealer in such Swap Agreements (which may include a Lender or any
Affiliate of a Lender).
"Tariff" means the tariffs paid by (a) MEPC and CPOC to the Borrower
pursuant to Section 4.6 of the Operating and Production Handling Agreement and
(ii) other Persons for production processed through the Medusa Spar in
accordance with the applicable third party production handling agreements
entered into pursuant to Section 6.1 of the Operating and Production Handling
Agreement.
"Taxes" means any and all present or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Term Loan" has the meaning given such term in Section 2.01.
"Termination Date" means the earlier of the Maturity Date and the date
of termination of the Commitments or the acceleration of the Loans pursuant to
Section 10.02.
"Third Party Throughput Amount" means, with respect to any given
calendar quarter, that portion of the Tariff received by the Borrower which is
attributable to throughput of production through the Medusa Spar from Persons
other than MEPC and CPOC.
"Transactions" means, with respect to (a) the Borrower, the execution,
delivery and performance by the Borrower of this Agreement and each other Loan
Document and Medusa Spar Document to which it is a party, the Medusa Spar
Transactions, the borrowing of the Term Loan, the use of the proceeds thereof,
and the grant of Liens by the Borrower on certain of its Properties pursuant to
the Security Instruments and (b) each other Loan Party, the execution, delivery
and performance by such Loan Party of each Loan Document and Medusa Spar
Document to which it is a party, the Medusa Spar Transactions, and its
guarantee, grant of Liens, pledge and provision of collateral and other
agreements pursuant to the Security Instruments.
"Type", when used in reference to any Loan, refers to whether the rate
of interest on such Loan is determined by reference to the Alternate Base Rate
or the Adjusted LIBO Rate.
Section 1.03 Types of Loans. For purposes of this Agreement, Loans may
be classified and referred to by Type (e.g., a "Eurodollar Loan").
18
Section 1.04 Terms Generally; Rules of Construction. The definitions of terms
herein shall apply equally to the singular and plural forms of the terms
defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation". The word "will" shall be construed to have the same meaning and
effect as the word "shall". Unless the context requires otherwise (a) any
definition of or reference to any agreement, instrument or other document herein
shall be construed as referring to such agreement, instrument or other document
as from time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth in the
Loan Documents), (b) any reference herein to any law shall be construed as
referring to such law as amended, modified, codified or reenacted, in whole or
in part, and in effect from time to time, (c) any reference herein to any Person
shall be construed to include such Person's successors and assigns (subject to
the restrictions contained in the Loan Documents), (d) the words "herein",
"hereof" and "hereunder", and words of similar import, shall be construed to
refer to this Agreement in its entirety and not to any particular provision
hereof, (e) with respect to the determination of any time period, the word
"from" means "from and including" and the word "to" means "to and including" and
(f) any reference herein to Articles, Sections, Annexes, Exhibits and Schedules
shall be construed to refer to Articles and Sections of, and Annexes, Exhibits
and Schedules to, this Agreement. No provision of this Agreement or any other
Loan Document shall be interpreted or construed against any Person solely
because such Person or its legal representative drafted such provision.
Section 1.05 Accounting Terms and Determinations; GAAP. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Administrative Agent or the Lenders hereunder
shall be prepared, in accordance with GAAP, applied on a basis consistent with
the financial statements described in Section 7.04(a) except for changes in
which the Borrower's (or, in the case of any other Person, such Person's)
independent certified public accountants concur and which are disclosed to
Administrative Agent on the next date on which financial statements are required
to be delivered to the Lenders pursuant to Section 8.01(a); provided that,
unless the Borrower and the Majority Lenders shall otherwise agree in writing,
no such change shall modify or affect the manner in which compliance with the
covenants contained herein is computed such that all such computations shall be
conducted utilizing financial information presented consistently with prior
periods.
19
ARTICLE II
THE TERM LOAN
Section 2.01 Term Loan. Subject to the terms and conditions set forth herein,
each Lender agrees to make a Loan to the Borrower, as part of a single advance
term loan in an aggregate principal amount equal to $83,741,602.17 (the "Term
Loan"), on the Funding Date in an aggregate principal amount equal to such
Lender's Applicable Percentage of the Term Loan; provided that the making of
such Loan shall not result in (a) such Lender's Credit Exposure exceeding such
Lender's Commitment or (b) the total Credit Exposures exceeding the total
Commitments. The Term Loan shall be fully funded in a single advance to the
Borrower on the Funding Date, and once paid or prepaid, neither the Term Loan
nor any Loan (nor any portion thereof) comprising a part of the Term Loan may be
reborrowed under any circumstance.
Section 2.02 Loans.
(a) Term Loan; Several Obligations. Each Loan shall be made as part of
the Term Loan, which shall consist of Loans made by the Lenders ratably in
accordance with their respective Commitments. The failure of any Lender to make
the Loan required to be made by it shall not relieve any other Lender of its
obligations hereunder; provided that the Commitments are several and no Lender
shall be responsible for any other Lender's failure to make its Loan as required
hereby.
(b) Type of Loans. From the period commencing on the Funding Date
through and including December 30, 2003, the Term Loan shall be comprised
entirely of Eurodollar Loans having an Interest Period of two weeks; thereafter,
subject to Section 3.03 and Section 5.05, the Term Loan shall be comprised
entirely of Eurodollar Loans having an Interest Period of three months, which
Eurodollar Loans shall automatically continue as Eurodollar Loans having an
Interest Period of three months at the end of the first three-month Interest
Period and all subsequent Interest Periods thereafter. Each Lender at its option
may make its Loan by causing any domestic or foreign branch or Affiliate of such
Lender to make such Loan; provided that any exercise of such option shall not
affect the obligation of the Borrower to repay such Loan in accordance with the
terms of this Agreement.
(c) Notes. The Loan made by each Lender shall be evidenced by a single
promissory note of the Borrower in substantially the form of Exhibit A, dated,
in the case of (i) any Lender party hereto as of the date of this Agreement, as
of the date of this Agreement, or (ii) any Lender that becomes a party hereto
pursuant to an Assignment and Assumption, as of the effective date of the
Assignment and Assumption, payable to the order of such Lender in a principal
amount equal to its Commitment as in effect on such date, and otherwise duly
completed. In the event that any Lender's Commitment increases or decreases for
any reason (whether pursuant to Section 12.04(b) or otherwise), the Borrower
shall deliver or cause to be delivered on the effective date of such increase or
decrease, a new Note payable to the order of such Lender in a principal amount
equal to its Commitment after giving effect to such increase or decrease, and
otherwise duly completed. The date, amount, Type, interest rate and, if
applicable, Interest Period of the Loan made by each Lender, and all payments
made on account of the principal thereof, shall be recorded by such Lender on
its books for its Note, and, prior to any transfer, may be endorsed by such
Lender on a schedule attached to such Note or any
20
continuation thereof or on any separate record maintained by such Lender.
Failure to make any such notation or to attach a schedule shall not affect any
Lender's or the Borrower's rights or obligations in respect of its Loan or
affect the validity of such transfer by any Lender of its Note.
Section 2.03 Request for Term Loan To request the Term Loan, the Borrower shall
provide the Borrowing Request signed by the Borrower to the Administrative
Agent, not later than 12:00 noon, New York City time, on the date of the
proposed borrowing of the Term Loan. The Borrowing Request shall be irrevocable
and shall specify the following information:
(i) the aggregate amount of the Term Loan, which shall be
$83,741,602.17;
(ii) the date of the borrowing of the Term Loan, which shall be a
Business Day; and
(iii) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of
Section 2.04.
The Borrowing Request shall constitute a representation that the amount of the
requested Term Loan shall not cause the total Credit Exposures to exceed the
total Commitments.
Promptly following receipt of the Borrowing Request in accordance with this
Section 2.03, the Administrative Agent shall advise each Lender of the details
thereof and of the amount of such Lender's Loan to be made as part of the Term
Loan.
Section 2.04 Funding of Term Loan.
(a) Funding by Lenders. Each Lender shall make the Loan to be made by
it hereunder on the Funding Date by wire transfer of immediately available funds
by 1:00 p.m., New York City time, to the account of the Administrative Agent
designated by it for such purpose by notice to the Lenders. The Administrative
Agent will make the Term Loan available to the Borrower by promptly crediting
the amounts so received, in like funds, to an account of the Borrower maintained
with the Administrative Agent in Atlanta, Georgia and designated by the Borrower
in the Borrowing Request. Nothing herein shall be deemed to obligate any Lender
to obtain the funds for its Loan in any particular place or manner or to
constitute a representation by any Lender that it has obtained or will obtain
the funds for its Loan in any particular place or manner.
(b) Presumption of Funding by the Lenders. Unless the Administrative
Agent shall have received notice from a Lender prior to Funding Date that such
Lender will not make available to the Administrative Agent such Lender's share
of the Term Loan, the Administrative Agent may assume that such Lender has made
such share available on such date in accordance with Section 2.04(a) and may, in
reliance upon such assumption, make available to the Borrower a corresponding
amount. In such event, if a Lender has not in fact made its share of the Term
Loan available to the Administrative Agent, then the applicable Lender and the
Borrower severally agree to pay to the Administrative Agent forthwith on demand
such corresponding amount with interest thereon, for each day from and including
the date such amount is made available to the Borrower to but excluding the date
of payment to the Administrative Agent, at (i)
21
in the case of such Lender, the greater of the Federal Funds Effective Rate and
a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation or (ii) in the case of the Borrower,
the interest rate applicable to ABR Loans. If such Lender pays such amount to
the Administrative Agent, then such amount shall constitute such Lender's Loan
included in the Term Loan.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST; PREPAYMENTS; FEES
Section 3.01 Repayment of Loans. The Borrower hereby unconditionally promises to
pay to the Administrative Agent for the account of the Lenders, (a) the
principal of the Loans in such principal amounts and on such dates as are set
forth in the Amortization Schedule and (b) the then unpaid principal amount of
the Loans on the Termination Date.
Section 3.02 Interest.
(a) ABR Loans. Each ABR Loan shall bear interest at the Alternate Base
Rate plus the Applicable Margin, but in no event to exceed the Highest Lawful
Rate.
(b) Eurodollar Loans. Each Eurodollar Loan shall bear interest at the
Adjusted LIBO Rate for the Interest Period in effect for such Loan plus the
Applicable Margin, but in no event to exceed the Highest Lawful Rate.
(c) Post-Default Rate. Notwithstanding the foregoing, (i) during the
continuance of any Default, all Loans shall bear interest, after as well as
before judgment, at a rate per annum equal to two percent (2%) plus the rate
applicable to Eurodollar Loans as provided in Section 3.02(b), but in no event
to exceed the Highest Lawful Rate and (ii) all amounts payable by the Borrower
hereunder (other than principal of and interest on the Loans) that are not paid
when due shall bear interest, after as well as before judgment, at a rate per
annum equal to two percent (2%) plus the rate applicable to ABR Loans as
provided in Section 3.02(a), but in no event to exceed the Highest Lawful Rate.
(d) Interest Payment Dates. Accrued interest on each Loan shall be
payable in arrears on each Interest Payment Date for such Loan and on the
Termination Date; provided that (i) interest accrued pursuant to Section 3.02(c)
shall be payable on demand and (ii) in the event of any repayment or prepayment
of any Loan, accrued interest on the principal amount repaid or prepaid shall be
payable on the date of such repayment or prepayment.
(e) Interest Rate Computations. All interest hereunder shall be
computed on the basis of a year of 360 days, unless such computation would
exceed the Highest Lawful Rate, in which case interest shall be computed on the
basis of a year of 365 days (or 366 days in a leap year), except that interest
computed by reference to the Alternate Base Rate at times when the Alternate
Base Rate is based on the Prime Rate shall be computed on the basis of a year of
365 days (or 366 days in a leap year), and in each case shall be payable for the
actual number of days elapsed (including the first day but excluding the last
day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall
be determined by the Administrative Agent, and such determination shall be
conclusive absent manifest error, and be binding upon the parties hereto.
22
Section 3.03 Alternate Rate of Interest. If prior to the commencement
of any Interest Period for the Term Loan:
(a) the Administrative Agent determines (which determination shall be
conclusive absent manifest error) that adequate and reasonable means do not
exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate for such Interest
Period; or
(b) the Administrative Agent is advised by the Majority Lenders that
the Adjusted LIBO Rate or LIBO Rate, as applicable, for such Interest Period
will not adequately and fairly reflect the cost to such Lenders of making or
maintaining their Loans included in the Term Loan for such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, the Loans comprising
the Term Loan shall not be continued as Eurodollar Loans at the end of the then
current Interest Period, but instead, shall be converted to ABR Loans at the end
of the then current Interest Period.
Section 3.04 Prepayments.
(a) Optional Prepayments. The Borrower shall have the right at any time
and from time to time to prepay the Term Loan in whole or in part, subject to
prior notice in accordance with Section 3.04(b). In connection with any such
prepayment, in addition to any other amounts required to be paid hereunder, the
Borrower shall pay any unwind payments or other amounts due as a result of such
prepayment under any Swap Agreement entered into by the Borrower pursuant to
Section 6.01(m), when and as the same shall become due and payable.
(b) Notice and Terms of Optional Prepayment. The Borrower shall notify
the Administrative Agent by telephone (confirmed by telecopy) of any prepayment
hereunder, not later than 12:00 noon, New York City time, three Business Days
before the date of prepayment. Each such notice shall be irrevocable and shall
specify the prepayment date and the principal amount of the Term Loan to be
prepaid. Promptly following receipt of any such notice relating to the Term
Loan, the Administrative Agent shall advise the Lenders of the contents thereof.
Each partial prepayment of the Term Loan shall be in an aggregate amount that is
an integral multiple of $100,000 and not less than $1,000,000.
(c) Application of Prepayments. Each prepayment made pursuant to
Section 3.04 shall be applied ratably to the Loans and to the scheduled
principal payments of the Term Loan in the inverse order of their maturity.
Prepayments shall be accompanied by accrued interest to the extent required by
Section 3.02.
(d) No Premium or Penalty. Prepayments permitted or required under this
Section 3.04 shall be without premium or penalty, except as required under
Section 5.02.
Section 3.05 Fees. The Borrower shall pay to the Administrative Agent,
the Arranger, and the Lenders, for their respective accounts, such fees as shall
have been agreed upon in writing with the Administrative Agent in amounts and at
times so specified.
23
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; SHARING OF SET-OFFS
Section 4.01 Payments Generally; Pro Rata Treatment; Sharing of
Set-offs.
(a) Payments by the Borrower. The Borrower shall make each payment
required to be made by it hereunder (whether of principal, interest, fees or of
amounts payable under Section 5.01, Section 5.02, Section 5.03 or otherwise)
prior to 12:00 noon, New York City time, on the date when due, in immediately
available funds, without defense, deduction, recoupment, set-off or
counterclaim. Fees, once paid, shall be fully earned and shall not be refundable
under any circumstances. Any amounts received after such time on any date may,
in the discretion of the Administrative Agent, be deemed to have been received
on the next succeeding Business Day for purposes of calculating interest
thereon. All such payments shall be made to the Administrative Agent at its
offices specified in Section 12.01, except that payments pursuant to Section
5.01, Section 5.02, Section 5.03 and Section 12.03 shall be made directly to the
Persons entitled thereto. The Administrative Agent shall distribute any such
payments received by it for the account of any other Person to the appropriate
recipient promptly following receipt thereof. If any payment hereunder shall be
due on a day that is not a Business Day, the date for payment shall be extended
to the next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such extension.
All payments hereunder shall be made in dollars.
(b) Application of Insufficient Payments. If at any time insufficient
funds are received by and available to the Administrative Agent to pay fully all
amounts of principal, interest and fees then due hereunder, such funds shall be
applied (i) first, towards payment of interest and fees then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
interest and fees then due to such parties and (ii) second, towards payment of
principal then due hereunder, ratably among the parties entitled thereto in
accordance with the amounts of principal then due to such parties.
(c) Sharing of Payments by Lenders. If any Lender shall, by exercising
any right of set-off or counterclaim or otherwise, obtain payment in respect of
any principal of or interest on its Loan resulting in such Lender receiving
payment of a greater proportion of the aggregate amount of its Loan and accrued
interest thereon than the proportion received by any other Lender, then the
Lender receiving such greater proportion shall purchase (for cash at face value)
participations in the Loans of other Lenders to the extent necessary so that the
benefit of all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued interest on
their respective Loans; provided that (i) if any such participations are
purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price
restored to the extent of such recovery, without interest and (ii) the
provisions of this Section 4.01(c) shall not be construed to apply to any
payment made by the Borrower pursuant to and in accordance with the express
terms of this Agreement or any payment obtained by a Lender as consideration for
the assignment of or sale of a participation in any of its Loan to any assignee
or participant, other than to the Borrower (as to which the provisions of this
Section 4.01(c) shall apply). The Borrower consents to the foregoing and agrees,
to the extent it may effectively do so under applicable law, that any Lender
acquiring a participation pursuant to the foregoing arrangements
24
may exercise against the Borrower rights of set-off and counterclaim with
respect to such participation as fully as if such Lender were a direct creditor
of the Borrower in the amount of such participation.
Section 4.02 Presumption of Payment by the Borrower. Unless the
Administrative Agent shall have received notice from the Borrower prior to the
date on which any payment is due to the Administrative Agent for the account of
the Lenders that the Borrower will not make such payment, the Administrative
Agent may assume that the Borrower has made such payment on such date in
accordance herewith and may, in reliance upon such assumption, distribute to the
Lenders the amount due. In such event, if the Borrower has not in fact made such
payment, then each of the Lenders severally agrees to repay to the
Administrative Agent forthwith on demand the amount so distributed to such
Lender with interest thereon, for each day from and including the date such
amount is distributed to it to but excluding the date of payment to the
Administrative Agent, at the greater of the Federal Funds Effective Rate and a
rate determined by the Administrative Agent in accordance with banking industry
rules on interbank compensation.
Section 4.03 Certain Deductions by the Administrative Agent. If any
Lender shall fail to make any payment required to be made by it pursuant to
Section 2.04(b) or Section 4.02 then the Administrative Agent may, in its
discretion (notwithstanding any contrary provision hereof), apply any amounts
thereafter received by the Administrative Agent for the account of such Lender
to satisfy such Lender's obligations under such Sections until all such
unsatisfied obligations are fully paid.
ARTICLE V
INCREASED COSTS; BREAK FUNDING PAYMENTS; TAXES; ILLEGALITY
Section 5.01 Increased Costs.
(a) Eurodollar Changes in Law. If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit
or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender (except any such reserve
requirement reflected in the Adjusted LIBO Rate); or
(ii) impose on any Lender or the London interbank market any other
condition affecting this Agreement or the Eurodollar Loan made by such
Lender;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining its Eurodollar Loan (or of maintaining its
obligation to make such Loan) or to reduce the amount of any sum received or
receivable by such Lender (whether of principal, interest or otherwise), then
the Borrower will pay to such Lender such additional amount or amounts as will
compensate such Lender for such additional costs incurred or reduction suffered.
(b) Capital Requirements. If any Lender determines that any Change in
Law regarding capital requirements has or would have the effect of reducing the
rate of return on such Lender's capital or on the capital of such Lender's or
holding company, if any, as a consequence
26
of this Agreement or the Loan made by such Lender to a level below that which
such Lender or such Lender's holding company could have achieved but for such
Change in Law (taking into consideration such Lender's policies and the policies
of such Lender's holding company with respect to capital adequacy), then from
time to time the Borrower will pay to such Lender such additional amount or
amounts as will compensate such Lender or such Lender's holding company for any
such reduction suffered.
(c) Certificates. A certificate of a Lender setting forth the amount or
amounts necessary to compensate such Lender or its holding company, as the case
may be, as specified in Section 5.01(a) or (b) shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.
(d) Effect of Failure or Delay in Requesting Compensation. Failure or
delay on the part of any Lender to demand compensation pursuant to this Section
5.01 shall not constitute a waiver of such Lender's right to demand such
compensation; provided that the Borrower shall not be required to compensate a
Lender pursuant to this Section 5.01 for any increased costs or reductions
incurred more than 365 days prior to the date that such Lender notifies the
Borrower of the Change in Law giving rise to such increased costs or reductions
and of such Lender's intention to claim compensation therefor; provided further
that, if the Change in Law giving rise to such increased costs or reductions is
retroactive, then the 365-day period referred to above shall be extended to
include the period of retroactive effect thereof.
Section 5.02 Break Funding Payments. In the event of (a) the payment of
any principal of any Eurodollar Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default), (b)
the conversion of any Eurodollar Loan into an ABR Loan other than on the last
day of the Interest Period applicable thereto, (c) the failure to borrow or
prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto, or (d) the failure to continue any Loan as a Eurodollar Loan at
the beginning of the next succeeding Interest Period, then, in any such event,
the Borrower shall compensate each Lender for the loss, cost and expense
attributable to such event. Such loss, cost or expense to any Lender shall be
deemed to include an amount determined by such Lender to be the excess, if any,
of (i) the amount of interest which would have accrued on the principal amount
of such Loan had such event not occurred, at the Adjusted LIBO Rate that would
have been applicable to such Loan, for the period from the date of such event to
the last day of the then current Interest Period therefor (or, in the case of a
failure to borrow or continue, for the period that would have been the Interest
Period for such Loan), over (ii) the amount of interest which would accrue on
such principal amount for such period at the interest rate which such Lender
would bid were it to bid, at the commencement of such period, for dollar
deposits of a comparable amount and period from other banks in the eurodollar
market.
A certificate of any Lender setting forth any amount or amounts that such Lender
is entitled to receive pursuant to this Section 5.02 shall be delivered to the
Borrower and shall be conclusive absent manifest error. The Borrower shall pay
such Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.
Section 5.03 Taxes.
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(a) Payments Free of Taxes. Any and all payments by or on account of
any obligation of the Borrower under any Loan Document shall be made free and
clear of and without deduction for any Indemnified Taxes or Other Taxes;
provided that if the Borrower shall be required to deduct any Indemnified Taxes
or Other Taxes from such payments, then (i) the sum payable shall be increased
as necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 5.03(a)), the
Administrative Agent or Lender (as the case may be) receives an amount equal to
the sum it would have received had no such deductions been made, (ii) the
Borrower shall make such deductions and (iii) the Borrower shall pay the full
amount deducted to the relevant Governmental Authority in accordance with
applicable law.
(b) Payment of Other Taxes by the Borrower. The Borrower shall pay any
Other Taxes to the relevant Governmental Authority in accordance with applicable
law.
(c) Indemnification by the Borrower. The Borrower shall indemnify the
Administrative Agent and each Lender, within 10 days after written demand
therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by
the Administrative Agent or such Lender, as the case may be, on or with respect
to any payment by or on account of any obligation of the Borrower hereunder
(including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section 5.03) and any penalties,
interest and reasonable expenses arising therefrom or with respect thereto,
whether or not such Indemnified Taxes or Other Taxes were correctly or legally
imposed or asserted by the relevant Governmental Authority. A certificate of the
Administrative Agent or a Lender as to the amount of such payment or liability
under this Section 5.03 shall be delivered to the Borrower and shall be
conclusive absent manifest error.
(d) Evidence of Payments. As soon as practicable after any payment of
Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority,
the Borrower shall deliver to the Administrative Agent the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
such payment, a copy of the return reporting such payment or other evidence of
such payment reasonably satisfactory to the Administrative Agent.
(e) Foreign Lenders. Any Foreign Lender that is entitled to an
exemption from or reduction of withholding tax under the law of the jurisdiction
in which the Borrower is located, or any treaty to which such jurisdiction is a
party, with respect to payments under this Agreement or any other Loan Document
shall deliver to the Borrower (with a copy to the Administrative Agent), at the
time or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably requested by the
Borrower as will permit such payments to be made without withholding or at a
reduced rate.
Section 5.04 Mitigation Obligations. If any Lender requests
compensation under Section 5.01, or if the Borrower is required to pay any
additional amount to any Lender or any Governmental Authority for the account of
any Lender pursuant to Section 5.03, then such Lender shall use reasonable
efforts to designate a different lending office for funding or booking its Loans
hereunder or to assign its rights and obligations hereunder to another of its
offices, branches or affiliates, if, in the judgment of such Lender, such
designation or assignment (i) would eliminate or reduce amounts payable pursuant
to Section 5.01 or Section 5.03, as the case
27
may be, in the future and (ii) would not subject such Lender to any unreimbursed
cost or expense and would not otherwise be disadvantageous to such Lender. The
Borrower hereby agrees to pay all reasonable costs and expenses incurred by any
Lender in connection with any such designation or assignment.
Section 5.05 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
applicable lending office to honor its obligation to make or maintain a
Eurodollar Loan either generally or having a particular Interest Period
hereunder, then (a) such Lender shall promptly notify the Borrower and the
Administrative Agent thereof and such Lender's obligation to make such
Eurodollar Loan shall be suspended (the "Affected Loan") until such time as such
Lender may again make and maintain such Eurodollar Loan and (b) any Affected
Loan which would otherwise be made by such Lender shall be made instead as an
ABR Loan (and, if such Lender so requests by notice to the Borrower and the
Administrative Agent, any Affected Loan of such Lender then outstanding shall be
automatically converted into ABR Loan on the date specified by such Lender in
such notice) and, to the extent that any Affected Loan is so made as (or
converted into) an ABR Loan, all payments of principal which would otherwise be
applied to such Lender's Affected Loan shall be applied instead to its ABR Loan.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Effective Date. The obligations of the Lenders to make
Loans hereunder shall not become effective until the date on which each of the
following conditions is satisfied (or waived in accordance with Section 12.02):
(a) The Administrative Agent, the Arranger and the Lenders shall have
received all fees and other amounts due and payable on or prior to the Effective
Date, including, to the extent invoiced, reimbursement or payment of all
out-of-pocket expenses required to be reimbursed or paid by the Borrower
hereunder.
(b) The Administrative Agent shall have received a certificate of the
Secretary or an Assistant Secretary of each Loan Party setting forth (i)
resolutions of its board of directors or other governing body with respect to
the authorization of such Loan Party to execute and deliver the Loan Documents
to which it is a party and to enter into the transactions contemplated in those
documents, (ii) the officers of such Loan Party (A) who are authorized to sign
the Loan Documents to which the such Loan Party is a party and (B) who will,
until replaced by another officer or officers duly authorized for that purpose,
act as its representative for the purposes of signing documents and giving
notices and other communications in connection with this Agreement and the
transactions contemplated hereby, (iii) specimen signatures of such authorized
officers, and (iv) the Organization Documents of such Loan Party, certified as
being true and complete. The Administrative Agent and the Lenders may
conclusively rely on such certificate until the Administrative Agent receives
notice in writing from the Borrower to the contrary.
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(c) The Administrative Agent shall have received certificates of the
appropriate State agencies with respect to the existence, qualification and good
standing of each Loan Party in its jurisdiction of formation.
(d) The Administrative Agent shall have received a compliance
certificate which shall be substantially in the form of Exhibit C, duly and
properly executed by a Responsible Officer and dated as of the date of Effective
Date.
(e) The Administrative Agent shall have received from each party hereto
counterparts (in such number as may be requested by the Administrative Agent) of
this Agreement signed on behalf of such party.
(f) The Administrative Agent shall have received duly executed Notes
payable to the order of each Lender in a principal amount equal to its
Commitment dated as of the Effective Date.
(g) The Administrative Agent shall have received from each party
thereto duly executed counterparts (in such number as may be requested by the
Administrative Agent) of the Security Instruments, including the Guarantees, the
Pledge Agreement, the Security Agreement and the other Security Instruments
described on Exhibit E-1. In connection with the execution and delivery of the
Pledge Agreement and the Security Agreement, the Administrative Agent shall be
satisfied that (after giving effect to the filing of financing statements or the
taking of any other action contemplated thereby for perfection) (i) the Pledge
Agreement creates first priority, perfected Liens in the collateral described
therein, and the Security Agreement creates first priority, perfected Liens in
the collateral described therein (subject to any Liens permitted thereby) and
(ii) the deposit accounts and the collateral securities account referred to in
the Security Agreement shall have been established in the name of the
Administrative Agent.
(h) The Administrative Agent shall have received an opinion of (i)
Baker Botts L.L.P., special counsel to the Borrower and OII, substantially in
the form of Exhibit D-1 hereto; (ii) Lemle & Kelleher, L.L.P., special counsel
to MEPC and MOC, substantially in the form of Exhibit D-2 hereto; (iii) Haynes
and Boone, LLP, special counsel to CPC and CPOC, substantially in the form of
Exhibit D-3 hereto and (iv) John Moore, in-house counsel to MEPC and MOC,
substantially in the form of Exhibit D-4 hereto.
(i) The Administrative Agent shall have received a certificate of
insurance coverage of the Borrower evidencing that the Borrower is carrying
insurance in accordance with Section 7.13.
(j) The Administrative Agent shall have received a certificate of a
Responsible Officer of the Borrower certifying that the Borrower has received
all consents and approvals required by Section 7.03.
(k) The Administrative Agent shall have received the financial
statements referred to in Section 7.04(a).
29
(l) The Administrative Agent shall have received appropriate UCC search
certificates reflecting no prior Liens encumbering the Collateral for each
jurisdiction reasonably requested by the Administrative Agent;
(m) The Administrative Agent shall have received evidence satisfactory
to it that the Borrower has entered into one or more Swap Agreements with
Approved Counterparties which shall effectively convert the floating rate of
interest from time to time in effect hereunder to a fixed rate of interest, the
notional amount of which shall at all times be equal to the then outstanding
principal amount of the Loans (and on the Effective Date, the notional amount
shall be equal to the total Commitments), on such terms (including, the
applicable fixed rate and provisions for the reduction of the notional amount(s)
thereof in accordance with the amortization of the Term Loan hereunder and in
connection with any optional prepayment made by the Borrower hereunder) and
conditions, and durations reasonably satisfactory to the Administrative Agent.
(n) The Administrative Agent shall be satisfied that the Medusa Spar
Transactions are being simultaneously consummated on terms, conditions and
documentation satisfactory to it.
(o) The Administrative Agent shall have received a certificate of a
Responsible Officer of the Borrower certifying that the Medusa Spar Transactions
have been consummated and all closing conditions and conditions precedent
specified in the Medusa Spar Documents have been satisfied.
(p) The Administrative Agent shall have received an execution copy,
certified by a Responsible Officer as true and complete, of each of the Medusa
Spar Documents (together with all amendments, if any).
(q) The Administrative shall have received a certificate duly signed by
a Responsible Officer of the Borrower certifying the Debt Rating of MOC as
determined by each such rating agency;
(r) The Administrative Agent shall have received, reviewed and be
satisfied with, the following:
(i) a certificate of a Responsible Officer of MOC containing a
detailed summary of MOC's accounting treatment of its investment in the
Borrower and its accounting treatment of the MOC Parent Guarantee, in
each case, in accordance with GAAP;
(ii) such other financial information as the Administrative Agent
may reasonably request;
(iii) title information as the Administrative Agent may reasonably
require satisfactory to the Administrative Agent regarding the status
of title to the Medusa Spar and the Dedicated Blocks;
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(iv) information as to the environmental condition of the Medusa
Spar, the other Properties of the Borrower and the Dedicated Blocks;
(v) copies of the Declaration of Operating and Production Handling
Agreement and Dedication of Leases and any other instruments to be
filed with the parishes and MMS related to the dedication of the
Dedicated Blocks;
(vi) information regarding litigation, tax, accounting, labor,
insurance, pension liabilities (actual or contingent), leases, material
contracts, debt agreements, Property ownership, contingent liabilities
and management of the Borrower; and
(vii) Initial Reserve Report from an Approved Petroleum Engineer.
(s) The Administrative Agent shall have completed and be satisfied with
the results of its due diligence in respect of the Loan Parties, the Medusa
Spar, the Medusa Spar Transactions, the Collateral, the Medusa Spar Documents
and all other contracts relating to the ownership and use of the Medusa Spar,
including all production handling agreements, production sales agreements,
production transportation agreements, supply agreements, and master service
contracts with vendors.
(t) The Administrative Agent shall have received a letter from CT
Corporation System evidencing the appointment of CT Corporation System as
authorized agent for service of process on each of each Loan Party under each
Loan Document to which it is a party.
(u) The Administrative Agent shall have received such other documents
as the Administrative Agent or special counsel to the Administrative Agent may
reasonably request.
(v) At the time of and immediately after giving effect to the borrowing
of the Term Loan, no Default shall have occurred and be continuing.
(w) At the time of and immediately after giving effect to the borrowing
of the Term Loan, no event, development or circumstance has occurred or shall
then exist that has resulted in, or could reasonably be expected to have, a
Material Adverse Effect.
(x) The representations and warranties of the Loan Parties set forth in
this Agreement and in the other Loan Documents shall be true and correct on and
as of the date of the borrowing of the Term Loan, except to the extent any such
representations and warranties are expressly limited to an earlier date, in
which case, on and as of the date of borrowing of the Term Loan, such
representations and warranties shall continue to be true and correct as of such
specified earlier date.
(y) The making of the Term Loan would not conflict with, or cause any
Lender to violate or exceed, any applicable Governmental Requirement, and no
Change in Law shall have occurred, and no litigation shall be pending or
threatened, which does or, with respect to any threatened litigation, seeks to,
enjoin, prohibit or restrain, the making or repayment of any Loan or any
participations therein or the consummation of the transactions contemplated by
this Agreement or any other Loan Document.
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(z) The receipt by the Administrative Agent of the Borrowing Request in
accordance with Section 2.03.
The borrowing of the Term Loan shall be deemed to constitute a
representation and warranty by the Borrower on the date thereof as to the
matters specified in Section 6.01(v) through Section 6.01(z).
The Administrative Agent shall notify the Borrower and the Lenders of
the Effective Date, and such notice shall be conclusive and binding.
Notwithstanding the foregoing, the obligations of the Lenders to make Loans
hereunder shall not become effective unless each of the foregoing conditions is
satisfied (or waived pursuant to Section 12.02) at or prior to 2:00 p.m., New
York City time, on December 31, 2003 (and, in the event such conditions are not
so satisfied or waived, the Commitments shall terminate at such time).
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
Section 7.01 Organization; Powers. Each of the Loan Parties is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite power and authority, and has
all material governmental licenses, authorizations, consents and approvals
necessary, to own its assets and to carry on its business as now conducted, and
is qualified to do business in, and is in good standing in, every jurisdiction
where such qualification is required, except where failure to have such power,
authority, licenses, authorizations, consents, approvals and qualifications
could not reasonably be expected to have a Material Adverse Effect.
Section 7.02 Authority; Enforceability. The Transactions are within
each Loan Party's corporate powers and have been duly authorized by all
necessary corporate and, if required, stockholder or member action (including,
without limitation, any action required to be taken by any class of directors,
members or managers of any Loan Party, whether interested or disinterested, in
order to ensure the due authorization of the Transactions). Each Loan Document
and Medusa Spar Document to which each Loan Party is a party has been duly
executed and delivered by such Loan Party and constitutes a legal, valid and
binding obligation of such Loan Party, as applicable, enforceable in accordance
with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding
in equity or at law.
Section 7.03 Approvals; No Conflicts. The Transactions (a) do not
require any consent or approval of, registration or filing with, or any other
action by, any Governmental Authority or any other third Person (including
shareholders or members or any class of directors, members or managers, whether
interested or disinterested, of any Loan Party or any other Person), nor is any
such consent, approval, registration, filing or other action necessary for the
validity or enforceability of any Loan Document or Medusa Spar Document or the
consummation of the transactions contemplated thereby, except such as have been
obtained or made and are in full
32
force and effect other than (i) the recording and filing of the Security
Instruments as required by this Agreement and (ii) those third party approvals
or consents which, if not made or obtained, would not cause a Default hereunder,
could not reasonably be expected to have a Material Adverse Effect or do not
have an adverse effect on the enforceability of the Loan Documents, (b) will not
violate any applicable law or regulation or the Organization Documents of any
Loan Party or any order of any Governmental Authority, (c) will not violate or
result in a default under any indenture, agreement or other instrument binding
upon any Loan Party or its Properties, or give rise to a right thereunder to
require any payment to be made by any Loan Party and (d) will not result in the
creation or imposition of any Lien on any Property of any Loan Party (other than
the Liens created by the Loan Documents).
Section 7.04 Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Lenders (i) the
Borrower's pro forma balance sheet and projected statements of income, members'
equity and cash flows for the period beginning the Effective Date and ending
December 31, 2006; and (ii) MOC's consolidated balance sheet and statements of
income, stockholders' equity and cash flows (A) as of and for the fiscal year
ended December 31, 2002, reported on by KPMG, independent public accountants,
and (B) as of and for the fiscal quarter and the portion of the fiscal year
ended September 30, 2003, certified by its chief financial officer. The
Borrower's financial statements were prepared in good faith based upon
assumptions believed to be reasonable at the time. MOC's financial statements
present fairly, in all material respects, the financial position and results of
operations and cash flows of MOC and its Consolidated Subsidiaries, as of such
dates and for such periods in accordance with GAAP, subject to year-end audit
adjustments and the absence of footnotes in the case of the unaudited quarterly
financial statements.
(b) Since December 31, 2002, there has been no event, development or
circumstance that has had or could reasonably be expected to have a Material
Adverse Effect.
(c) The Borrower does not have on the date hereof any material Debt
(including Disqualified Capital Stock) or any contingent liabilities,
off-balance sheet liabilities or partnerships, liabilities for taxes, unusual
forward or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except as referred to or reflected or provided for in
the Financial Statements and under Swap Agreements disclosed pursuant to Section
7.19.
Section 7.05 Litigation.
(a) Except as set forth on Schedule 7.05, there are no actions, suits,
investigations or proceedings by or before any arbitrator or Governmental
Authority pending against or, to the knowledge of the Borrower, threatened
against or affecting the Borrower or involving the Medusa Spar, the Medusa Spar
Transactions or the Dedicated Blocks (i) as to which there is a reasonable
possibility of an adverse determination that, if adversely determined, could
reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect, (ii) that involve any Loan Document, any Medusa Spar
Document, the Medusa Spar, the Medusa Spar Transactions, the Dedicated Blocks or
the Transactions or (iii) that could
33
reasonably be expected to impair the consummation of the Medusa Spar
Transactions on the time and in the manner contemplated by the Medusa Spar
Documents.
(b) Since the date of this Agreement, there has been no change in the
status of the matters disclosed in Schedule 7.05 that, individually or in the
aggregate, has resulted in, or materially increased the likelihood of, a
Material Adverse Effect.
Section 7.06 Environmental Matters. Except as could not be reasonably
expected to have a Material Adverse Effect (or with respect to (c), (d) and (e)
below, where the failure to take such actions could not be reasonably expected
to have a Material Adverse Effect):
(a) neither any Property of the Borrower nor the operations conducted
thereon nor the Dedicated Blocks nor the operations conducted thereon violate
any order or requirement of any court or Governmental Authority or any
Environmental Laws.
(b) no Property of the Borrower nor the operations currently conducted
thereon nor the Dedicated Blocks nor the operations currently conducted thereon
or, to the knowledge of the Borrower, by any prior owner or operator of such
Property or operation, are in violation of or subject to any existing, pending
or threatened action, suit, investigation, inquiry or proceeding by or before
any court or Governmental Authority or to any remedial obligations under
Environmental Laws.
(c) all notices, permits, licenses, exemptions, approvals or similar
authorizations, if any, required to be obtained or filed in connection with the
operation or use of any and all Property of the Borrower and the Dedicated
Blocks, including, without limitation, past or present treatment, storage,
disposal or release of a hazardous substance, oil and gas waste or solid waste
into the environment, have been duly obtained or filed, and the Borrower and the
Dedicated Blocks are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations.
(d) all hazardous substances, solid waste and oil and gas waste, if
any, generated at any and all Property of the Borrower and the Dedicated Blocks
have in the past been transported, treated and disposed of in accordance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and, to the
knowledge of the Borrower, all such transport carriers and treatment and
disposal facilities have been and are operating in compliance with Environmental
Laws and so as not to pose an imminent and substantial endangerment to public
health or welfare or the environment, and are not the subject of any existing,
pending or threatened action, investigation or inquiry by any Governmental
Authority in connection with any Environmental Laws.
(e) the Borrower has taken all steps reasonably necessary to determine
and has determined that no oil, hazardous substances, solid waste or oil and gas
waste, have been disposed of or otherwise released and there has been no
threatened release of any oil, hazardous substances, solid waste or oil and gas
waste on or to any Property of the Borrower or the Dedicated Blocks, in each
case, except in compliance with Environmental Laws and so as not to pose an
imminent and substantial endangerment to public health or welfare or the
environment.
34
(f) to the extent applicable, all Property of the Borrower and the
Dedicated Blocks currently satisfies all design, operation, and equipment
requirements imposed by the OPA, and the Borrower does not have any reason to
believe that such Property, to the extent subject to the OPA, will not be able
to maintain compliance with the OPA requirements during the term of this
Agreement.
(g) the Borrower does not have any known contingent liability or
Remedial Work in connection with any release or threatened release of any oil,
hazardous substance, solid waste or oil and gas waste into the environment, and
there is no known contingent liability or Remedial Work in connection with any
release or threatened release of any oil, hazardous substance, solid waste or
oil and gas waste into the environment associated with the Dedicated Blocks.
Section 7.07 Compliance with the Laws and Agreements; No Defaults.
(a) Each Loan Party is in compliance with all Governmental Requirements
applicable to it or its Property and all agreements and other instruments
binding upon it or its Property, and possesses all licenses, permits,
franchises, exemptions, approvals and other governmental authorizations
necessary for the ownership of its Property and the conduct of its business,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
(b) No Loan Party is in default nor has any event or circumstance
occurred which, but for the expiration of any applicable grace period or the
giving of notice, or both, would constitute a default or would require any Loan
Party to Redeem or make any offer to Redeem under any indenture, note, credit
agreement or instrument pursuant to which any Material Indebtedness is
outstanding or by which any Loan Party or any of its Properties is bound.
(c) No Default has occurred and is continuing.
Section 7.08 Investment Company Act. Neither the Borrower nor any other
Loan Party is an "investment company" or a company "controlled" by an
"investment company," within the meaning of, or subject to regulation under, the
Investment Company Act of 1940, as amended.
Section 7.09 Public Utility Holding Company Act. Neither the Borrower
nor any other Loan Party is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of, or
subject to regulation under, the Public Utility Holding Company Act of 1935, as
amended.
Section 7.10 Taxes. The Borrower has timely filed or caused to be filed
all Tax returns and reports required to have been filed and has paid or caused
to be paid all Taxes required to have been paid by it, except (a) Taxes that are
being contested in good faith by appropriate proceedings and for which the
Borrower has set aside on its books adequate reserves in accordance with GAAP or
(b) to the extent that the failure to do so could not reasonably be expected to
result in a Material Adverse Effect. The charges, accruals and reserves on the
books of the Borrower in respect of Taxes and other governmental charges are, in
the reasonable
35
opinion of the Borrower, adequate. No Tax Lien has been filed and, to the
knowledge of the Borrower, no claim is being asserted with respect to any such
Tax or other such governmental charge.
Section 7.11 ERISA. Neither the Borrower nor any ERISA Affiliate
currently has or has ever had any employees and neither the Borrower nor any
ERISA Affiliate currently sponsors, maintains or contributes to or has ever
sponsored, maintained or contributed to any "employee benefit plan" as such term
is defined in Section 3(3) of ERISA.
Section 7.12 Disclosure; No Material Misstatements. The Borrower has
disclosed to the Administrative Agent and the Lenders all material agreements,
instruments and corporate or other restrictions to which it is subject, and all
other matters known to it, that, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect. Neither the
Information Memorandum nor any of the other reports, financial statements,
certificates or other information furnished by or on behalf of the Borrower or
any other Loan Party to the Administrative Agent or any Lender or any of their
Affiliates in connection with the negotiation of this Agreement or any other
Loan Document or delivered hereunder or under any other Loan Document (as
modified or supplemented by other information so furnished) contains any
material misstatement of fact or omits to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided that, with respect to projected financial
information, the Borrower represents only that such information was prepared in
good faith based upon assumptions believed to be reasonable at the time. There
is no fact peculiar to the Borrower or any other Loan Party which could
reasonably be expected to have a Material Adverse Effect or in the future is
reasonably likely to have a Material Adverse Effect and which has not been set
forth in this Agreement or the Loan Documents or the other documents,
certificates and statements furnished to the Administrative Agent or the Lenders
by or on behalf of the Borrower or any other Loan Party prior to, or on, the
date hereof in connection with the transactions contemplated hereby. There are
no statements or conclusions in the Initial Reserve Report or any other reserve
report delivered hereunder which are based upon or include misleading
information or fail to take into account material information regarding the
matters reported therein, it being understood that projections concerning
volumes attributable to the Dedicated Blocks and production and cost estimates
contained in the Initial Reserve Report and each other reserve report delivered
hereunder are necessarily based upon professional opinions, estimates and
projections and that the Borrower does not warrant that such opinions, estimates
and projections will ultimately prove to have been accurate.
Section 7.13 Insurance. The Borrower has, or the Borrower's owners on
behalf of the Borrower have obtained, (a) all insurance policies sufficient for
the compliance by it with all material Governmental Requirements, the Medusa
Spar Documents and all other material agreements and (b) insurance coverage in
at least amounts and against such risk (including, without limitation, public
liability) that are usually insured against by companies similarly situated and
engaged in the same or a similar business for the assets and operations of the
Borrower. The Administrative Agent and the Lenders have been named as additional
insureds in respect of such liability insurance policies (other than the
insurance policy obtained by MOC on behalf of the Borrower issued by Oil
Insurance Limited) and the Administrative Agent, for the benefit of the Lenders,
has been named as loss payee with respect to property loss insurance.
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Section 7.14 Restriction on Liens. None of the Borrower or any Pledgor
is a party to any material agreement or arrangement, or subject to any order,
judgment, writ or decree, which either restricts or purports to restrict its
ability to grant Liens to the Administrative Agent and the Lenders on or in
respect of their Properties upon which Liens have been or are purported to be
granted under the Security Instruments to secure the Indebtedness and the Loan
Documents.
Section 7.15 Subsidiaries. The Borrower has no Subsidiaries nor has any
Equity Interest in any other Person.
Section 7.16 Location of Business and Offices. The Borrower's
jurisdiction of organization is Delaware; the name of the Borrower as listed in
the public records of its jurisdiction of organization is Medusa Spar LLC; and
the organizational identification number of the Borrower in its jurisdiction of
organization is 3724209 (or, in each case, as set forth in a notice delivered to
the Administrative Agent pursuant to Section 8.01(j) in accordance with Section
12.01). The Borrower's principal place of business and chief executive offices
are located at the address specified in Section 12.01 (or as set forth in a
notice delivered pursuant to Section 8.01(j) and Section 12.01(c)).
Section 7.17 Properties; Titles, Etc.
(a) The Borrower has good and defensible title to a 75% undivided
interest in and to the Medusa Spar and the Borrower's other Properties, free and
clear of all Liens except Liens permitted by Section 9.02.
(b) Each of MEPC and CPOC has good and defensible title to the
Dedicated Blocks owned by it evaluated in the most recently delivered reserve
report hereunder, free and clear of all Liens except Excepted Liens and JOA
Liens. After giving full effect to the Excepted Liens, each of MEPC and CPOC
owns the net interests in production attributable to the Dedicated Blocks owned
by it as reflected in the most recently delivered reserve report hereunder, and
the ownership of the Dedicated Blocks shall not in any material respect obligate
MEPC or CPOC to bear the costs and expenses relating to the maintenance,
development and operations of the Dedicated Blocks in an amount in excess of the
working interest of the Dedicated Blocks set forth in the most recently
delivered reserve report hereunder that is not offset by a corresponding
proportionate increase in MEPC's or CPOC's net revenue interest in the Dedicated
Blocks.
(c) All material leases and agreements necessary for the conduct of the
business of the Borrower are valid and subsisting, in full force and effect, and
there exists no default or event or circumstance which with the giving of notice
or the passage of time or both would give rise to a default under any such lease
or leases, which could reasonably be expected to have a Material Adverse Effect.
(d) The rights and Properties presently owned, leased or licensed by
the Borrower including, without limitation, all easements and rights of way,
include all rights and Properties necessary to permit the Borrower to conduct
its business in all material respects in the same manner as its business has
been conducted prior to the date hereof, except to the extent the failure to
maintain could reasonably be expected to have a Material Adverse Effect.
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(e) All of the Properties of the Borrower which are reasonably
necessary for the operation of its business are in good working condition and
are maintained in accordance with prudent business standards.
(f) The Borrower owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual Property material to its
business, and the use thereof by the Borrower does not infringe upon the rights
of any other Person, except for any such infringements that, individually or in
the aggregate, could not reasonably be expected to result in a Material Adverse
Effect. The Borrower either owns or has valid licenses or other rights to use
all databases, geological data, geophysical data, engineering data, seismic
data, maps, interpretations and other technical information used in its business
as presently conducted, subject to the limitations contained in the agreements
governing the use of the same, which limitations are customary for similarly
situated companies engaged in the similar businesses, with such exceptions as
could not reasonably be expected to have a Material Adverse Effect.
Section 7.18 Maintenance of Properties. Except for such acts or
failures to act as could not be reasonably expected to have a Material Adverse
Effect, the Properties of the Borrower have been maintained, operated and
developed in a good and workmanlike manner and in conformity with all Government
Requirements and in conformity with the provisions of all leases, subleases or
other contracts and agreements to which it is a party. All pipelines, wells, gas
processing plants, platforms and other material improvements, fixtures and
equipment owned in whole or in part by the Borrower or that are necessary to
conduct normal operations are being maintained in a state adequate to conduct
normal operations, and with respect to such of the foregoing which are operated
by the Borrower, in a careful and efficient manner in accordance with the
practices of the industry and in compliance with all applicable contracts and
agreements and in compliance with all Governmental Requirements (other than
those the failure of which to maintain in accordance with this Section 7.07
could not reasonably be expect to have a Material Adverse Effect).
Section 7.19 Swap Agreements. Schedule 7.19, as of the date hereof, and
after the date hereof, each report required to be delivered by the Borrower
pursuant to Section 8.01(d), sets forth, a true and complete list of all Swap
Agreements of the Borrower, the material terms thereof (including the type,
term, effective date, termination date and notional amounts or volumes), the net
mark to market value thereof, all credit support agreements relating thereto
(including any margin required or supplied) and the counterparty to each such
agreement.
Section 7.20 Use of Loans. The proceeds of the Loans shall be used to
reimburse MEPC and CPOC for a portion of their respective capital contributions
to the Borrower, which amounts represent in the aggregate, an amount equal to
approximately 50% of the purchase price of an undivided 75% interest in the
Medusa Spar, and for the transaction fees and expenses associated with the
Medusa Spar Transactions. The Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the purpose,
whether immediate, incidental or ultimate, of buying or carrying margin stock
(within the meaning of Regulation T, U or X of the Board). No part of the
proceeds of any Loan will be used for any purpose which violates the provisions
of Regulations T, U or X of the Board.
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Section 7.21 Solvency. After giving effect to the transactions
contemplated hereby, (a) the aggregate assets (after giving effect to amounts
that could reasonably be received by reason of indemnity, offset, insurance or
any similar arrangement), at a fair valuation, of the Borrower will exceed the
aggregate Debt of the Borrower, as the Debt becomes absolute and matures, (b)
the Borrower will not have incurred or intended to incur, and will not believe
that it will incur, Debt beyond its ability to pay such Debt (after taking into
account the timing and amounts of cash to be received by the Borrower and the
amounts to be payable on or in respect of its liabilities, and giving effect to
amounts that could reasonably be received by reason of indemnity, offset,
insurance or any similar arrangement) as such Debt becomes absolute and matures
and (c) the Borrower will not have (and will have no reason to believe that it
will have thereafter) unreasonably small capital for the conduct of its
business.
Section 7.22 Medusa Spar Documents. The copies of the Medusa Spar
Documents previously delivered by the Borrower to the Administrative Agent are
true, accurate and complete and have not been amended or modified in any manner,
other than pursuant to amendments or modifications previously delivered to the
Administrative Agent and otherwise permitted by Section 9.17. No party to any
Medusa Spar Document is in default in respect of any term or obligation
thereunder which could reasonably be expected to have a Material Adverse Effect.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Until the Commitments have expired or been terminated and the principal
of and interest on each Loan and all fees payable hereunder and all other
amounts payable under the Loan Documents shall have been paid in full, the
Borrower covenants and agrees with the Lenders that:
Section 8.01 Financial Statements; Ratings Change; Other Information.
The Borrower will furnish to the Administrative Agent and each Lender:
(a) Annual Financial Statements. As soon as available, but in any event
in accordance with then applicable law and not later than 120 days after the end
of each fiscal year of such Person, the Borrower's audited balance sheet and the
consolidated balance sheet of each Parent Guarantor and its Consolidated
Subsidiaries and MEPC, and related statements of operations, members' or
stockholders' equity and cash flows as of the end of and for such year, setting
forth in each case in comparative form the figures for the previous fiscal year,
all reported on by independent public accountants of recognized national
standing acceptable to the Administrative Agent and the Majority Lenders
(without a "going concern" or like qualification or exception and without any
qualification or exception as to the scope of such audit) to the effect that
such financial statements or consolidated financial statements, as applicable,
present fairly in all material respects the financial condition and results of
operations of such Person or such Person on a consolidated basis, as applicable,
in accordance with GAAP consistently applied.
(b) Quarterly Financial Statements. As soon as available, but in any
event in accordance with then applicable law and not later than 60 days after
the end of each of the first
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three fiscal quarters of each fiscal year of such Person, the Borrower's balance
sheet and the consolidated balance sheet of each Parent Guarantor and its
Consolidated Subsidiaries and MEPC, and related statements of operations,
members' or stockholders' equity and cash flows as of the end of and for such
fiscal quarter and the then elapsed portion of the fiscal year, setting forth in
each case in comparative form the figures for the corresponding period or
periods of (or, in the case of the balance sheet, as of the end of) the previous
fiscal year, all certified by one of such Person's Financial Officers as
presenting fairly in all material respects the financial condition and results
of operations of such Person in accordance with GAAP consistently applied,
subject to normal year-end audit adjustments and the absence of footnotes.
(c) Certificate of Financial Officer -- Compliance. Concurrently with
any delivery of financial statements under Section 8.01(a) or Section 8.01(b), a
certificate of a Financial Officer in substantially the form of Exhibit C hereto
(i) certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed to be
taken with respect thereto and (ii) stating whether any change in GAAP or in the
application thereof has occurred since the date of the audited financial
statements referred to in Section 7.04 and, if any such change has occurred,
specifying the effect of such change on the financial statements accompanying
such certificate.
(d) Certificate of Financial Officer - Swap Agreements. Concurrently
with any delivery of financial statements under Section 8.01(a) and Section
8.01(b), a certificate of a Financial Officer, in form and substance
satisfactory to the Administrative Agent, setting forth as of a recent date, a
true and complete list of all Swap Agreements of the Borrower, the material
terms thereof (including the type, term, effective date, termination date and
notional amounts or volumes), the net mark-to-market value therefor, and the
counterparty to each such agreement.
(e) Certificate of Insurer -- Insurance Coverage. Concurrently with any
delivery of financial statements under Section 8.01(a), a certificate of
insurance coverage from each insurer with respect to the insurance required by
Section 8.07, in form and substance reasonably satisfactory to the
Administrative Agent, and, if requested by the Administrative Agent or any
Lender, all copies of the applicable policies.
(f) SEC and Other Filings; Reports to Shareholders. Promptly after the
same become publicly available, copies of all periodic and other reports, proxy
statements and other materials filed by the Borrower or MOC with the SEC, or
with any national securities exchange, or distributed by the Borrower or MOC to
its shareholders or members generally, as the case may be.
(g) Notices Under Material Instruments. Promptly after the furnishing
thereof, copies of any financial statement, report or notice furnished to or by
the Borrower pursuant to the terms of any preferred stock designation,
indenture, loan or credit or other similar agreement, other than this Agreement
and not otherwise required to be furnished to the Lenders pursuant to any other
provision of this Section 8.01.
(h) Notice of Dispositions. In the event the Borrower intends to
Dispose of any Properties in accordance with Section 9.11, prior written notice
of such Disposition, the
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price thereof and the anticipated date of closing and any other details thereof
requested by the Administrative Agent or any Lender.
(i) Notice of Casualty Events. Prompt written notice, and in any event
within three Business Days, of the occurrence of any Casualty Event or the
commencement of any action or proceeding that could reasonably be expected to
result in a Casualty Event.
(j) Information Regarding Loan Parties. Prompt written notice (and in
any event within thirty (30) days prior thereto) of any change (i) in the
Borrower or any other Loan Party's corporate name or in any trade name used to
identify such Person in the conduct of its business or in the ownership of its
Properties, (ii) in the location of the Borrower or any other Loan Party's chief
executive office or principal place of business, (iii) in the Borrower or any
other Loan Party's identity or corporate structure or in the jurisdiction in
which such Person is incorporated or formed, (iv) in the Borrower or any other
Loan Party's jurisdiction of organization or such Person's organizational
identification number in such jurisdiction of organization and (v) in the
Borrower or any other Loan Party's federal taxpayer identification number.
(k) Notices of Certain Changes. Promptly, but in any event within five
(5) Business Days after the execution thereof, copies of any amendment,
modification or supplement to the Borrower's LLC Agreement, the certificate or
articles of formation, any preferred membership interest designation or any
other Organization Document of the Borrower.
(l) Ratings Change. Promptly after, but in no event later than three
(3) Business Days after, Moody's or S&P shall have announced a change in the
Debt Rating, written notice of such rating change.
(m) Reserve Reports. If requested by the Administrative Agent, the
Borrower shall furnish to the Administrative Agent and the Lenders a reserve
report regarding the Dedicated Blocks, in form and substance reasonably
satisfactory to the Administrative Agent, prepared as of a date requested by the
Administrative Agent. Such reserve report shall be prepared by one or more
Approved Petroleum Engineers. With the delivery of each such reserve report, the
Borrower shall furnish to the Administrative Agent and the Lenders a certificate
from a Responsible Officer of MEPC or CPOC, as applicable, certifying that in
all material respects: (i) the information provided to the Approved Petroleum
Engineer by MEPC or CPOC, as applicable, upon which the Approved Petroleum
Engineer has prepared such reserve report and any other information delivered in
connection therewith is true and correct; (ii) MEPC or CPOC, as applicable, owns
good and defensible title to their respective percentage interests in the
Dedicated Blocks evaluated in such reserve report and such Properties are free
of all Liens other than Excepted Liens and JOA Liens; (iii) none of its
interests in the Properties comprising the Dedicated Blocks have been sold since
the date of the most recently delivered reserve report except for production
therefrom and as set forth on an exhibit to the certificate, which certificate
shall list any such Property sold and in such detail as reasonably required by
the Administrative Agent and (iv) attached to the certificate is a list of all
marketing agreements entered into in respect of its interest in the Dedicated
Blocks.
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(n) Other Requested Information. Promptly following any request
therefor, such other information regarding the operations, business affairs and
financial condition of the Borrower or any other Loan Party, or compliance with
the terms of this Agreement or any other Loan Document, as the Administrative
Agent or any Lender may reasonably request.
Section 8.02 Notices of Material Events. The Borrower will furnish to
the Administrative Agent and each Lender prompt written notice of the following:
(a) the occurrence of any Default;
(b) the filing or commencement of, or the threat in writing of, any
action, suit, proceeding, investigation or arbitration by or before any
arbitrator or Governmental Authority against or affecting the Borrower or any
Affiliate thereof not previously disclosed in writing to the Lenders or any
material adverse development in any action, suit, proceeding, investigation or
arbitration previously disclosed to the Lenders that, if adversely determined,
could reasonably be expected to result in a Material Adverse Effect; and
(c) any other development that results in, or could reasonably be
expected to result in, a Material Adverse Effect.
Each notice delivered under this Section 8.02 shall be accompanied by a
statement of a Responsible Officer setting forth the details of the event or
development requiring such notice and any action taken or proposed to be taken
with respect thereto.
Section 8.03 Existence; Conduct of Business. The Borrower will do or
cause to be done all things necessary to preserve, renew and keep in full force
and effect its legal existence and the rights, licenses, permits, privileges and
franchises material to the conduct of its business and maintain, if necessary,
its qualification to do business in each other jurisdiction in which its
Properties is located or the ownership of its Properties requires such
qualification, except where the failure to do so could not reasonably be
expected to have a Material Adverse Effect.
Section 8.04 Payment of Obligations. The Borrower will pay its
obligations, including Tax liabilities of the Borrower before the same shall
become delinquent or in default, except where (a) the validity or amount thereof
is being contested in good faith by appropriate proceedings, (b) the Borrower
has set aside on its books adequate reserves with respect thereto in accordance
with GAAP and (c) the failure to make payment pending such contest could not
reasonably be expected to result in a Material Adverse Effect or result in the
seizure or levy of any Property of the Borrower.
Section 8.05 Performance of Obligations under Loan Documents and Medusa
Spar Documents. The Borrower will pay the Notes according to the reading, tenor
and effect thereof, and the Borrower will do and perform every act and discharge
all of the obligations to be performed and discharged by it under the Loan
Documents, including, without limitation, this Agreement, at the time or times
and in the manner specified, and the Borrower shall comply with, observe and
perform all of its material obligations, undertakings, agreements, covenants and
duties under each Medusa Spar Document to which it is a party in accordance with
the terms thereof.
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Section 8.06 Operation and Maintenance of Properties. The Borrower, at
its own expense, will:
(a) maintain all bonding required to be maintained by any Governmental
Authority in connection with its Properties (including the Borrower's
operatorship of its interest in the Medusa Spar) and operate its Properties or
cause such Properties to be operated in a careful and efficient manner in
accordance with the practices of the industry and in compliance with all
applicable contracts and agreements and in compliance with all Governmental
Requirements, including, without limitation, applicable pro ration requirements
and Environmental Laws, and all applicable laws, rules and regulations of every
other Governmental Authority from time to time constituted to regulate the
development and operation of its Properties and the production and sale,
gathering, handling, operation and transportation of hydrocarbons and other
minerals therefrom, except, in each case, where the failure to do so could not
reasonably be expected to have a Material Adverse Effect.
(b) keep and maintain all Property material to the conduct of its
business in good working order and condition, ordinary wear and tear excepted
preserve, maintain and keep in good repair, working order and efficiency
(ordinary wear and tear excepted) all of its material Properties, including,
without limitation, all equipment, machinery and facilities.
(c) promptly pay and discharge, or make reasonable and customary
efforts to cause to be paid and discharged, all delay rentals, royalties,
expenses and indebtedness accruing under the leases or other agreements
affecting or pertaining to its Properties and will do all other things necessary
to keep unimpaired their rights with respect thereto and prevent any forfeiture
thereof or default thereunder, except, in each case, where the failure to do so
could not reasonably be expected to have a Material Adverse Effect.
(d) promptly perform or make reasonable and customary efforts to cause
to be performed, in accordance with industry standards, the obligations required
by each and all of the assignments, deeds, leases, sub-leases, contracts and
agreements affecting its interests in its Properties, except, in each case,
where the failure to do so could not reasonably be expected to have a Material
Adverse Effect.
(e) cause MEPC to become and maintain its status as a sole "Operator"
of the Medusa Spar under the Joint Operating Agreement.
(f) to the extent the Borrower is not the operator of any of its
Property, the Borrower shall use reasonable efforts to cause the operator to
comply with this Section 8.06.
Section 8.07 Insurance. The Borrower will, or the Borrower's owners on
behalf of the Borrower will, maintain, with insurance companies rated A-VII or
better by Best's Insurance Guide and Key Ratings (or an equivalent rating by
another nationally recognized insurance rating agency for an insurer not rated
by Best's Insurance Guide and Key Ratings), insurance in such amounts and
against such risks as are customarily maintained by companies engaged in the
same or similar businesses operating in the same or similar locations, but in
any event, at least as required by the terms of the Medusa Spar Documents. The
Administrative Agent and the
43
Lenders hereby agree that the energy industry mutual insurer, Oil Insurance
Limited, is an acceptable insurer. The loss payable clauses or provisions in
said insurance policy or policies insuring the Borrower's undivided ownership
interest in the Medusa Spar and any of the collateral for the Loans shall be
endorsed in favor of and made payable to the Administrative Agent as its
interests may appear and such policies shall name the Administrative Agent and
the Lenders as "additional insureds" (other than with respect to the insurance
policy obtained by MOC on behalf of the Borrower issued by Oil Insurance
Limited). The insured or the insurer will endeavor to give at least 30 days
prior notice of any cancellation to the Administrative Agent.
Section 8.08 Books and Records; Inspection Rights. The Borrower will
keep proper books of record and account in which full, true and correct entries
are made of all dealings and transactions in relation to its business and
activities. The Borrower will permit any representatives designated by the
Administrative Agent or any Lender, upon reasonable prior notice, to visit and
inspect its Properties, to examine and make extracts from its books and records,
and to discuss its affairs, finances and condition with its officers and
independent accountants, all at such reasonable times and as often as reasonably
requested.
Section 8.09 Compliance with Laws. The Borrower will comply with all
laws, rules, regulations and orders of any Governmental Authority applicable to
it or its Property, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect.
Section 8.10 Environmental Matters.
(a) The Borrower shall at its sole expense: (i) comply, and shall cause
its Properties and operations to comply, with all applicable Environmental Laws,
the breach of which could be reasonably expected to have a Material Adverse
Effect; (ii) not dispose of or otherwise release any oil, oil and gas waste,
hazardous substance, or solid waste on, under, about or from any of the
Borrower's Properties or any other Property to the extent caused by the
Borrower's operations except in compliance with applicable Environmental Laws,
the disposal or release of which could reasonably be expected to have a Material
Adverse Effect; (iii) timely obtain or file all notices, permits, licenses,
exemptions, approvals, registrations or other authorizations, if any, required
under applicable Environmental Laws to be obtained or filed in connection with
the operation or use of the Borrower's Properties, which failure to obtain or
file could reasonably be expected to have a Material Adverse Effect; (iv)
promptly commence and diligently prosecute to completion any assessment,
evaluation, investigation, monitoring, containment, cleanup, removal, repair,
restoration, remediation or other remedial obligations (collectively, the
"Remedial Work") in the event any Remedial Work is required or reasonably
necessary under applicable Environmental Laws because of or in connection with
the actual or suspected past, present or future disposal or other release of any
oil, oil and gas waste, hazardous substance or solid waste on, under, about or
from any of the Borrower's Properties, which failure to commence and diligently
prosecute to completion could reasonably be expected to have a Material Adverse
Effect; and (v) establish and implement such procedures as may be necessary to
continuously determine and assure that the Borrower's obligations under this
Section 8.10(a) are timely and fully satisfied, which failure to establish and
implement could reasonably be expected to have a Material Adverse Effect.
44
(b) The Borrower will promptly, but in no event later than five days of
the occurrence thereof, notify the Administrative Agent and the Lenders in
writing of any threatened action, investigation or inquiry by any Governmental
Authority or any threatened demand or lawsuit by any landowner or other third
party against the Borrower or related to any of its Properties (including,
without limitation, the Medusa Spar) or the Dedicated Blocks of which the
Borrower has knowledge in connection with any Environmental Laws (excluding
routine testing and corrective action) if the Borrower reasonably anticipates
that such action will result in liability (whether individually or in the
aggregate) in excess of $2,000,000, not fully covered by insurance, subject to
normal deductibles.
Section 8.11 Further Assurances.
(a) The Borrower at its expense will promptly execute and deliver to
the Administrative Agent all such other documents, agreements and instruments
reasonably requested by the Administrative Agent to comply with, cure any
defects or accomplish the conditions precedent, covenants and agreements of the
Borrower in the Loan Documents, including the Notes, or to further evidence and
more fully describe the collateral intended as security for the Indebtedness, or
to correct any omissions in this Agreement or the Security Instruments, or to
state more fully the obligations secured therein, or to perfect, protect or
preserve any Liens created pursuant to this Agreement or any of the Security
Instruments or the priority thereof, or to make any recordings, file any notices
or obtain any consents, all as may be reasonably necessary or appropriate, in
the sole discretion of the Administrative Agent, in connection therewith.
(b) The Borrower hereby authorizes the Administrative Agent to file one
or more financing or continuation statements, and amendments thereto, relative
to all or any part of the Collateral without the signature of the Borrower or
any other Person where permitted by law. A carbon, photographic or other
reproduction of the Security Instruments or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law.
Section 8.12 Collateral. The Borrower will at all times cause the
Collateral to be subject to a Lien of the Security Instruments on such terms and
conditions and documentation as the Administrative Agent shall reasonably
require.
Section 8.13 Swap Agreements. The Borrower shall maintain the hedge
position established by the Swap Agreements required under Section 6.01(m)
during the period specified therein and shall neither assign, terminate or
unwind any such Swap Agreements nor sell any Swap Agreements if the effect of
such action (when taken together with any other Swap Agreements executed
contemporaneously with the taking of such action) would have the effect of
canceling its positions under such Swap Agreements required hereby.
Section 8.14 MEPC Restricted Account. The Borrower shall cause all
amounts from time to time credited to the MEPC Restricted Account (as defined in
the Security Agreement) to be held in the form of cash or Investments permitted
by Section 9.04(c), Section 9.04(d), Section 9.04(e) or Section 9.04(f);
provided that the Borrower may from time to time cause the withdrawal of any
such amounts in order to prepay the Loans in accordance with Section 3.04(a).
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ARTICLE IX
NEGATIVE COVENANTS
Until the Commitments have expired or terminated and the principal of
and interest on each Loan and all fees payable hereunder and all other amounts
payable under the Loan Documents have been paid in full, the Borrower covenants
and agrees with the Lenders that:
Section 9.01 Debt. The Borrower will not incur, create, assume or
suffer to exist any Debt, except:
(a) the Notes or other Indebtedness arising under the Loan Documents.
(b) Debt of the Borrower under the Joint Operating Agreement.
(c) accounts payable from time to time incurred in the ordinary course
of business which are not greater than ninety (90) days past the date of invoice
or delinquent or which are being contested in good faith by appropriate action
and for which adequate reserves have been maintained in accordance with GAAP.
(d) accrued expenses or accrued liabilities arising in the ordinary
course of business (other than Debt referred to in Section 9.01(c)) not to
exceed in the aggregate at any one time outstanding $1,000,000.
(e) endorsements of negotiable instruments for collection in the
ordinary course of business.
Section 9.02 Liens. The Borrower will not create, incur, assume or
permit to exist any Lien on any of its Properties (now owned or hereafter
acquired), except:
(a) Liens securing the payment of any Indebtedness.
(b) Excepted Liens.
(c) the JOA Liens securing obligations that are not delinquent.
46
Section 9.03 Restricted Payments. The Borrower will not declare or
make, or agree to pay or make, directly or indirectly, any Restricted Payment,
return any capital to its stockholders or make any distribution of its Property
to its Equity Interest holders, except (a) the Borrower may declare and pay a
one time cash dividend or distribution to each MEPC and CPOC from the proceeds
of the Term Loan for the purpose specified in Section 7.20 in the amounts set
forth in Schedule 9.03; (b) the Borrower may declare and pay dividends with
respect to its Equity Interests payable solely in additional shares of its
Equity Interests (other than Disqualified Capital Stock) and (c) subject to the
terms of the Security Agreement, the Borrower may declare and pay cash dividends
and distributions in an amount not to exceed the sum of the Actual CPOC
Throughput Amount and the Third Party Throughput Amount, to the extent and only
to the extent such amounts constitute Available Cash and so long as no Default
has occurred and is continuing, or would occur, after giving effect to any such
payment.
Section 9.04 Investments. The Borrower will not make or permit to
remain outstanding any Investments in or to any Person, except that the
foregoing restriction shall not apply to:
(a) Investments reflected in the Financial Statements or which are
disclosed to the Lenders in Schedule 9.05.
(b) accounts receivable arising in the ordinary course of business.
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof.
(d) commercial paper maturing within one year from the date of creation
thereof rated in the highest grade by S&P or Moody's.
(e) deposits maturing within one year from the date of creation thereof
with, including certificates of deposit issued by, any Lender or any office
located in the United States of any other bank or trust company which is
organized under the laws of the United States or any state thereof, has capital,
surplus and undivided profits aggregating at least $100,000,000 (as of the date
of such bank or trust company's most recent financial reports) and has a short
term deposit rating of no lower than A2 or P2, as such rating is set forth from
time to time, by S&P or Moody's, respectively.
(f) deposits in money market funds investing exclusively in Investments
described in Section 9.04(c), Section 9.04(d) or Section 9.04(e).
(g) Investments in stock, obligations or securities received in
settlement of debts arising from Investments permitted under this Section 9.04
owing to the Borrower as a result of a bankruptcy or other insolvency proceeding
of the obligor in respect of such debts or upon the enforcement of any Lien in
favor of the Borrower.
Section 9.05 Nature of Business; International Operations. The Borrower
will not allow any material change to be made in the character of its business
as it is currently being conducted on the date hereof. The Borrower will not
operate its business outside of the
47
geographical boundaries of the United States, provided that the Borrower may
purchase Property from Persons located outside of the geographical boundaries of
the United States.
Section 9.06 Limitation on Leases. The Borrower will not create, incur,
assume or suffer to exist any obligation for the payment of rent or hire of
Property of any kind whatsoever (real or personal or otherwise), under leases or
lease agreements.
Section 9.07 Proceeds of Notes. The Borrower will not permit the
proceeds of the Notes to be used for any purpose other than those permitted by
Section 7.20. Neither the Borrower nor any Person acting on behalf of the
Borrower has taken or will take any action which might cause any of the Loan
Documents to violate Regulations T, U or X or any other regulation of the Board
or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect. If requested by the Administrative Agent, the Borrower
will furnish to the Administrative Agent and each Lender a statement to the
foregoing effect in conformity with the requirements of FR Form U-1 or such
other form referred to in Regulation U, Regulation T or Regulation X of the
Board, as the case may be.
Section 9.08 ERISA Compliance. Neither the Borrower nor any ERISA
Affiliate will at any time employ any employees or sponsor, maintain or
contribute to any "employee benefit plan" as such term is defined in Section
3(3) of ERISA.
Section 9.09 Sale or Discount of Receivables. The Borrower will not
discount or sell (with or without recourse) any of its notes receivable or
accounts receivable.
Section 9.10 Mergers, Etc. The Borrower will not merge into or
consolidate with any other Person, or permit any other Person to merge into or
consolidate with it, or sell, transfer, lease or otherwise dispose of (whether
in one transaction or in a series of transactions) all or substantially all of
its Property to any other Person (whether now owned or hereafter acquired), or
liquidate or dissolve.
Section 9.11 Dispositions. The Borrower will not Dispose of any
Property or make any agreement to make any Disposition other than a Disposition
the Operator is permitted to make in the ordinary course of its operations under
the Joint Operating Agreement in respect of the Medusa Spar without the consent
of the working interest owners which are parties to the Joint Operating
Agreement.
Section 9.12 Environmental Matters. The Borrower will not cause or
permit any of its Property to be in violation of, or do anything or permit
anything to be done which will subject any such Property to any Remedial Work
under any Environmental Laws, assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to such Property where such violations or remedial obligations could
reasonably be expected to have a Material Adverse Effect.
Section 9.13 Transactions with Affiliates. Except for transactions
contemplated by the Oceaneering Products & Services Agreement dated August 8,
2003 (as in effect on the date hereof) and the Medusa Spar Documents (as in
effect on the date hereof), the Borrower will not enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of
48
Property or the rendering of any service, with any Affiliate unless such
transactions are otherwise permitted under this Agreement and are upon fair and
reasonable terms no less favorable to it than it would obtain in a comparable
arm's length transaction with a Person not an Affiliate.
Section 9.14 Subsidiaries. The Borrower will not create, acquire or
have any Subsidiaries or acquire or have any Equity Interest in any other
Person.
Section 9.15 Negative Pledge Agreements. The Borrower will not create,
incur, assume or suffer to exist any contract, agreement or understanding (other
than this Agreement or the Security Instruments) which in any way prohibits or
restricts the granting, conveying, creation or imposition of any Lien on any of
its Property in favor of the Administrative Agent and the Lenders, or which
requires the consent of or notice to other Persons in connection therewith.
Section 9.16 Swap Agreements. The Borrower will not enter into any Swap
Agreements other than as required by Section 6.01(m). In no event shall any Swap
Agreement contain any requirement, agreement or covenant for the Borrower or any
other Loan Party to post collateral or margin to secure its obligations under
such Swap Agreement or to cover market exposures.
Section 9.17 Amendments of Agreements. The Borrower will not amend,
modify, supplement or terminate, or agree to amend, modify, supplement or
terminate, any Medusa Spar Document, or any other provision of any security
issued by the Borrower or of any agreement, instrument or other undertaking to
which the Borrower is a party or by which it or any of its Property is bound,
related to the ownership, operation, or use of the Medusa Spar by the Borrower,
without the prior written consent of the Majority Lenders.
Section 9.18 Limitation on Capital Expenditures. The Borrower shall not
agree to pay for any Capital Expenditures in respect of any of its Properties
except for Capital Expenditures in respect of the Medusa Spar for which the
Borrower is responsible pursuant to the terms of the Operating and Production
Handling Agreement and which is entirely prefunded from the proceeds of capital
contributions from one or more of its members.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default. One or more of the following events
shall constitute an "Event of Default":
(a) the Borrower shall fail to pay any principal of any Loan when and
as the same shall become due and payable, whether at the due date thereof or at
a date fixed for prepayment thereof, by acceleration or otherwise.
(b) the Borrower shall fail to pay any interest on any Loan or any fee
or any other amount (other than an amount referred to in Section 10.01(a))
payable under any Loan Document, when and as the same shall become due and
payable, and such failure shall continue unremedied for a period of three
Business Days.
49
(c) any representation or warranty made or deemed made by or on behalf
of the Borrower or any other Loan Party in or in connection with any Loan
Document or Medusa Spar Document or any amendment or modification of any Loan
Document or Medusa Spar Document or waiver under such Loan Document or Medusa
Spar Document, or in any report, certificate, financial statement or other
document furnished pursuant to or in connection with any Loan Document, Medusa
Spar Document or any amendment or modification thereof or waiver thereunder,
shall prove to have been incorrect when made or deemed made.
(d) the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in Section 8.01(g), Section 8.01(j), Section
8.01(l), Section 8.02, Section 8.03, Section 8.12, Section 8.14 or in ARTICLE
IX.
(e) MOC shall fail to observe or perform any covenant, condition or
agreement contained in Section 3.2 of the MOC Parent Guarantee.
(f) the Borrower or any other Loan Party shall fail to observe or
perform any covenant, condition or agreement contained in this Agreement (other
than those specified in Section 10.01(a), Section 10.01(b) or Section 10.01(d))
or any other Loan Document, and such failure shall continue unremedied for a
period of 30 days after the earlier to occur of (A) notice thereof from the
Administrative Agent to the Borrower (which notice will be given at the request
of any Lender) or (B) a Responsible Officer of the Borrower otherwise becoming
aware of such default.
(g) the Borrower, MOC or MEPC shall fail to make any payment (whether
of principal or interest and regardless of amount) in respect of any Material
Indebtedness of such Person, when and as the same shall become due and payable.
(h) any event or condition occurs that results in any Material
Indebtedness of the Borrower, MOC or MEPC becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of such Material Indebtedness or
any trustee or agent on its or their behalf to cause such Material Indebtedness
to become due, or to require the Redemption thereof or any offer to Redeem to be
made in respect thereof, prior to its scheduled maturity or require such Person
to make an offer in respect thereof.
(i) any event or condition occurs which constitutes an "Event of
Default" or which upon notice, lapse of time or both would, unless cured or
waived, become an "Event of Default" under the MOC Credit Agreement;
(j) (i) an "Event of Default" or an "Additional Termination Event"
under the documentation related to any Swap Agreement entered into by the
Borrower pursuant to Section 6.01(m) occurs or (ii) the Borrower is required to
pay an amount in respect of an Early Termination Date designated under such
documentation as a result of a "Termination Event" as to which the Borrower is
the "Affected Party" (quoted terms in this paragraph having the meanings given
such terms in such documentation).
(k) the failure of any Loan Party to make any payment when due, or the
failure by such Person to observe or perform any other covenant, agreement or
condition, under
50
any Medusa Spar Document to which it is a party, including, without limitation,
the Minimum Throughput Guarantee and the Parent Guarantees (and in the case of
the Joint Operating Agreement, which would entitle any party to the Joint
Operating Agreement to exercise its rights in connection with any Lien granted
under or in connection with the Joint Operating Agreement), in each case,
subject to any applicable grace period provided for therein.
(l) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of the Borrower or any other Loan Party or its debts, or of a
substantial part of its assets, under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect or (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or other Loan Party or for a substantial part
of its assets, and, in any such case, such proceeding or petition shall continue
undismissed for 30 days or an order or decree approving or ordering any of the
foregoing shall be entered.
(m) the Borrower or any other Loan Party shall (i) voluntarily commence
any proceeding or file any petition seeking liquidation, reorganization or other
relief under any Federal, state or foreign bankruptcy, insolvency, receivership
or similar law now or hereafter in effect, (ii) consent to the institution of,
or fail to contest in a timely and appropriate manner, any proceeding or
petition described in Section 10.01(l), (iii) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any other Loan Party or for a substantial
part of its assets, (iv) file an answer admitting the material allegations of a
petition filed against it in any such proceeding, (v) make a general assignment
for the benefit of creditors or (vi) take any action for the purpose of
effecting any of the foregoing.
(n) the Borrower or any other Loan Party shall become unable, admit in
writing its inability or fail generally to pay its debts as they become due.
(o) (i) one or more judgments for the payment of money in an aggregate
amount in excess of (A) $35,000,000, in the case of MOC; (B) $35,000,000, in the
case of MEPC or (C) $2,000,000, in the case of the Borrower, (in each case, to
the extent not covered by independent third party insurance provided by insurers
of the highest claims paying rating or financial strength as to which the
insurer does not dispute coverage and is not subject to an insolvency
proceeding) or (ii) any one or more non-monetary judgments that have, or could
reasonably be expected to have, individually or the aggregate, a Material
Adverse Effect, shall be rendered against the Borrower, MOC, or MEPC or any
combination thereof and the same shall remain undischarged for a period of 30
consecutive days during which execution shall not be effectively stayed, or any
action shall be legally taken by a judgment creditor to attach or levy upon any
assets of the Borrower, MOC or MEPC to enforce any such judgment.
(p) the Loan Documents after delivery thereof shall for any reason,
except to the extent permitted by the terms thereof, cease to be in full force
and effect and valid, binding and enforceable in accordance with their terms
against the Borrower or any other Loan Party thereto or shall be repudiated by
any of them, or cease to create a valid and perfected Lien of the priority
required thereby on any of the collateral purported to be covered thereby,
except to the
51
extent permitted by the terms of this Agreement, or the Borrower or any other
Loan Party or any of their Affiliates shall so state in writing.
(q) the Borrower shall at any time fail to have good and defensible
title to an undivided 75% interest in and to the Medusa Spar, free and clear of
any Lien other than Liens permitted by Section 9.02.
(r) MEPC, or any other Person approved in writing by the Lenders, shall
at any time cease to be the "Operator" under the Joint Operating Agreement.
(s) a Change in Control shall occur.
(t) CPC shall at any time sell or otherwise dispose of any of the
Equity Interests of the Borrower owned by CPC on the date hereof (whether
directly or indirectly, or beneficially or of record), to any other Person, and
such other Person, at the time of acquisition of any such Equity Interests (i)
fails to have a long term senior, unsecured debt rating from S&P of B and
Moody's of B2 or (ii) fails to execute and deliver to the Administrative Agent
documentation similar in form and substance to the Loan Documents to which CPC
is then a party (including, without limitation, the CPC Parent Guarantee), in
form and substance satisfactory to the Administrative Agent and the Lenders, and
such other documentation (including legal opinions) as the Administrative Agent
and the Lenders may reasonably require.
Section 10.02 Remedies.
(a) In the case of an Event of Default other than one described in
Section 10.01(l), Section 10.01(m) or Section 10.01(n), at any time thereafter
during the continuance of such Event of Default, the Administrative Agent may,
and at the request of the Majority Lenders, shall, by notice to the Borrower,
take either or both of the following actions, at the same or different times:
(i) terminate the Commitments, and thereupon the Commitments shall terminate
immediately and (ii) declare the Notes and the Loans then outstanding to be due
and payable in whole (or in part, in which case any principal not so declared to
be due and payable may thereafter be declared to be due and payable), and
thereupon the principal of the Loans so declared to be due and payable, together
with accrued interest thereon and all fees and other obligations of the Borrower
accrued hereunder and under the Notes and the other Loan Documents, shall become
due and payable immediately, without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other notice of any kind, all of
which are hereby waived by the Borrower; and in case of an Event of Default
described in Section 10.01(l), Section 10.01(m) or Section 10.01(n), the
Commitments shall automatically terminate and the Notes and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
the other obligations of the Borrower accrued hereunder and under the Notes and
the other Loan Documents, shall automatically become due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower and each other Loan Party.
(b) In the case of the occurrence of an Event of Default, the
Administrative Agent and the Lenders will have all other rights and remedies
available at law and equity.
52
(c) All proceeds realized from the liquidation or other disposition of
collateral or otherwise received after maturity of the Notes, whether by
acceleration or otherwise, shall be applied:
(i) first, to payment or reimbursement of that portion of the
Indebtedness constituting fees, expenses, indemnities and other amounts
payable to the Administrative Agent in its capacity as such;
(ii) second, pro rata to payment or reimbursement of that portion
of the Indebtedness constituting fees, expenses, indemnities and other
amounts (other than principal and interest) payable to the Lenders;
(iii) third, pro rata to payment of accrued interest on the Loans;
(iv) fourth, pro rata to payment of principal outstanding on the
Loans and that portion of the Indebtedness constituting Swap
Termination Values; and
(v) and any excess, if any, after all of the Indebtedness shall
have been indefeasibly paid in full in cash, shall be paid to the
Borrower or as otherwise required by any Governmental Requirement.
ARTICLE XI
THE AGENTS
Section 11.01 Appointment; Powers. Each of the Lenders hereby
irrevocably appoints the Administrative Agent as its agent and authorizes the
Administrative Agent to take such actions on its behalf and to exercise such
powers as are delegated to the Administrative Agent by the terms hereof and the
other Loan Documents, together with such actions and powers as are reasonably
incidental thereto.
Section 11.02 Duties and Obligations of Administrative Agent. The
Administrative Agent shall not have any duties or obligations except those
expressly set forth in the Loan Documents. Without limiting the generality of
the foregoing, (a) the Administrative Agent shall not be subject to any
fiduciary or other implied duties, regardless of whether a Default has occurred
and is continuing (the use of the term "agent" herein and in the other Loan
Documents with reference to the Administrative Agent is not intended to connote
any fiduciary or other implied (or express) obligations arising under agency
doctrine of any applicable law; rather, such term is used merely as a matter of
market custom, and is intended to create or reflect only an administrative
relationship between independent contracting parties), (b) the Administrative
Agent shall not have any duty to take any discretionary action or exercise any
discretionary powers, except as provided in Section 11.03, and (c) except as
expressly set forth herein, the Administrative Agent shall not have any duty to
disclose, and shall not be liable for the failure to disclose, any information
relating to the Borrower or any other Loan Party that is communicated to or
obtained by the bank serving as Administrative Agent or any of its Affiliates in
any capacity. The Administrative Agent shall be deemed not to have knowledge of
any Default unless and until written notice thereof is given to the
Administrative Agent by the Borrower or a Lender, and shall not be responsible
for or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement or any other
53
Loan Document, (ii) the contents of any certificate, report or other document
delivered hereunder or under any other Loan Document or in connection herewith
or therewith, (iii) the performance or observance of any of the covenants,
agreements or other terms or conditions set forth herein or in any other Loan
Document, (iv) the validity, enforceability, effectiveness or genuineness of
this Agreement, any other Loan Document or any other agreement, instrument or
document, (v) the satisfaction of any condition set forth in ARTICLE VI or
elsewhere herein, other than to confirm receipt of items expressly required to
be delivered to the Administrative Agent or as to those conditions precedent
expressly required to be to the Administrative Agent's satisfaction, (vi) the
existence, value, perfection or priority of any collateral security or the
financial or other condition of the Borrower or any other Loan Party or any
other obligor or guarantor, or (vii) any failure by the Borrower or any other
Person (other than itself) to perform any of its obligations hereunder or under
any other Loan Document or the performance or observance of any covenants,
agreements or other terms or conditions set forth herein or therein. For
purposes of determining compliance with the conditions specified in ARTICLE VI,
each Lender that has signed this Agreement shall be deemed to have consented to,
approved or accepted or to be satisfied with, each document or other matter
required thereunder to be consented to or approved by or acceptable or
satisfactory to a Lender unless the Administrative Agent shall have received
notice from such Lender prior to the proposed closing date specifying its
objection thereto.
Section 11.03 Action by Administrative Agent. The Administrative Agent
shall not have any duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and powers expressly
contemplated hereby that the Administrative Agent is required to exercise in
writing as directed by the Majority Lenders (or such other number or percentage
of the Lenders as shall be necessary under the circumstances as provided in
Section 12.02) and in all cases the Administrative Agent shall be fully
justified in failing or refusing to act hereunder or under any other Loan
Documents unless it shall (a) receive written instructions from the Majority
Lenders or the Lenders, as applicable, (or such other number or percentage of
the Lenders as shall be necessary under the circumstances as provided in Section
12.02) specifying the action to be taken and (b) be indemnified to its
satisfaction by the Lenders against any and all liability and expenses which may
be incurred by it by reason of taking or continuing to take any such action. The
instructions as aforesaid and any action taken or failure to act pursuant
thereto by the Administrative Agent shall be binding on all of the Lenders. If a
Default has occurred and is continuing, then the Administrative Agent shall take
such action with respect to such Default as shall be directed by the requisite
Lenders in the written instructions (with indemnities) described in this Section
11.03, provided that, unless and until the Administrative Agent shall have
received such directions, the Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event, however, shall the Administrative Agent be required to take any
action which exposes the Administrative Agent to personal liability or which is
contrary to this Agreement, the Loan Documents or applicable law. If a Default
has occurred and is continuing, the Syndication Agents shall have no obligation
to perform any act in respect thereof. No Agent shall be liable for any action
taken or not taken by it with the consent or at the request of the Majority
Lenders or the Lenders (or such other number or percentage of the Lenders as
shall be necessary under the circumstances as provided in Section 12.02), and
otherwise no Agent shall be liable for any action taken or not taken by it
hereunder or under any other Loan Document or under any other document or
instrument referred to or provided for herein or therein or in connection
herewith or therewith INCLUDING
54
ITS OWN ORDINARY NEGLIGENCE, except for its own gross negligence or willful
misconduct.
Section 11.04 Reliance by Administrative Agent. The Administrative
Agent shall be entitled to rely upon, and shall not incur any liability for
relying upon, any notice, request, certificate, consent, statement, instrument,
document or other writing believed by it to be genuine and to have been signed
or sent by the proper Person. The Administrative Agent also may rely upon any
statement made to it orally or by telephone and believed by it to be made by the
proper Person, and shall not incur any liability for relying thereon and each of
the Borrower and the Lenders hereby waives the right to dispute the
Administrative Agent's record of such statement, except in the case of gross
negligence or willful misconduct by the Administrative Agent. The Administrative
Agent may consult with legal counsel (who may be counsel for the Borrower),
independent accountants and other experts selected by it, and shall not be
liable for any action taken or not taken by it in accordance with the advice of
any such counsel, accountants or experts. The Agents may deem and treat the
payee of any Note as the holder thereof for all purposes hereof unless and until
a written notice of the assignment or transfer thereof permitted hereunder shall
have been filed with the Administrative Agent.
Section 11.05 Subagents. The Administrative Agent may perform any and
all its duties and exercise its rights and powers by or through any one or more
sub-agents appointed by the Administrative Agent. The Administrative Agent and
any such sub-agent may perform any and all its duties and exercise its rights
and powers through their respective Related Parties. The exculpatory provisions
of the preceding Sections of this ARTICLE XI shall apply to any such sub-agent
and to the Related Parties of the Administrative Agent and any such sub-agent,
and shall apply to their respective activities in connection with the
syndication of the credit facilities provided for herein as well as activities
as Administrative Agent.
Section 11.06 Resignation or Removal of Agents. Subject to the
appointment and acceptance of a successor Agent as provided in this Section
11.06, any Agent may resign at any time by notifying the Lenders and the
Borrower, and any Agent may be removed at any time with or without cause by the
Majority Lenders. Upon any such resignation or removal, the Majority Lenders
shall have the right, in consultation with the Borrower, to appoint a successor.
If no successor shall have been so appointed by the Majority Lenders and shall
have accepted such appointment within 30 days after the retiring Agent gives
notice of its resignation or removal of the retiring Agent, then the retiring
Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a
bank with an office in New York, New York, or an Affiliate of any such bank.
Upon the acceptance of its appointment as Agent hereunder by a successor, such
successor shall succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations hereunder. The fees payable by the
Borrower to a successor Agent shall be the same as those payable to its
predecessor unless otherwise agreed between the Borrower and such successor.
After the Agent's resignation hereunder, the provisions of this ARTICLE XI and
Section 12.03 shall continue in effect for the benefit of such retiring Agent,
its sub-agents and their respective Related Parties in respect of any actions
taken or omitted to be taken by any of them while it was acting as Agent.
55
Section 11.07 Agents as Lenders. Each bank serving as an Agent
hereunder shall have the same rights and powers in its capacity as a Lender as
any other Lender and may exercise the same as though it were not an Agent, and
such bank and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any other Loan
Party or other Affiliate thereof as if it were not an Agent hereunder.
Section 11.08 No Reliance. Each Lender acknowledges that it has,
independently and without reliance upon the Administrative Agent, any other
Agent or any other Lender and based on such documents and information as it has
deemed appropriate, made its own credit analysis and decision to enter into this
Agreement and each other Loan Document to which it is a party. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent, any other Agent or any other Lender and based on such
documents and information as it shall from time to time deem appropriate,
continue to make its own decisions in taking or not taking action under or based
upon this Agreement, any other Loan Document, any related agreement or any
document furnished hereunder or thereunder. The Agents shall not be required to
keep themselves informed as to the performance or observance by the Borrower or
any other Loan Party of this Agreement, the Loan Documents or any other document
referred to or provided for herein or to inspect the Properties or books of the
Borrower or any other Loan Party . Except for notices, reports and other
documents and information expressly required to be furnished to the Lenders by
the Administrative Agent hereunder, no Agent or the Arranger shall have any duty
or responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Borrower (or any
of its Affiliates) which may come into the possession of such Agent or any of
its Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins
L.L.P. is acting in this transaction as special counsel to the Administrative
Agent only, except to the extent otherwise expressly stated in any legal opinion
or any Loan Document. Each other party hereto will consult with its own legal
counsel to the extent that it deems necessary in connection with the Loan
Documents and the matters contemplated therein.
Section 11.09 Administrative Agent 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 any Loan Party, the Administrative Agent (irrespective of
whether the principal of any Loan shall then be due and payable as herein
expressed or by declaration or otherwise and irrespective of whether the
Administrative Agent shall have made any demand on the Borrower) shall be
entitled and empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and
interest owing and unpaid in respect of the Loans and all other Indebtedness
that are owing and unpaid and to file such other documents as may be necessary
or advisable in order to have the claims of the Lenders and the Administrative
Agent (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Lenders and the Administrative Agent and their
respective agents and counsel and all other amounts due the Lenders and the
Administrative Agent under Section 12.03) allowed in such judicial proceeding;
and
(b) to collect and receive any monies or other property payable or
deliverable on any such claims and to distribute the same;
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and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Lender to make such payments to the Administrative Agent and,
in the event that the Administrative Agent shall consent to the making of such
payments directly to the Lenders, to pay to the Administrative Agent any amount
due for the reasonable compensation, expenses, disbursements and advances of the
Administrative Agent and its agents and counsel, and any other amounts due the
Administrative Agent under Section 12.03.
Nothing contained herein shall be deemed to authorize the
Administrative Agent to authorize or consent to or accept or adopt on behalf of
any Lender any plan of reorganization, arrangement, adjustment or composition
affecting the Indebtedness or the rights of any Lender or to authorize the
Administrative Agent to vote in respect of the claim of any Lender in any such
proceeding.
Section 11.10 Authority of Administrative Agent to Release Collateral
and Liens. Each Lender hereby authorizes the Administrative Agent to release any
collateral that is permitted to be sold or released pursuant to the terms of the
Loan Documents. Each Lender hereby authorizes the Administrative Agent to
execute and deliver to the Borrower, at the Borrower's sole cost and expense,
any and all releases of Liens, termination statements, assignments or other
documents reasonably requested by the Borrower in connection with any sale or
other disposition of Property to the extent such sale or other disposition is
permitted by the terms of Section 9.11 or is otherwise authorized by the terms
of the Loan Documents.
Section 11.11 The Arranger and the Syndication Agents. The Arranger and
the Syndication Agents shall have no duties, responsibilities or liabilities
under this Agreement and the other Loan Documents other than their duties,
responsibilities and liabilities in their capacity as Lenders hereunder.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Notices.
(a) Except in the case of notices and other communications expressly
permitted to be given by telephone (and subject to Section 12.01(b)), all
notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(i) if to the Borrower, to it at 131 South Robertson, New Orleans,
Louisiana 70112, Attention of John C. Higgins (Telecopy No. (504)
561-2551);
(ii) if to the Administrative Agent, to it at 1100 Louisiana,
Suite 3000, Houston, Texas 77002, Attention of Randy Crath (Telecopy
No. (713) 752-2425), with a copy to The Bank of Nova Scotia, at 600
Peachtree Street, NE Suite 2700, Atlanta, Georgia 30308, Attention of
Eudia Smith (Telecopy No. (404) 888-8998); and
(iii) if to any other Lender, to it at its address (or telecopy
number) set forth in its Administrative Questionnaire.
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(b) Notices and other communications to the Lenders hereunder may be
delivered or furnished by electronic communications pursuant to procedures
approved by the Administrative Agent; provided that the foregoing shall not
apply to notices pursuant to ARTICLE II, ARTICLE III, ARTICLE IV and ARTICLE V
unless otherwise agreed by the Administrative Agent and the applicable Lender.
The Administrative Agent or the Borrower may, in its discretion, agree to accept
notices and other communications to it hereunder by electronic communications
pursuant to procedures approved by it; provided that approval of such procedures
may be limited to particular notices or communications.
(c) Any party hereto may change its address or telecopy number for
notices and other communications hereunder by notice to the other parties
hereto. All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt.
Section 12.02 Waivers; Amendments.
(a) No failure on the part of the Administrative Agent or any Lender to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege, or any abandonment or discontinuance of steps to
enforce such right, power or privilege, under any of the Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under any of the Loan Documents preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies of the Administrative Agent and the Lenders hereunder
and under the other Loan Documents are cumulative and are not exclusive of any
rights or remedies that they would otherwise have. No waiver of any provision of
this Agreement or any other Loan Document or consent to any departure by the
Borrower therefrom shall in any event be effective unless the same shall be
permitted by Section 12.02(b), and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Without limiting the generality of the foregoing, the making of a Loan shall not
be construed as a waiver of any Default, regardless of whether the
Administrative Agent or any Lender may have had notice or knowledge of such
Default at the time.
(b) Neither this Agreement nor any provision hereof nor any Security
Instrument nor any provision thereof may be waived, amended or modified except
pursuant to an agreement or agreements in writing entered into by the Borrower
and the Majority Lenders or by the Borrower and the Administrative Agent with
the consent of the Majority Lenders; provided that no such agreement shall (i)
increase the Commitment of any Lender without the written consent of such
Lender, (ii) reduce the principal amount of any Loan or reduce the rate of
interest thereon, or reduce any fees payable hereunder, or reduce any other
Indebtedness hereunder or under any other Loan Document, without the written
consent of each Lender affected thereby, (iii) postpone the scheduled date of
payment or prepayment of the principal amount of any Loan, or any interest
thereon, or any fees payable hereunder, or any other Indebtedness hereunder or
under any other Loan Document, or reduce the amount of, waive or excuse any such
payment, or postpone or extend the Termination Date without the written consent
of each Lender affected thereby, (iv) change Section 4.01(b) or Section 4.01(c)
in a manner that would alter the pro rata sharing of payments required thereby,
without the written consent of each Lender, (v) waive or amend Section 6.01,
Section 8.12, Section 10.02(c) or
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Section 12.14 or change the definition of the term "Subsidiary", without
the written consent of each Lender, (vi) release any Guarantor (except as set
forth in the Guarantees), release any of the collateral (other than as
provided in Section 11.10), without the written consent of each Lender, or (vii)
change any of the provisions of this Section 12.02(b) or the definitions of
"Majority Lenders" or any other provision hereof specifying the number or
percentage of Lenders required to waive, amend or modify any rights hereunder or
under any other Loan Documents or make any determination or grant any consent
hereunder or any other Loan Documents, without the written consent of each
Lender; provided further that no such agreement shall amend, modify or otherwise
affect the rights or duties of the Administrative Agent hereunder or under any
other Loan Document without the prior written consent of the Administrative
Agent.
Section 12.03 Expenses, Indemnity; Damage Waiver.
(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses
incurred by the Administrative Agent and its Affiliates, including, without
limitation, the reasonable fees, charges and disbursements of counsel and other
outside consultants for the Administrative Agent, the reasonable travel,
photocopy, mailing, courier, telephone and other similar expenses, and the cost
of environmental audits and surveys and appraisals, in connection with the
syndication of the credit facilities provided for herein, the preparation,
negotiation, execution, delivery and administration (both before and after the
execution hereof and including advice of counsel to the Administrative Agent as
to the rights and duties of the Administrative Agent and the Lenders with
respect thereto) of this Agreement and the other Loan Documents and any
amendments, modifications or waivers of or consents related to the provisions
hereof or thereof (whether or not the transactions contemplated hereby or
thereby shall be consummated), (ii) all reasonable costs, expenses, Taxes,
assessments and other charges incurred by any Agent or any Lender in connection
with any filing, registration, recording or perfection of any security interest
contemplated by this Agreement or any Security Instrument or any other document
referred to therein, (iii) all reasonable out-of-pocket expenses incurred by any
Agent or any Lender, including the fees, charges and disbursements of any
counsel for any Agent or any Lender, in connection with the enforcement or
protection of its rights in connection with this Agreement or any other Loan
Document, including its rights under this Section 12.03, or in connection with
the Loans made hereunder, including, without limitation, all such reasonable
out-of-pocket expenses incurred during any workout, restructuring or
negotiations in respect of such Loans.
(b) THE BORROWER SHALL INDEMNIFY EACH AGENT, THE ACCOUNT BANK, THE
SECURITIES INTERMEDIARY AND EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE
FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN "INDEMNITEE") AGAINST, AND
HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES,
LIABILITIES AND RELATED EXPENSES, INCLUDING THE FEES, CHARGES AND DISBURSEMENTS
OF ANY COUNSEL FOR ANY INDEMNITEE, INCURRED BY OR ASSERTED AGAINST ANY
INDEMNITEE ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (i) THE
EXECUTION OR DELIVERY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY
AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE
PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE
OBLIGATIONS HEREUNDER OR THEREUNDER OR THE
59
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR BY ANY OTHER LOAN
DOCUMENT, (ii) THE FAILURE OF THE BORROWER OR ANY OTHER LOAN PARTY TO COMPLY
WITH THE TERMS OF ANY LOAN DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY
GOVERNMENTAL REQUIREMENT, (iii) ANY INACCURACY OF ANY REPRESENTATION OR ANY
BREACH OF ANY WARRANTY OR COVENANT OF THE BORROWER OR ANY OTHER LOAN PARTY SET
FORTH IN ANY OF THE LOAN DOCUMENTS OR ANY INSTRUMENTS, DOCUMENTS OR
CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (iv) ANY LOAN OR THE USE OF
THE PROCEEDS THEREFROM, (v) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, (vi) THE
OPERATIONS OF THE BUSINESS OF THE BORROWER AND THE OTHER LOAN PARTIES BY THE
BORROWER AND THE OTHER LOAN PARTIES, (vii) ANY ASSERTION THAT THE LENDERS WERE
NOT ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY
INSTRUMENTS, (viii) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY
OTHER LOAN PARTY OR ANY OF THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE
PRESENCE, GENERATION, STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT,
DISPOSAL, ARRANGEMENT OF DISPOSAL OR TREATMENT OF OIL, OIL AND GAS WASTES, SOLID
WASTES OR HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES, (ix) THE BREACH OR
NON-COMPLIANCE BY THE BORROWER OR ANY OTHER LOAN PARTY WITH ANY ENVIRONMENTAL
LAW APPLICABLE TO THE BORROWER OR ANY OTHER LOAN PARTY, (x) THE PAST OWNERSHIP
BY THE BORROWER OR ANY OTHER LOAN PARTY OF ANY OF THEIR PROPERTIES OR PAST
ACTIVITY ON ANY OF THEIR PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE
AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (xi) THE PRESENCE, USE, RELEASE,
STORAGE, TREATMENT, DISPOSAL, GENERATION, THREATENED RELEASE, TRANSPORT,
ARRANGEMENT FOR TRANSPORT OR ARRANGEMENT FOR DISPOSAL OF OIL, OIL AND GAS
WASTES, SOLID WASTES OR HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES
OWNED OR OPERATED BY THE BORROWER OR ANY OTHER LOAN PARTY OR ANY ACTUAL OR
ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY PROPERTY OWNED
OR OPERATED BY THE BORROWER OR ANY OTHER LOAN PARTY, (xii) ANY ENVIRONMENTAL
LIABILITY RELATED IN ANY WAY TO THE BORROWER OR ANY OTHER LOAN PARTY, OR (xiii)
ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN
DOCUMENTS, OR (xiv) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION
OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT
OR ANY OTHER THEORY AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO,
AND SUCH INDEMNITY SHALL EXTEND TO EACH INDEMNITEE NOTWITHSTANDING THE SOLE OR
CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER WHATSOEVER, WHETHER ACTIVE OR
PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN OMISSION, INCLUDING WITHOUT
LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT IDENTIFIED IN THE RESTATEMENT
(SECOND) OF TORTS OF ONE OR MORE OF THE INDEMNITEES OR BY REASON OF STRICT
LIABILITY IMPOSED WITHOUT FAULT ON ANY ONE OR MORE OF THE INDEMNITEES; PROVIDED
THAT
50
SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT
SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY
A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE
RESULTED FROM THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF SUCH INDEMNITEE.
(c) To the extent that the Borrower fails to pay any amount required to
be paid by it to any Agent under Section 12.03(a) or (b), each Lender severally
agrees to pay to such Agent such Lender's Applicable Percentage (determined as
of the time that the applicable unreimbursed expense or indemnity payment is
sought) of such unpaid amount; provided that the unreimbursed expense or
indemnified loss, claim, damage, liability or related expense, as the case may
be, was incurred by or asserted against such Agent in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower shall not
assert, and hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement, any other Loan Document or any agreement or instrument
contemplated hereby or thereby, the Transactions, any Loan or the use of the
proceeds thereof.
(e) All amounts due under this Section 12.03 shall be payable not later
than thirty (30) days after written demand therefor.
Section 12.04 Successors and Assigns.
(a) The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
permitted hereby, except that (i) the Borrower may not assign or otherwise
transfer any of its rights or obligations hereunder without the prior written
consent of each Lender (and any attempted assignment or transfer by the Borrower
without such consent shall be null and void) and (ii) no Lender may assign or
otherwise transfer its rights or obligations hereunder except in accordance with
this Section 12.04. Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby, Participants (to the extent
provided in Section 12.04(c)) and, to the extent expressly contemplated hereby,
the Related Parties of each of the Administrative Agent and the Lenders) any
legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) (i) Subject to the conditions set forth in Section 12.04(b)(ii),
any Lender may assign to one or more assignees all or a portion of its rights
and obligations under this Agreement (including all or a portion of its
Commitment and the Loans at the time owing to it) with the prior written consent
(such consent not to be unreasonably withheld) of:
(A) the Borrower, provided that no consent of the Borrower shall
be required for an assignment to a Lender, an Affiliate of a Lender, an Approved
Fund or, if an Event of Default has occurred and is continuing, any other
assignee; and
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(B) the Administrative Agent, provided that no consent of the
Administrative Agent shall be required for an assignment to an assignee that is
a Lender immediately prior to giving effect to such assignment.
(ii) Assignments shall be subject to the following additional
conditions:
(A) except in the case of an assignment to a Lender or an
Affiliate of a Lender or an assignment of the entire remaining amount of the
assigning Lender's Commitment or Loans, the amount of the Commitment or Loans of
the assigning Lender subject to each such assignment (determined as of the date
the Assignment and Assumption with respect to such assignment is delivered to
the Administrative Agent) shall not be less than $2,000,000 unless each of the
Borrower and the Administrative Agent otherwise consent, provided that no such
consent of the Borrower shall be required if an Event of Default has occurred
and is continuing;
(B) each partial assignment shall be made as an assignment of a
proportionate part of all the assigning Lender's rights and obligations under
this Agreement;
(C) the parties to each assignment shall execute and deliver to
the Administrative Agent an Assignment and Assumption, together with a
processing and recordation fee of $3,500; and
(D) the assignee, if it shall not be a Lender, shall deliver to
the Administrative Agent an Administrative Questionnaire.
(iii) Subject to Section 12.04(b)(iv) and the acceptance and
recording thereof, from and after the effective date specified in each
Assignment and Assumption the assignee thereunder shall be a party
hereto and, to the extent of the interest assigned by such Assignment
and Assumption, have the rights and obligations of a Lender under this
Agreement, and the assigning Lender thereunder shall, to the extent of
the interest assigned by such Assignment and Assumption, be released
from its obligations under this Agreement (and, in the case of an
Assignment and Assumption covering all of the assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a
party hereto but shall continue to be entitled to the benefits of
Section 5.01, Section 5.02, Section 5.03 and Section 12.03). Any
assignment or transfer by a Lender of rights or obligations under this
Agreement that does not comply with this Section 12.04 shall be treated
for purposes of this Agreement as a sale by such Lender of a
participation in such rights and obligations in accordance with Section
12.04(c).
(iv) The Administrative Agent, acting for this purpose as an agent
of the Borrower, shall maintain at one of its offices a copy of each
Assignment and Assumption delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the
Commitment of, and principal amount of the Loans owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The
entries in the Register shall be conclusive, and the Borrower, the
Administrative Agent and the Lenders may treat each Person
whose name is recorded in the Register pursuant to the
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terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. The Register shall
be available for inspection by the Borrower and any Lender, at any
reasonable time and from time to time upon reasonable prior notice. In
connection with any changes to the Register, if necessary, the
Administrative Agent will reflect the revisions on Annex I and forward
a copy of such revised Annex I to the Borrower and each Lender.
(v) Upon its receipt of a duly completed Assignment and Assumption
executed by an assigning Lender and an assignee, the assignee's
completed Administrative Questionnaire (unless the assignee shall
already be a Lender hereunder), the processing and recordation fee
referred to in Section 12.04(b) and any written consent to such
assignment required by Section 12.04(b), the Administrative Agent shall
accept such Assignment and Assumption and record the information
contained therein in the Register. No assignment shall be effective for
purposes of this Agreement unless it has been recorded in the Register
as provided in this Section 12.04(b).
(c) (i) Any Lender may, without the consent of the Borrower or the
Administrative Agent, sell participations to one or more banks or other entities
(a "Participant") in all or a portion of such Lender's rights and obligations
under this Agreement (including all or a portion of its Commitment and the Loan
owing to it); provided that (A) such Lender's obligations under this Agreement
shall remain unchanged, (B) such Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations and (C) the
Borrower, the Administrative Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement. Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement; provided that such
agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, modification or waiver
described in the proviso to Section 12.02 that affects such Participant. In
addition such agreement must provide that the Participant be bound by the
provisions of Section 12.03. Subject to Section 12.04(c)(ii), the Borrower
agrees that each Participant shall be entitled to the benefits of Section 5.01,
Section 5.02 and Section 5.03 to the same extent as if it were a Lender and had
acquired its interest by assignment pursuant to Section 12.04(b). To the extent
permitted by law, each Participant also shall be entitled to the benefits of
Section 12.08 as though it were a Lender, provided such Participant agrees to be
subject to Section 4.01(c) as though it were a Lender.
(ii) A Participant shall not be entitled to receive any
greater payment under Section 5.01 or Section 5.03 than the applicable
Lender would have been entitled to receive with respect to the
participation sold to such Participant, unless the sale of the
participation to such Participant is made with the Borrower's prior
written consent. A Participant that would be a Foreign Lender if it
were a Lender shall not be entitled to the benefits of Section 5.03
unless the Borrower is notified of the participation sold to such
Participant and such Participant agrees, for the benefit of the
Borrower, to comply with Section 5.03(e) as though it were a Lender.
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(d) Any Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement to secure obligations of
such Lender, including, without limitation, any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section 12.04(d) shall not apply
to any such pledge or assignment of a security interest; provided that no such
pledge or assignment of a security interest shall release a Lender from any of
its obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.
(e) Notwithstanding any other provisions of this Section 12.04, no
transfer or assignment of the interests or obligations of any Lender or any
grant of participations therein shall be permitted if such transfer, assignment
or grant would require the Borrower to file a registration statement with the
SEC or to qualify the Loans under the "Blue Sky" laws of any state.
Section 12.05 Survival; Revival; Reinstatement.
(a) All covenants, agreements, representations and warranties made by
the Borrower herein and in the certificates or other instruments delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of this Agreement and the making of any
Loans, regardless of any investigation made by any such other party or on its
behalf and notwithstanding that the Administrative Agent or any Lender may have
had notice or knowledge of any Default or incorrect representation or warranty
at the time any credit is extended hereunder, and shall continue in full force
and effect as long as the principal of or any accrued interest on any Loan or
any fee or any other amount payable under this Agreement is outstanding and
unpaid and so long as the Commitments have not expired or terminated. The
provisions of Section 5.01, Section 5.02, Section 5.03 and Section 12.03 and
ARTICLE XI shall survive and remain in full force and effect regardless of the
consummation of the transactions contemplated hereby, the repayment of the
Loans, the expiration or termination of the Commitments or the termination of
this Agreement, any other Loan Document or any provision hereof or thereof.
(b) To the extent that any payments on the Indebtedness or proceeds of
any collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent, the Indebtedness so satisfied shall be
revived and continue as if such payment or proceeds had not been received and
the Administrative Agent's and the Lenders' Liens, security interests, rights,
powers and remedies under this Agreement and each Loan Document shall continue
in full force and effect. In such event, each Loan Document shall be
automatically reinstated and the Borrower shall take such action as may be
reasonably requested by the Administrative Agent and the Lenders to effect such
reinstatement.
Section 12.06 Counterparts; Integration; Effectiveness.
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(a) This Agreement may be executed in counterparts (and by different
parties hereto on different counterparts), each of which shall constitute an
original, but all of which when taken together shall constitute a single
contract.
(b) This Agreement, the other Loan Documents and any separate letter
agreements with respect to fees payable to the Administrative Agent constitute
the entire contract among the parties relating to the subject matter hereof and
thereof and supersede any and all previous agreements and understandings, oral
or written, relating to the subject matter hereof and thereof. This Agreement
and the other Loan Documents represent the final agreement among the parties
hereto and thereto and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties. There are no
unwritten oral agreements between the parties.
(c) Except as provided in Section 6.01, this Agreement shall become
effective when it shall have been executed by the Administrative Agent and when
the Administrative Agent shall have received counterparts hereof which, when
taken together, bear the signatures of each of the other parties hereto, and
thereafter shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Delivery of an executed counterpart
of a signature page of this Agreement by telecopy shall be effective as delivery
of a manually executed counterpart of this Agreement.
Section 12.07 Severability. Any provision of this Agreement or any
other Loan Document held to be invalid, illegal or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity, illegality or unenforceability without affecting the validity,
legality and enforceability of the remaining provisions hereof or thereof; and
the invalidity of a particular provision in a particular jurisdiction shall not
invalidate such provision in any other jurisdiction.
Section 12.08 Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations (of
whatsoever kind, including, without limitations obligations under Swap
Agreements) at any time owing by such Lender or Affiliate to or for the credit
or the account of the Borrower or any or its Affiliates against any of and all
the obligations of the Borrower or any or any of its Affiliates owed to such
Lender now or hereafter existing under this Agreement or any other Loan
Document, irrespective of whether or not such Lender shall have made any demand
under this Agreement or any other Loan Document and although such obligations
may be unmatured. The rights of each Lender under this Section 12.08 are in
addition to other rights and remedies (including other rights of setoff) which
such Lender or its Affiliates may have.
Section 12.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF
PROCESS.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
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YORK EXCEPT TO THE EXTENT THAT UNITED STATES FEDERAL LAW PERMITS ANY LENDER TO
CONTRACT FOR, CHARGE, RECEIVE, RESERVE OR TAKE INTEREST AT THE RATE ALLOWED BY
THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS
MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, EACH PARTY HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT
PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT
PRECLUDE A PARTY FROM OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT
OTHERWISE HAVING JURISDICTION.
(c) THE BORROWER HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS
AND HEREBY CONFERS AN IRREVOCABLE SPECIAL POWER, AMPLE AND SUFFICIENT, TO CT
CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 111 8TH AVENUE, NEW YORK,
NEW YORK 10011 AS ITS DESIGNEE, APPOINTEE AND AGENT WITH RESPECT TO ANY SUCH
ACTION OR PROCEEDING IN NEW YORK TO RECEIVE AND ACCEPT FOR AND ON ITS BEHALF,
AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS,
NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH PROCEEDING AND AGREES THAT
THE FAILURE OF SUCH AGENT TO GIVE ANY ADVICE OF ANY SUCH SERVICE OF PROCESS TO
THE BORROWER SHALL NOT IMPAIR OR AFFECT THE VALIDITY OF SUCH SERVICE OR OF ANY
CLAIM BASED THEREON. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL
CEASE TO BE AVAILABLE TO ACT AS SUCH, THE BORROWER AGREES TO DESIGNATE A NEW
DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY REASONABLY SATISFACTORY TO THE
ADMINISTRATIVE AGENT ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION. EACH
PARTY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES
THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS
SPECIFIED IN SECTION 12.01 OR SUCH OTHER ADDRESS AS IS SPECIFIED PURSUANT TO
SECTION 12.01 (OR ITS ASSIGNMENT AND ASSUMPTION), SUCH SERVICE TO BECOME
EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF A PARTY OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
ANOTHER PARTY IN ANY OTHER JURISDICTION.
66
(d) EACH PARTY HEREBY (i) IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (iii) CERTIFIES THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (iv)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE LOAN
DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.09.
Section 12.10 Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.
Section 12.11 Confidentiality. Each of the Administrative Agent and the
Lenders agrees to maintain the confidentiality of the Information (as defined
below), except that Information may be disclosed (a) to its and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
shall agree to be bound by the terms of this Section 12.11), (b) to the extent
requested by any regulatory authority having jurisdiction over such Person, (c)
to the extent required by applicable laws or regulations or by any subpoena or
similar legal process, (d) to any other party to this Agreement or any other
Loan Document, (e) in connection with the exercise of any remedies hereunder or
under any other Loan Document or any suit, action or proceeding relating to this
Agreement or any other Loan Document or the enforcement of rights hereunder or
thereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section 12.11, to (i) any assignee of or Participant in,
or any prospective assignee of or Participant in, any of its rights or
obligations under this Agreement or (ii) any actual or prospective counterparty
(or its advisors) to any Swap Agreement relating to the Borrower and its
obligations, (g) with the consent of the Borrower or (h) to the extent such
Information (i) becomes publicly available other than as a result of a breach of
this Section 12.11 or (ii) becomes available to the Administrative Agent or any
Lender on a nonconfidential basis from a source other than the Borrower. For the
purposes of this Section 12.11, "Information" means all information received
from the Borrower or any other Loan Party relating to the Borrower or any other
Loan Party and their businesses, other than any such information that is
available to the Administrative Agent or any Lender on a nonconfidential basis
prior to disclosure by the Borrower or any other Loan Party; provided that, in
the case of information received from the Borrower or other Loan Party after the
date hereof, such information is clearly identified at the time of delivery as
confidential. Any Person required to maintain the confidentiality of Information
as provided in this Section 12.11 shall be considered to have complied with its
67
obligation to do so if such Person has exercised the same degree of care to
maintain the confidentiality of such Information as such Person would accord to
its own confidential information. Notwithstanding anything herein to the
contrary, "Information" shall not include, and the Borrower, the other Loan
Parties, the Administrative Agent, each Lender and the respective Affiliates of
each of the foregoing (and the respective partners, directors, officers,
employees, agents, advisors and other representatives of the aforementioned
Persons), and any other party, may disclose to any and all Persons, without
limitation of any kind (a) any information with respect to the U.S. federal and
state income tax treatment of the transactions contemplated hereby and any facts
that may be relevant to understanding the U.S. federal or state income tax
treatment of such transactions ("tax structure"), which facts shall not include
for this purpose the names of the parties or any other person named herein, or
information that would permit identification of the parties or such other
persons, or any pricing terms or other nonpublic business or financial
information that is unrelated to such tax treatment or tax structure, and (b)
all materials of any kind (including opinions or other tax analyses) that are
provided to the Borrower, the Administrative Agent or such Lender relating to
such tax treatment or tax structure.
Section 12.12 Interest Rate Limitation. It is the intention of the
parties hereto that each Lender shall conform strictly to usury laws applicable
to it. Accordingly, if the transactions contemplated hereby would be usurious as
to any Lender under laws applicable to it (including the laws of the United
States of America and the State of Texas or any other jurisdiction whose laws
may be mandatorily applicable to such Lender notwithstanding the other
provisions of this Agreement), then, in that event, notwithstanding anything to
the contrary in any of the Loan Documents or any agreement entered into in
connection with or as security for the Notes, it is agreed as follows: (i) the
aggregate of all consideration which constitutes interest under law applicable
to any Lender that is contracted for, taken, reserved, charged or received by
such Lender under any of the Loan Documents or agreements or otherwise in
connection with the Notes shall under no circumstances exceed the maximum amount
allowed by such applicable law, and any excess shall be canceled automatically
and if theretofore paid shall be credited by such Lender on the principal amount
of the Indebtedness (or, to the extent that the principal amount of the
Indebtedness shall have been or would thereby be paid in full, refunded by such
Lender to the Borrower); and (ii) in the event that the maturity of the Notes is
accelerated by reason of an election of the holder thereof resulting from any
Event of Default under this Agreement or otherwise, or in the event of any
required or permitted prepayment, then such consideration that constitutes
interest under law applicable to any Lender may never include more than the
maximum amount allowed by such applicable law, and excess interest, if any,
provided for in this Agreement or otherwise shall be canceled automatically by
such Lender as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by such Lender on the principal amount of
the Indebtedness (or, to the extent that the principal amount of the
Indebtedness shall have been or would thereby be paid in full, refunded by such
Lender to the Borrower). All sums paid or agreed to be paid to any Lender for
the use, forbearance or detention of sums due hereunder shall, to the extent
permitted by law applicable to such Lender, be amortized, prorated, allocated
and spread throughout the stated term of the Loans evidenced by the Notes until
payment in full so that the rate or amount of interest on account of any Loans
hereunder does not exceed the maximum amount allowed by such applicable law. If
at any time and from time to time (i) the amount of interest payable to any
Lender on any date shall be computed at the Highest Lawful Rate applicable to
such Lender pursuant to this Section 12.12
68
and (ii) in respect of any subsequent interest computation period the amount of
interest otherwise payable to such Lender would be less than the amount of
interest payable to such Lender computed at the Highest Lawful Rate applicable
to such Lender, then the amount of interest payable to such Lender in respect of
such subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Lender until the total amount of interest
payable to such Lender shall equal the total amount of interest which would have
been payable to such Lender if the total amount of interest had been computed
without giving effect to this Section 12.12. To the extent that Chapter 303 of
the Texas Finance Code is relevant for the purpose of determining the Highest
Lawful Rate applicable to a Lender, such Lender elects to determine the
applicable rate ceiling under such Chapter by the weekly ceiling from time to
time in effect. Chapter 346 of the Texas Finance Code does not apply to the
Borrower's obligations hereunder.
Section 12.13 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION
OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD
NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
Section 12.14 Collateral Matters; Swap Agreements. The benefit of the
Security Instruments and of the provisions of this Agreement relating to any
collateral securing the Indebtedness shall also extend to and be available to
those Lenders or their Affiliates which are counterparties to any Secured Swap
Agreement with the Borrower, subject to Section 10.02(c), on a pro rata basis in
respect of any obligations of the Borrower which arise under any such Secured
Swap Agreement while such Person or its Affiliate is a Lender, but only while
such Person or its Affiliate is a Lender, including any Secured Swap Agreements
between such Persons in existence prior to the date hereof. No Lender or any
Affiliate of a Lender shall have any voting rights under any Loan Document as a
result of the existence of obligations owed to it under any such Secured Swap
Agreements.
Section 12.15 No Third Party Beneficiaries. This Agreement, the other
Loan Documents, and the agreement of the Lenders to make Loans hereunder are
solely for the benefit
69
of the Borrower, and no other Person (including, without limitation, any other
Loan Party, any obligor, contractor, subcontractor, supplier or materialsman)
shall have any rights, claims, remedies or privileges hereunder or under any
other Loan Document against the Administrative Agent, any other Agent or any
Lender for any reason whatsoever. There are no third party beneficiaries.
[SIGNATURES BEGIN NEXT PAGE]
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The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
BORROWER: MEDUSA SPAR LLC
By:
-----------------------------------
Name:
Title:
1
ADMINISTRATIVE AGENT: THE BANK OF NOVA SCOTIA,
as Administrative Agent and a Lender
By:
-----------------------------------
Name:
Title:
2
SYNDICATION AGENT: BANK ONE, N.A.,
as a Syndication Agent and a Lender
By:
-----------------------------------
Name:
Title:
3
SYNDICATION AGENT: SUNTRUST BANK,
as a Syndication Agent and a Lender
By:
-----------------------------------
Name:
Title:
4
LENDERS: SCOTIABANC INC.
By:
-----------------------------------
Name:
Title:
5
LENDERS: DEN NORSKE BANK ASA
By:
-----------------------------------
Name:
Title:
6
LENDERS: WHITNEY NATIONAL BANK
By:
-----------------------------------
Name:
Title:
7
EXHIBIT 10.21
RETIREMENT PACKAGE AND RELEASE AGREEMENT
THIS RETIREMENT PACKAGE AND RELEASE AGREEMENT ("Agreement"), made, entered
into and effective March 9, 2004, is between CALLON PETROLEUM COMPANY, a
Delaware company having its principal offices at 200 North Canal Street, P.O.
Box 1287, Natchez, Mississippi, 39121 AND ALL OF ITS SUBSIDIARIES AND AFFILIATES
("Callon"), and DENNIS W. CHRISTIAN ("Christian"), an individual, residing at
1616 Main St, Natchez, Mississippi.
WITNESSETH:
WHEREAS, Callon and Christian entered into that certain Severance
Compensation Agreement dated effective January 1, 2002 ("Change of Control
Agreement");
WHEREAS, the parties have agreed upon certain terms relating to the
retirement of Christian from Callon and his resignation from the Board of
Directors.
NOW, THEREFORE, for and in consideration of the recitals and covenants
herein set forth, the parties agree as follows:
1. Employment and Directorship. Christian hereby resigns as an officer and
employee of Callon, and resigns as a member of the Board of Directors of Callon.
Christian's resignation of employment with Callon and his resignation from the
Board of Directors will be effective as of March 9, 2004 ("Retirement Date").
2. Change of Control Agreement. The Change of Control Agreement and
Christian's employment thereunder are hereby terminated by Christian's
retirement and mutual agreement of the parties, effective as of the Retirement
Date. Except for those provisions and the agreements expressly set forth herein,
neither party shall have any obligation or responsibility of any kind to the
other party after the Retirement Date.
3. Consideration. In consideration of the premises and his 23 years of
service to Callon, Christian shall receive, on the terms and conditions stated
herein, the following:
a) $1,500,000, payable as set forth below, less maximum additional 401k
contribution for 2004 and lawful withholdings of federal and state income and
payroll taxes in an amount equal to 33% of the taxable amount;
b) Callon shall assign to Christian the ownership of his company car,
laptop computer, cell phone; and
c) Christian shall take certain "memorabilia" as specifically approved by
Fred L. Callon.
Items 3 a) through c) shall be hereafter referred to as the "Payment".
The cash portion of the Payment set forth in Section 3(a) shall be made by wire
transfer to an account designated in writing by Christian as follows: (i)
$1,350,000 (less taxes as provided for
above) no later than noon on the eighth day after Christian signs this Agreement
and has not revoked his acceptance of this Agreement ("Initial Payment") and
(ii) $150,000 (less taxes as provided for above) plus an amount equal to 6% per
annum interest thereon from March 9, 2004 to the date of payment on March 9,
2005 ("Final Payment"). The Final Payment shall be placed in escrow with Simon,
Peragine, Smith and Redfearn, L.L.P. contemporaneously with the Initial Payment
and shall be released to Christian on March 9, 2005, including 6% per annum
interest.
4. Severance Pay. Christian waives, and Callon shall not be required to
pay, any severance pay or severance benefits, except as expressly provided for
in this Agreement, in connection with Christian's retirement. The consideration
and remuneration provided for under this Agreement are in lieu of and take the
place of any other severance pay or severance benefit, which Christian forfeits.
Christian shall promptly deliver into escrow with Simon, Peragine, Smith and
Redfearn, L.L.P. original copies of all option agreements following the payment
of the Initial Payment provided for above. Simon, Peragine, Smith and Redfearn,
L.L.P. shall release the option agreements to Callon along with Christian's full
release of any rights thereto, upon notification from Christian that the payment
set forth in 3 (ii) has been received .
All unvested restricted shares owned by Christian will immediately vest without
restriction upon the execution of the Agreement and the stock certificates for
those net shares, after lawful withholdings of federal and state income and
payroll taxes, will be delivered to Christian concurrent with the Initial
Payment.
5. Employee Benefit Plans. Callon agrees to continue health and dental
insurance coverage for Christian and his eligible dependents under Callon's
group health insurance plan as it may be amended from time to time until the
earlier of the date Christian becomes eligible for Medicare benefits or the date
Christian obtains new coverage as a result of any future employment, and to pay
Christian and his eligible dependents' portion of the premium while such
coverage is continued. When requested by Christian, Callon will provide any
necessary evidence of continuation of coverage.
6. Release and Indemnity. By execution of this Agreement, Christian for
himself, his legal and other representatives, claimants, heirs and
beneficiaries, forever waives and releases Callon from all rights, benefits,
payments and claims (including but not limited to statutory, tort or contractual
claims) of any kind and nature to which Christian is now or in the future may be
entitled, and/or arising out of or in connection with Christian's employment
with Callon, and resignation of Christian's employment, including but not
limited to, claims of race, sex, age, color, disability, religion, national
origin, and any other form of discrimination, harassment, or retaliation in
violation of Title VII of the Civil Rights Act, the Americans With Disabilities
Act, the Age Discrimination in Employment Act ("ADEA"), the Family and Medical
Leave Act, the Equal Pay Act, the Employee Retirement Income Security Act of
1974, all as amended, and any other state or federal statute, regulation or the
common law (contract, tort or other), except as may be specifically provided for
under this Agreement or contained in the plan documents or grants of benefits to
which Christian is entitled according to the provisions hereof. It is
specifically agreed that this Agreement, and the consideration Christian will
receive hereunder, constitute a complete settlement and release, and an absolute
bar to any and all claims, known or unknown, Christian has
2
or may have against Callon or its respective directors, officers, and employees,
whether or not the same be presently known or suspected to be arising out of or
in any manner connected with Christian's employment thereby or resignation of
employment with Callon, except as may be specifically provided for under this
Agreement or contained in the plan documents or grants of benefits to which
Christian is entitled according to the provisions hereof. THIS SECTION OF THE
AGREEMENT APPLIES TO RIGHTS OR CLAIMS PURSUANT TO THE ADEA ONLY IN EXISTENCE ON
OR BEFORE THE DATE OF PAYMENT OF CONSIDERATION AND REMUNERATION PROVIDED FOR
HEREIN. CHRISTIAN ACKNOWLEDGES AND AGREES, AND REPRESENTS TO CALLON THAT (I) HE
UNDERSTANDS THE EFFECT OF THE PROVISIONS OF THIS PARAGRAPH; (II) HE HAS BEEN
PROVIDED AT LEAST TWENTY-ONE (21) CALENDAR DAYS IN WHICH TO CONSIDER THE EFFECT
OF THE PROVISIONS OF THIS PARAGRAPH; AND (III) HE HAS BEEN ADVISED IN WRITING BY
CALLON TO CONSULT AN ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT. CHRISTIAN MAY
KNOWINGLY AND VOLUNTARILY WAIVE THE REMAINDER OF THE 21-DAY CONSIDERATION
PERIOD, IF ANY, FOLLOWING THE DATE HE SIGNED THIS AGREEMENT. CHRISTIAN
ACKNOWLEDGES: 1) HE HAS NOT BEEN ASKED BY CALLON TO SHORTEN HIS PERIOD FOR
CONSIDERATION OF WHETHER TO SIGN THIS AGREEMENT; 2) CALLON HAS NOT THREATENED TO
WITHDRAW OR ALTER THE BENEFITS DUE PRIOR TO THE EXPIRATION OF THE 21-DAY PERIOD;
OR 3) CALLON HAS NOT PROVIDED DIFFERENT TERMS BECAUSE HE HAS DECIDED TO SIGN THE
AGREEMENT PRIOR TO THE EXPIRATION OF THE 21-DAY CONSIDERATION PERIOD. CHRISTIAN
UNDERSTANDS AND ACKNOWLEDGES THAT HE HAS SEVEN (7) CALENDAR DAYS FOLLOWING HIS
EXECUTION OF THIS AGREEMENT TO REVOKE HIS ACCEPTANCE OF THIS AGREEMENT,
WHEREUPON THIS AGREEMENT SHALL BE RESCINDED IN ITS ENTIRETY AND BECOME NULL AND
VOID. THIS AGREEMENT WILL NOT BECOME EFFECTIVE OR ENFORCEABLE, AND THE PAYMENT
WILL NOT BECOME PAYABLE, UNTIL AFTER THIS REVOCATION PERIOD HAS EXPIRED.
In consideration of the payments and promises contained in this Agreement,
Callon and all its subsidiaries, affiliates and related companies hereby
release, discharge, forever holds harmless and Callon agrees to indemnify and
defend Christian from any and all claims, demands or suits, whether civil or
criminal, at law or in equity, known or unknown, fixed or contingent, liquidated
or unliquidated, asserted or unasserted, arising or existing on or at any time
prior to the Retirement Date. This Release includes, but is not limited to, any
claims relating to or arising out of Christian's employment with Callon, its
subsidiaries, affiliates and/or related companies and/or his separation and
retirement therefrom.
7. Knowingly and Voluntary. Christian understands that it is his choice
whether or not to enter into this Agreement and that his decision to do so is
voluntary and is made knowingly.
8. Post Employment Obligations.
8.1 Post Employment Confidentiality Obligations. The terms of this
Agreement and the content of the discussions pertaining to this Agreement shall
be considered and treated as confidential and Christian shall not discuss or
otherwise disclose, in any manner, the amount paid under this Agreement, and/or
the substance or content of discussions involved in reaching this Agreement to
any person other than Christian's attorney, spouse, family and tax/financial
advisors and as required by appropriate taxing or other legal authorities.
Further, Christian acknowledges and agrees to continue to abide by any and all
Callon's confidentiality policies and procedures for a period of two years.
3
The terms of this Agreement and the content of the discussions pertaining
to this Agreement shall be considered and treated as confidential and Callon
shall not discuss or otherwise disclose, in any manner, the amount paid under
this Agreement, and/or the substance or content of discussions involved in
reaching this Agreement to any third party except as required by law.
8.2 Cooperation. Christian agrees that he will promptly return any and all
Callon property, including copies thereof, to Callon. Christian agrees that for
a period of 60 days he shall cooperate with, and make himself available for, any
and all requests by Callon for information regarding his job functions with
Callon and events, circumstances, and transactions with which he became familiar
during the course of his employment with Callon. With respect to any litigation,
charges, investigations, or subpoenas initiated by governmental or private
parties, such cooperation shall include, but not be limited to, assisting Callon
with preparing responses to subpoenas and other forms of discovery and making
himself available to provide testimony for depositions, hearings or trials.
Callon agrees to compensate Christian for any significant or lengthy assistance
at the rate of $500 per hour and to reimburse him for all reasonable expenses
incurred in so doing.
8.3 Recommendations; Malignment. Callon acknowledges that Christian's
retirement from the company was in no way related to any improper activities.
Callon agrees that it will honestly and freely answer any questions from
prospective employers in a manner that would support Christian's efforts to
obtain another job either in the oil and gas business or otherwise. Christian
and Callon agree that neither party will engage in any behavior nor act in any
manner to malign the other party in any way to any third party, the oil and gas
community, government agencies, the media or the public.
8.4 Re-Employment. Christian agrees to relinquish and hereby does
relinquish any and all rights he may have to re-employment with Callon.
Christian further agrees that he will not knowingly seek, accept, or otherwise
pursue employment with Callon, except that this paragraph will not apply if
Christian's then-current employer becomes part of Callon as a result of a merger
or acquisition. Similarly this paragraph will not apply if Christian is part of
a consulting team hired by Callon or its partners.
8.5 No Impediment. Callon agrees not to impede the hiring of Dennis
Christian by any other entity, including Callon's existing partners, as either
an employee or a consultant.
9. Miscellaneous.
9.1 Applicable Law. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Mississippi.
9.2 No Waiver. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
4
9.3 Remedy for Breach of Contract. The parties agree that in the event
there is any breach or asserted breach of the terms, covenants or conditions of
this Agreement, the remedy of the parties hereto shall be in both law and in
equity, including injunctive relief for the enforcement of or relief from any
provisions of this Agreement.
9.4 Severability. It is the desire and intent of the parties that the
terms, provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant or remedy of this Agreement or the application thereof to any person or
circumstances shall, to any extent, be construed to be invalid or unenforceable
in whole or in part, then such term, provision, covenant or remedy shall be
construed in a manner so as to permit its enforceability under the applicable
law to the fullest extent permitted by law. In any case, the remaining
provisions of this Agreement or the application thereof to any person or
circumstances other than those to which they have been held invalid or
unenforceable, shall remain in full force and effect. It is further the desire
and intent of the parties that in the event of any breach of any portion of this
Agreement, the remainder of this Agreement shall remain in effect as written and
enforceable to the fullest extent permitted by law.
9.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
9.6 Withholding of Taxes. Callon may withhold from any benefits or
remuneration payable under this Agreement all federal, state, city or other
taxes as may be required pursuant to any law or governmental regulation or
ruling.
9.7 Headings. The paragraph headings have been inserted for purposes of
convenience and shall not be used for interpretive purposes.
9.8 Assignability.
A. By Callon:
Callon's obligations under this Agreement are not transferable
or assignable by Callon and shall be considered a liability of
Callon in any sale or transfer of substantially all of its business
or assets by any means whether direct or indirect, by purchase,
merger, consolidation or otherwise.
B. By Christian:
With respect to Christian's rights and obligations, his rights
and obligations hereunder are personal and neither this Agreement,
nor any right, benefit or obligation of Christian, shall be subject
to voluntary or involuntary assignment, alienation or transfer,
whether by operation of law or otherwise, without the prior written
consent of Callon. This Agreement and all payments hereunder shall
inure
5
to the benefit of and be enforceable by and against Christian's
personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
9.9 Entire Agreement: Modification. This Agreement constitutes the entire
agreement of the parties with regard to the resignation of employment of
Christian, supersedes any and all prior written agreements between the parties,
and contains all of the covenants, promises, representations and agreements
between the parties with respect to the resignation of employment of Christian
with Callon. Each party to this Agreement acknowledges that no representation,
inducement, promise or agreement, oral or written, has been made by either
party, which is not embodied herein, or referred to hereby and that no
agreement, statement or promise relating to the employment or resignation of
employment of Christian with Callon that is not contained or provided for,
identified or referred to in this Agreement, shall be valid or binding. Any
modification of this Agreement will be effective only if it is in writing and
signed by both parties.
PLEASE READ THIS DOCUMENT CAREFULLY AS IT INCLUDES A
RELEASE OF CLAIMS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
___________________________________
Dennis W. Christian
Callon Petroleum Company
By: ______________________________
Name: ____________________________
Title: ___________________________
6
EXHIBIT 10.22
RETIREMENT PACKAGE AND RELEASE AGREEMENT
THIS RETIREMENT PACKAGE AND RELEASE AGREEMENT ("Agreement"), made, entered
into and effective March 9, 2004, is between CALLON PETROLEUM COMPANY, a
Delaware company having its principal offices at 200 North Canal Street, P.O.
Box 1287, Natchez, Mississippi, 39121, AND ALL OF ITS SUBSIDIARIES AND
AFFILIATES ("CALLON") and KATHY G. TILLEY ("Tilley"), an individual, residing at
P.O. Drawer N, Natchez, Ms. 39121.
WITNESSETH:
WHEREAS, the parties have agreed upon certain terms relating to the
retirement of Tilley from Callon.
NOW, THEREFORE, for and in consideration of the recitals and covenants
herein set forth, the parties agree as follows:
1. Employment. Tilley hereby resigns as an officer and employee of Callon
effective as of March 9, 2004 ("Retirement Date").
2. Change of Control Agreement. Tilley's employment is hereby terminated
by Tilley's retirement and mutual agreement of the parties, effective as of the
Retirement Date. Except for those provisions and the agreements expressly set
forth herein, neither party shall have any obligation or responsibility of any
kind to the other party after the Retirement Date.
3. Consideration. In consideration of the premises and her 23 years of
service to Callon, Tilley shall receive, on the terms and conditions stated
herein, the following:
a) $1,000,000, payable as set forth below, less maximum additional 401k
contribution for 2004 and lawful withholdings of federal and state income and
payroll taxes in an amount equal to 33% of the taxable amount;
b) Callon shall assign to Tilley the ownership of her company car, laptop
computer, cell phone; and
c) Tilley shall take certain "memorabilia" as specifically approved by
Fred L. Callon.
Items 3 a) through c) shall be hereafter referred to as the "Payment".
The cash portion of the Payment set forth in Section 3(a) shall be made by wire
transfer to an account designated in writing by Tilley as follows: (i) $ 900,000
(Nine Hundred Thousand Dollars) (less taxes as provided for above) no later than
noon on the eighth day after Tilley signs this Agreement and has not revoked her
acceptance of the Agreement ("Initial Payment"), and (ii) $100,000 (One Hundred
Thousand Dollars) (less taxes as provided for above) plus an amount equal to 6%
per annum interest thereon from March 9, 2004 to the date of payment on March 9,
2005 ("Final Payment"). The Final Payment shall be placed in escrow with Simon,
Peragine, Smith and
6
Redfearn, L.L.P. contemporaneously with the Initial Payment and shall be
released to Tilley on March 9, 2005, including 6% per annum interest.
4. Severance Pay. Tilley waives, and Callon shall not be required to pay
any severance pay or severance benefits, except as expressly provided for in
this Agreement, in connection with Tilley's retirement. The consideration and
remuneration provided for under this Agreement are in lieu of and take the place
of any other severance pay or severance benefit, which Tilley forfeits. Tilley
shall promptly deliver into escrow with Simon, Peragine, Smith and Redfearn,
L.L.P. original copies of all option agreements following the payment of the
Initial Payment provided for above. Simon, Peragine, Smith and Redfearn, L.L.P.
shall release the option agreements upon notification from Tilley that the
payment set forth in 3 (ii) has been received.
All unvested restricted shares owned by Tilley will immediately vest without
restriction upon the execution of the Agreement and the stock certificates for
those net shares, after lawful withholdings of federal and state income and
payroll taxes will be delivered to Tilley concurrent with the Initial Payment.
5. Employee Benefit Plans. Callon agrees to continue health and dental
insurance coverage for Tilley and her eligible dependents under Callon's group
health insurance plan as it may be amended from time to time until the earlier
of the date Tilley becomes eligible for Medicare benefits or the date Tilley
obtains new coverage as a result of any future employment, and to pay Tilley and
her eligible dependents' portion of the premium while such coverage is
continued. When requested by Tilley, Callon will provide any necessary evidence
of continuation of coverage.
6. Release and Indemnity. By execution of this Agreement, Tilley for
herself, her legal and other representatives, claimants, heirs and
beneficiaries, forever waives and releases Callon from all rights, benefits,
payments and claims (including but not limited to statutory, tort or contractual
claims) of any kind and nature to which Tilley is now or in the future may be
entitled, and/or arising out of or in connection with Tilley's employment with
Callon, and resignation of Tilley's employment, including but not limited to,
claims of race, sex, age, color, disability, religion, national origin, and any
other form of discrimination, harassment, or retaliation in violation of Title
VII of the Civil Rights Act, the Americans With Disabilities Act, the Age
Discrimination in Employment Act ("ADEA"), the Family and Medical Leave Act, the
Equal Pay Act, the Employee Retirement Income Security Act of 1974, all as
amended, and any other state or federal statute, regulation or the common law
(contract, tort or other), except as may be specifically provided for under this
Agreement or contained in the plan documents or grants of benefits to which
Tilley is entitled according to the provisions hereof. It is specifically agreed
that this Agreement, and the consideration Tilley will receive hereunder,
constitute a complete settlement and release, and an absolute bar to any and all
claims, known or unknown, Tilley has or may have against Callon or its
respective directors, officers, and employees, whether or not the same be
presently known or suspected to be arising out of or in any manner connected
with Tilley's employment thereby or resignation of employment with Callon,
except as may be specifically provided for under this Agreement or contained in
the plan documents or grants of benefits to which Tilley is entitled according
to the provisions hereof. THIS SECTION OF THE AGREEMENT APPLIES TO RIGHTS OR
CLAIMS PURSUANT TO THE ADEA ONLY IN EXISTENCE ON OR BEFORE THE DATE OF PAYMENT
OF CONSIDERATION AND REMUNERATION PROVIDED FOR HEREIN. TILLEY ACKNOWLEDGES AND
AGREES, AND
2
REPRESENTS TO CALLON THAT (i) SHE UNDERSTANDS THE EFFECT OF THE PROVISIONS OF
THIS PARAGRAPH; (ii) SHE HAS BEEN PROVIDED AT LEAST TWENTY-ONE (21) CALENDAR
DAYS IN WHICH TO CONSIDER THE EFFECT OF THE PROVISIONS OF THIS PARAGRAPH; AND
(iii) SHE HAS BEEN ADVISED IN WRITING BY CALLON TO CONSULT AN ATTORNEY PRIOR TO
EXECUTING THIS AGREEMENT. TILLEY MAY KNOWINGLY AND VOLUNTARILY WAIVE THE
REMAINDER OF THE 21-DAY CONSIDERATION PERIOD, IF ANY, FOLLOWING THE DATE SHE
SIGNED THIS AGREEMENT. TILLEY ACKNOWLEDGES: 1) SHE HAS NOT BEEN ASKED BY CALLON
TO SHORTEN HER PERIOD FOR CONSIDERATION OF WHETHER TO SIGN THIS AGREEMENT; 2)
CALLON HAS NOT THREATENED TO WITHDRAW OR ALTER THE BENEFITS DUE PRIOR TO THE
EXPIRATION OF THE 21-DAY PERIOD; OR 3) CALLON HAS NOT PROVIDED DIFFERENT TERMS
BECAUSE SHE HAS DECIDED TO SIGN THE AGREEMENT PRIOR TO THE EXPIRATION OF THE
21-DAY CONSIDERATION PERIOD. TILLEY UNDERSTANDS AND ACKNOWLEDGES THAT SHE HAS
SEVEN (7) CALENDAR DAYS FOLLOWING HER EXECUTION OF THIS AGREEMENT TO REVOKE HER
ACCEPTANCE OF THIS AGREEMENT, WHEREUPON THIS AGREEMENT SHALL BE RESCINDED IN ITS
ENTIRETY AND BECOME NULL AND VOID. THIS AGREEMENT WILL NOT BECOME EFFECTIVE OR
ENFORCEABLE, AND THE PAYMENT WILL NOT BECOME PAYABLE, UNTIL AFTER THIS
REVOCATION PERIOD HAS EXPIRED.
In consideration of the payments and promises contained in this Agreement,
Callon and all its subsidiaries, affiliates and related companies hereby
release, discharge, forever hold harmless and Callon agrees to indemnify and
defend Tilley from any and all claims, demands or suits, whether civil or
criminal, at law or in equity, known or unknown, fixed or contingent, liquidated
or unliquidated, asserted or unasserted, arising or existing on or at any time
prior to the Retirement Date. This Release includes, but is not limited to, any
claims relating to or arising out of Tilley's employment with Callon, its
subsidiaries, affiliates and/or related companies and/or her separation and
retirement therefrom.
7. Knowingly and Voluntary. Tilley understands that it is her choice
whether or not to enter into this Agreement and that her decision to do so is
voluntary and is made knowingly.
8. Post Employment Obligations.
8.1 Post Employment Confidentiality Obligations. The terms of this
Agreement and the content of the discussions pertaining to this Agreement shall
be considered and treated as confidential and Tilley shall not discuss or
otherwise disclose, in any manner, the amount paid under this Agreement, and/or
the substance or content of discussions involved in reaching this Agreement to
any person other than Tilley's attorney, family, and tax/financial advisors and
as required by appropriate taxing or other legal authorities. Further, Tilley
acknowledges and agrees to continue to abide by any and all Callon's
confidentiality policies and procedures for a period of two years.
The terms of this Agreement and the content of the discussions pertaining
to this Agreement shall be considered and treated as confidential and Callon
shall not discuss or otherwise disclose, in any manner, the amount paid under
this Agreement, and/or the substance or content of discussions involved in
reaching this Agreement to any third party except as required by law.
8.2 Cooperation. Tilley agrees that she will promptly return any and all
Callon property, including copies thereof, to Callon. Tilley agrees that for a
period of 60 days she shall
3
cooperate with, and make herself available for, any and all requests by Callon
for information regarding her job functions with Callon and events,
circumstances, and transactions with which she became familiar during the course
of her employment. With respect to any litigation, charges, investigations, or
subpoenas initiated by governmental or private parties, such cooperation shall
include, but not be limited to, assisting Callon with preparing responses to
subpoenas and other forms of discovery and making herself available to provide
testimony for depositions, hearings or trials. Callon agrees to compensate
Tilley for any significant or lengthy assistance at the rate of $250 per hour
and to reimburse her for all reasonable expenses incurred in so doing.
8.3 Recommendations; Malignment: Callon acknowledges that Tilley'
retirement from the company was in no way related to any improper activities.
Callon agrees that it will honestly and freely answer any questions from
prospective employers in a manner that would support Tilley's efforts to obtain
another job either in the oil and gas business or otherwise. Tilley and Callon
agree that neither party will engage in any behavior nor act in any manner to
malign the other party in any way to any third party, the oil and gas community,
government agencies, the media or the public.
8.4 Re-Employment. Tilley agrees to relinquish and hereby does relinquish
any and all rights she may have to re-employment with Callon. Tilley further
agrees that she will not knowingly seek, accept, or otherwise pursue employment
with Callon, except that this paragraph will not apply if Tilley's then-current
employer becomes part of Callon as a result of a merger or acquisition.
Similarly this paragraph will not apply if Tilley is part of a consulting team
hired by Callon or its partners.
8.5 No Impediment. Callon agrees not to impede the hiring of Tilley by any
other entity, including Callon's existing partners, as either an employee or a
consultant.
9. Miscellaneous.
9.1 Applicable Law. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of Mississippi.
9.2 No Waiver. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
9.3 Remedy for Breach of Contract. The parties agree that in the event
there is any breach or asserted breach of the terms, covenants or conditions of
this Agreement, the remedy of the parties hereto shall be in both law and in
equity, including injunctive relief for the enforcement of or relief from any
provisions of this Agreement.
9.4 Severability. It is the desire and intent of the parties that the
terms, provisions, covenants and remedies contained in this Agreement shall be
enforceable to the fullest extent permitted by law. If any such term, provision,
covenant or remedy of this Agreement or the
4
application thereof to any person or circumstances shall, to any extent, be
construed to be invalid or unenforceable in whole or in part, then such term,
provision, covenant or remedy shall be construed in a manner so as to permit its
enforceability under the applicable law to the fullest extent permitted by law.
In any case, the remaining provisions of this Agreement or the application
thereof to any person or circumstances other than those to which they have been
held invalid or unenforceable, shall remain in full force and effect. It is
further the desire and intent of the parties that in the event of any breach of
any portion of this Agreement, the remainder of this Agreement shall remain in
effect as written and enforceable to the fullest extent permitted by law.
9.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
9.6 Withholding of Taxes. Callon may withhold from any benefits or
remuneration payable under this Agreement all federal, state, city or other
taxes as may be required pursuant to any law or governmental regulation or
ruling.
9.7 Headings. The paragraph headings have been inserted for purposes of
convenience and shall not be used for interpretive purposes.
9.8 Assignability.
A. By Callon:
Callon's obligations under this Agreement are not
transferable or assignable by Callon and shall be considered a
liability of Callon in any sale or transfer of substantially
all of its business or assets by any means whether direct or
indirect, by purchase, merger, consolidation or otherwise.
B. By Tilley:
With respect to Tilley's rights and obligations, her
rights and obligations hereunder are personal and neither this
Agreement, nor any right, benefit or obligation of Tilley,
shall be subject to voluntary or involuntary assignment,
alienation or transfer, whether by operation of law or
otherwise, without the prior written consent of Callon. This
Agreement and all payments hereunder shall inure to the
benefit of and be enforceable by and against Tilley's personal
or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
9.9 Entire Agreement: Modification. This Agreement constitutes the entire
agreement of the parties with regard to the resignation of employment of Tilley,
supersedes any and all prior written agreements between the parties, and
contains all of the covenants, promises, representations and agreements between
the parties with respect to the resignation of employment of Tilley with Callon.
Each party to this Agreement acknowledges that no representation, inducement,
promise or agreement, oral or written, has been made by either party, which is
not
5
embodied herein, or referred to hereby and that no agreement, statement or
promise relating to the employment or resignation of employment of Tilley with
Callon that is not contained or provided for, identified or referred to in this
Agreement, shall be valid or binding. Any modification of this Agreement will be
effective only if it is in writing and signed by both parties.
PLEASE READ THIS DOCUMENT CAREFULLY AS IT INCLUDES A
RELEASE OF CLAIMS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
__________________________________
Kathy G. Tilley
Callon Petroleum Company
By: _____________________________
Name: ___________________________
Title: __________________________
6
EXHIBIT 14.1
ADDENDUM B
CALLON PETROLEUM COMPANY
CODE OF ETHICS FOR THE CHIEF EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
The Chief Executive Officer, Chief Financial officer, principal
accounting officer or Controller, and other senior financial officers performing
similar functions (collectively, the "OFFICERS") of Callon Petroleum Company
(the "COMPANY") each have an obligation to the Company, its shareholders, the
public investor community, and themselves to maintain the highest standards of
ethical conduct. In recognition of this obligation, the Company has adopted the
following standards of ethical conduct for the purpose of promoting:
o Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
o Full, fair accurate, timely and understandable disclosure in
the reports and documents that the Company files with, or
submits to, the Securities and Exchange Commission (the
"SEC"), and in other public communications made by the
Company;
o Compliance with applicable governmental laws, rules and
regulations;
o The prompt internal reporting to an appropriate person or
persons identified herein of violations of this Code of
Ethics; and
o Accountability for an adherence to this Code of Ethics.
The Company has a Code of Business Conduct and Ethics applicable to all
directors and employees of the Company. The Officers are bound by all of the
provisions set forth therein, including those relating to ethical conduct,
conflicts of interest and compliance with law. In addition to the Code of
Business Conduct and Ethics, the Officers are subject to the additional specific
policies described below. Adherence to these standards is integral to achieving
the objectives of the Company and its shareholders. The Officers shall not
commit acts contrary to these standards nor shall they condone the commission of
such acts by others within the Company.
COMPETENCE
The Officers have a responsibility to:
o Maintain an appropriate level of professional competence
through the ongoing development of their knowledge and skills.
o Perform their professional duties in accordance with relevant
laws, regulations, and technical standards.
o Prepare accurate and timely financial statements, reports and
recommendations after appropriate analyses of relevant and
reliable information.
CONFIDENTIALITY
The Officers have a responsibility to protect the Company by:
o Refraining from disclosing confidential information
(regarding the Company or otherwise) acquired in the
course of their work except when authorized, unless
legally obligated to do so.
o Informing subordinates as appropriate regarding the
confidentiality of information acquired in the course
of their work and monitoring their activities to
assure the maintenance of that confidentiality.
o Refraining from using or appearing to use
confidential information acquired in the course of
their work for unethical or illegal advantage either
personally or through third parties.
INTEGRITY
The Officers have a responsibility to:
o Comply with laws, rules and regulations of federal, state and
local governments, and appropriate private and public
regulatory agencies or organizations, including insider
trading laws.
o Act in good faith, responsibility, without misrepresenting
material facts or allowing their independent judgment to be
subordinated.
o Protect the Company's assets and insure their efficient use.
o Avoid actual or apparent conflicts of interest with respect to
suppliers, customers and competitors and reports potential
conflicts as required in the Company's Conflict of Interest
Policy.
o Refrain from engaging in any activity that would prejudice
their ability to carry out their duties ethically.
o Refrain from either actively or passively subverting the
attainment of the organization's legitimate and ethical
objectives.
o Recognize and communicate professional limitations or other
constraints that would preclude responsible judgment or
successful performance of an activity.
o Report to senior management and the Audit Committee any
significant information they may have regarding judgments,
deficiencies, discrepancies, errors, lapses or any similar
matters relating to the Company's or its subsidiaries'
accounting, auditing or system of internal controls. The
officers must communicate unfavorable as well as favorable
information and professional judgments or opinions.
o Refrain from engaging in or supporting any activity that would
discredit their profession or the Company and proactively
promote ethical behavior within the Company.
OBJECTIVITY
The Officers have a responsibility to:
o Communicate information fairly and objectively.
o Disclose all material information that could reasonably be
expected to influence intended user's understanding of the
reports, comments and recommendations presented.
OVERSIGHT AND DISCLOSURE
The Officers have a responsibility to:
o Ensure the preparation of full, fair, accurate, timely and
understandable disclosure in the periodic reports required to
be filed by the Company with the SEC. Accordingly, it is the
responsibility of the Officers to promptly bring to the
attention of the Audit Committee any material information of
which he or she may become aware that affects the disclosures
made by the Company in its public filings or otherwise assist
the Audit Committee in fulfilling its responsibilities of
overseeing the Company's financial statements and disclosures
and internal control systems.
o Promptly bring to the attention of the Audit Committee any
information he or she may have concerning (1) significant
deficiencies in the design or operation of internal controls
which could aversely affect the Company's ability to record,
process, summarize and report financial data or (2) any fraud,
whether or not material, that involves management or other
employees who have a significant role in the Company's
financial reporting, disclosures or internal controls.
o Promptly bring to the attention of the CEO or internal legal
counsel, if any, and to the Audit Committee any information he
or she may have concerning any violation of the Company's Code
of Business Conduct and Ethics, including any actual or
apparent conflicts of interest between personal and
professional relationships, involving any management or other
employees who has a significant role in the Company's
financial reporting, disclosures or internal controls.
o Promptly bring to the attention of the CEO or internal legal
counsel, if any, and to the Audit Committee any information he
or she may have concerning evidence of a material violation of
the securities or other laws, rules or regulations applicable
to the Company and the operation of its business, by the
Company or any agent thereof, or of violation of the Code of
Business Conduct and Ethics or of these additional procedures.
ENFORCEMENT
The Board of Directors shall determine, or designate appropriate
persons to determine, appropriate actions to be taken in the event of violations
of the Code of Business Conduct and Ethics or of these additional procedures by
the Officers. Such actions shall be reasonably designed to deter wrongdoing and
to promote accountability for adherence to the Code of Business Conduct and
Ethics and to these additional procedures, and shall include written notices to
the individual involved that the Board has determined that there has been a
violation, censure by the Board, demotion or re-assignment of the individual
involved, suspension with or without pay or benefits (as determined by the
Board) and termination of the individual's employment. In determining what
action is appropriate in a particular case, the Board of Directors or such
designee shall take into account all relevant information, including the nature
and severity of the violation, whether the violation was a single occurrence or
repeated occurrences, whether the violation appears to have been intentional or
inadvertent, whether the individual in question had been advised prior to the
violation as to the proper course of action and whether or not the individual in
question had committed other violations in the past.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(File Nos. 333-100646, 333-87945, 333-60606, 333-47784, 333-29537, 333-29529,
333-90410 and 333-109744) of Callon Petroleum Company of our report dated March
3, 2004, with respect to the 2003 and 2002 consolidated financial statements of
Callon Petroleum Company included in this Form 10-K for the year ended December
31, 2003.
Ernst & Young LLP
New Orleans, Louisiana
March 15, 2004
EXHIBIT 31.1
CERTIFICATIONS
I, Fred L. Callon, certify that:
1. I have reviewed this annual report on Form 10-K of Callon Petroleum
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting;
Date: March 15, 2004
By: /s/ Fred L. Callon
- ----------------------------
Fred L. Callon, President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATIONS
I, John S. Weatherly, certify that:
1. I have reviewed this annual report on Form 10-K of Callon Petroleum
Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting
Date: March 15, 2004
By: /s/ John S. Weatherly
- ----------------------------
John S. Weatherly, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of Callon Petroleum Company (the
"COMPANY") on Form 10-K for the fiscal year ended December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "REPORT"),
I, Fred L. Callon, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company as of, and for the periods presented in the Report.
Dated: March 15, 2004
/s/ Fred L. Callon
------------------------------------------
Fred L. Callon, Chief Executive Officer
The foregoing certification is being furnished as an exhibit to the Report
pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and, accordingly, is not being filed as part of
the Report for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of Callon Petroleum Company (the
"COMPANY") on Form 10-K for the fiscal year ended December 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "REPORT"),
I, John S. Weatherly, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company as of, and for the periods presented in the Report.
Dated: March 15, 2004
/s/ John S. Weatherly
------------------------------------------
John S. Weatherly, Chief Financial Officer
The foregoing certification is being furnished as an exhibit to the Report
pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and, accordingly, is not being filed as part of
the Report for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
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